Adapthealth (NASDAQ:AHCO) Q1 2026 Earnings Call

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6:46 Good day, everyone, and welcome to today's AdaptHealth First Quarter twenty twenty six Earnings Release. Today's speakers will be Susan Foster, Chief Executive Officer of AdaptHealth and Jason Clements, Chief Financial Officer of AdaptHealth. Before we begin, I would 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 Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding financial results for 2026 and beyond. Actual results could differ materially from those projected in forward looking statements.

7:36 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, organic growth and free cash flow, all of which are non GAAP financial measures. You can find more information about these non GAAP measures in the presentation materials accompanying today's call, which are posted on the company's website.

8:26 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. Good morning, everyone. Thank you for joining us today. The opening months of 2026 have set the stage for what will be a defining year for AdaptHealth. We made significant progress in three areas this past quarter. First, we successfully completed the transition of hundreds of thousands of active patients to our platform under our new capitated agreement. The second highlight of the quarter was the progress we are making on infrastructure investments as our AI enabled initiatives and patient facing digital platform reached meaningful milestones and we are beginning to drive improvement in our operating metrics.

9:21 And third, in April, we refinanced our credit facility with improved terms, strengthening our balance sheet and providing financial and strategic flexibility. Starting with our new capitated agreement, we navigated through one of the most ambitious operational undertakings by completing the largest patient transition in the history of home medical equipment. No HME company had ever taken on a capitated contract of this scale from an incumbent. Over the past couple of months, we established 35 De Novo locations and are now the exclusive HME provider for more than 10,000,000 new members. We had planned to work through this transition over the first half of this year.

10:08 As a result of completing this transition on a more aggressive timeline and delivering strong performance across our legacy business, we delivered revenue significantly ahead of our guidance with solid organic growth across all four segments. Regarding the contract, covered membership count, revenue per member utilization and product costs are all meeting our expectations. However, we maintained heavier than planned labor costs to ensure a responsible transition. In the first quarter, that amounted to $12,000,000 of elevated labor expense, of which 8,000,000 accelerate the transition and that should normalize by the end of the second quarter.

10:59 The $4,000,000 of elevated wages and benefits that will decline as we right size in operating right size to the operating model and to meet the service requirements. Given that this is a five year contract with a potentially longer horizon, the extra implementation spend was the right decision for the relationship and the patients. As for Q1 financial results, first quarter revenue of $819,800,000 grew 5.4% versus the prior year quarter and exceeded the midpoint of our guidance range by approximately $22,000,000 On an organic basis, adjusting for the impact of acquisitions and dispositions, we delivered 9.1% year over year growth.

11:51 Of that about 500 basis points came from the new capitated contract. The other 400 basis points came from the base business with each of our four segments delivering positive organic growth in the quarter. Sleep Health net revenue of $358,500,000 grew 13.3% versus the prior year and PAP new starts set another new record. We anticipate that as accumulating evidence highlights the significance of sleep in overall health, there will be corresponding increase in demand for therapies aimed at improving sleep quality. Currently, up to eighty percent of individuals with obstructive sleep apnea are undiagnosed.

12:37 However, patient awareness is rising, driven by expanded access to home sleep studies, the development of wearable devices for early detection of obstructive sleep apnea and the integration of dual therapies. As more patients experience the advantages of sleep therapy, our commitment remains on focusing remains focused on delivering high quality care and supporting treatment adherence to fully capture the health benefits. Despite a very mild flu season, respiratory health net revenue of $178,100,000 grew 7.6% versus the prior year and oxygen new starts grew 12.8%. Diabetes health net revenue of 142,200,000 grew 2.4% versus the prior year.

13:32 Our investments in talent, process improvement and technology over the past year have taken hold. We had particularly strong results from resupply further demonstrating that our centralized resupply team is performing well and providing quality and timely care to these patients. Wellness at Home net revenue of 141,000,000 declined 10.3% on a reported basis, reflecting $35,800,000 of disposed revenue from non core assets exited during 2025. Over the past two years, we have carefully pruned our portfolio to product categories that support growth in our Sleep and Respiratory Health segments.

14:18 After adjusting for these dispositions, Wellness at Home delivered 11% organic growth. In Q1, capitated net revenue made up 9.2% of the total consolidated net revenue. Capitated membership increased seven times year over year to about $15,000,000 Adjusted EBITDA of $121,200,000 fell short of guidance driven by the previously mentioned labor and benefit costs. While labor costs will keep decreasing post transition, we started a cost containment initiative to stay on track. As a result, we are comfortable raising our full year net revenue projections and maintaining our full year 2026 guidance for adjusted EBITDA and free cash flow.

15:12 Stepping back from the quarter, I want to spend a few minutes on the playbook we are following. Because the industry dynamics at work right now are among the most favorable we have seen for a company of our scale. The business we have built over the past several years is well aligned to these dynamics, which leaves us well positioned to grow in the coming years. Interest in capitated arrangements among payers is increasing as a way to align incentives and lower healthcare costs, a trend we anticipate will persist. Securing and implementing these agreements is complex, demanding nationwide coverage, strong clinical practices, robust technology and operational expertise.

15:59 We possess these strengths, which the market acknowledges. Our discussions regarding new capitated deals remain active promising and we are optimistic about announcing additional partnerships soon. The regulatory environment is evolving in ways that benefits scaled compliance operators. The government is actively working to root out fraud and abuse in home medical equipment and we think that effort is long overdue and unambiguously what is needed for patients, for the Medicare program and for the broader healthcare ecosystem. The many legitimate hardworking home medical equipment companies that serve millions of patients managing chronic conditions at home deserve to operate in an industry with a reputation befitting this critical mission.

16:49 So we applaud the government's efforts and we see an opportunity and frankly a responsibility to be a constructive partner as it pursues these aims. The direction of travel here is clear. Greater scrutiny and clearer standards will over time separate operators who have made those investments in the systems, process and clinical infrastructure that proper compliance requires. We have made these investments and we are committed to helping lead the industry toward that standard. Our balance sheet following the refinancing of our credit facility gives us the flexibility to pursue tuck acquisitions from a position of strength where it makes sense in attractive geographies for assets that expand our access to patients focused on our core sleep and respiratory health segments.

17:42 These must be at returns that soundly meet or exceed our thresholds. The last two years reflect that discipline. We have deployed capital selectively and we have terminated as many deal processes and due diligence as we have closed. Technology is creating a real separation. We have invested in our patient facing and operational platforms and those investments are improving the patient experience and time to therapy. Our conversational AI platform has moved beyond pilot and Q1 is handling live calls across sleep scheduling, our contact center and resupply use cases. Scheduling that was entirely manual a year ago is now 25% touchless.

18:31 Order conversion times have shortened materially, a meaningful improvement in the experience for referring providers and patients alike. Our patient portal, MyApp crossed 412,000 users in Q1. These capabilities matter more as volume scales. In summary, our focus for the rest of twenty twenty six six is to manage patient growth and control costs. We aim for sustainable, profitable organic growth In while maintaining excellent service for over 4,500,000 patients. With that, let me turn it over to Jason to review the financials. Thank you, Suzanne, and thanks to everyone for joining our call today.

19:17 I'll cover our first quarter twenty twenty six financial results followed by our balance sheet, capital allocation and outlook. For Q1 twenty twenty six, net revenue of $819,800,000 increased 5.4% versus the prior year quarter. Organic growth was 9.1% for that same period with broad based growth across all four segments. Capitated revenue of $74,900,000 outperformed our expectations as we met go live dates for a new agreement faster than we originally anticipated. Covered membership count, revenue per member, utilization and product costs were all in line with our expectations.

20:04 First quarter adjusted EBITDA was $121,200,000 representing an adjusted EBITDA margin of 14.8% and coming in about $7,000,000 lower than guidance. Although it required additional labor to start the capitated contract sooner, the elevated labor cost is already declining and we expect to return to baseline in the next few months. First quarter cash flow from operations of $93,700,000 was essentially flat versus the prior year quarter. First quarter free cash flow of negative $27,500,000 was in line with our expectations and driven by capital expenditures of $121,200,000 reflecting patient equipment startup purchases to stock inventory in support of the new capitated contract.

20:51 As we move into steady state operations with the capitated arrangement, we expect CapEx to normalize and free cash flow to improve in the back half of the year. Turning to the balance sheet. We ended the quarter with unrestricted cash of approximately $48,000,000 Net debt stood at approximately $1,840,000,000 and our consolidated net leverage ratio was 3.0 times from 2.75 times in the fourth quarter of twenty twenty five. The increase reflects the $100,000,000 we drew on our revolving credit facility to acquire certain assets from a provider of home medical equipment to support our new capitated arrangement for a total consideration of $84,700,000 We intend to pay down the balance on our revolver in the coming quarters and remain committed to achieving our target of 2.5 times net leverage.

21:46 In April, we completed a $1,100,000,000 refinancing of our senior secured credit facility consisting of a $325,000,000 Term Loan A, a $325,000,000 delayed draw term loan and and a $450,000,000 revolving credit facility, all maturing in April 2031. The new facility extends our term loan maturity, lowers our weighted average cost of debt and provides incremental operating flexibility, expanded capacity on the revolving credit facility. It also provides committed capital through the delayed draw facility that we intend to use to redeem our 2028 notes following the call premium expiration in August 2026.

22:32 The favorable pricing reflects the recent credit upgrades we received from both S and P and Moody's as well as our commitment to further delevering. Our capital allocation priorities remain unchanged, investing to accelerate organic growth, reducing leverage and pursuing disciplined tuck in acquisitions. Subsequent to the end of the quarter, we completed the disposition of our remaining custom rehab assets, a small but consistent step in concentrating our portfolio around sleep, respiratory and the related product categories that support growth in our core. Turning to guidance, we are raising our full year net revenue projection by $10,000,000 to 3,450,000,000 to $3,520,000,000 This reflects the first quarter revenue outperformance offset by the revenue of the custom rehab disposition.

23:25 Given the steps we are taking to moderate labor costs related to the capitated arrangement, we are maintaining our full year guidance for adjusted EBITDA of $680,000,000 to $730,000,000 and free cash flow of $175,000,000 to $225,000,000 For the second quarter of twenty twenty six, we expect net revenue of $840,000,000 to $860,000,000 and adjusted EBITDA margin of approximately 19%. We expect free cash flow to be modest as we incur elevated CapEx to support the new contract. With that, I'd like to pass the call back to Suzanne for closing remarks. Thank you. This really has been a monumental quarter for us. Our team went to extraordinary lengths to complete the largest patient transition in the history of this industry and over an incredibly short period of time. So I want to close by saying thank you to all the adapters that worked nights, weekends, overtime, whatever they needed to do to stand up our new capitated partnership.

24:27 And a special thank you to all the adapters who ensured that our base business continued to perform. This was truly a team effort. The progress we made this quarter is just another proof point that this team has what it takes to achieve our aspiration of becoming the most trusted and reliable partner in home healthcare. The one patients depend on and physicians choose first. That brings me to the end of our prepared remarks. Operator, please open the call for questions. Thank you. We'll take our first question from Pito Chickering with Deutsche Bank. Please go ahead. Your line is open.

25:22 Hey, good morning guys. On the organic revenue side, are you realizing all the revenues from capitated arrangements, the 9.1% or should we assume acceleration in 2Q from those levels? And also, any color organic revenue growth would be excluding the capitated arrangements? Just trying to figure out sort of what core growth is after all the capitated arrangements are fully realized. Sure, Pito. This is Jason. So on the organic split, a little over 4% growth in the core business ex capitation, the new contract. And to your question on Q2, we do expect acceleration specifically of capitated revenue that is where we are providing the raise of net revenue for the full year. So we do expect as we're we'll be assuming an entire quarter of capitated revenue growth in this new contract in the second quarter that we will accelerate organic growth.

26:26 Okay. And then like you talked about the $8,000,000 of variable labor from acceleration of $4,000,000 of rightsizing. There's just a lot more sort of moving parts and it's no longer challenging 4Q and 1Q to sort of model EBITDA. So can you give us some color on how EBITDA should ramp 2Q and then ramp into 3Q and 4Q because of all these moving parts around these costs? Thank you so much. Sure. Thank you, Hito. So in our Q2 guidance, we are projecting eight forty million to $860,000,000 of revenue at an adjusted EBITDA margin of approximately 19%. So that translates to a little over $160,000,000 of EBITDA for the second quarter.

27:11 The reason for the big ramp is really twofold. Firstly, we will have an entire quarter of revenue from the new capitator arrangement, very different from Q1 where we had portions of that revenue as the staggered start dates rolled out. And so that revenue is going to come in at very high margin as the fixed costs are already in the P and L as we enter Q2. The second component is really around putting controls around the labor spend. Certainly, as we were exiting March, we had a surge in variable pay. So incentive pay, bonuses, contract labor and as such to support the transition that came with a lot of call volume as patients were moving from the incumbent provider over to Adapt and a lot of questions about how to continue to access their care and how to work with AdaptHealth going forward. So as that volume settles down as we're moving into Q2, we do expect to get some of this cost out that we referenced in Q1 and we expect to get all of it out at the time of Q3.

28:22 Great. Thanks so much. Thank you. Our next question comes from Kevin Caliendo with UBS. Please go ahead. Your line is open. Thanks. Thanks for taking my question. I just want to make sure I understand. So you said you missed Q1 EBITDA by roughly $7,000,000 but you also said that labor expenses are moderating. Is there anything else improving in the underlying EBITDA outlook ex contract onboarding, meaning whether it's mix, you cited some AI initiatives. Just trying to understand if those are helping the underlying trends as we see the ramp for over the course of the year or if it's just simply the onboarding stuff?

29:11 Well, it's certainly the onboarding, Kevin. Secondly, as we get into Q2, we typically see a little over a point of improved collections and therefore lower reserves on our revenue. So that number alone is about $10,000,000 and that all drops to the bottom line as it's peer collections and rate on the revenue side of things. The AI that we referenced this morning, Suzanne may expand on a little more. It's important to see that we're moving out of pilot phase and first starting go lives as we were exiting the first quarter. So that's going to take some time to scale over the course of the year and into 2027. But maybe Suzanne wants to add some color on the specifics. The technology that we're deploying has been the goal has been to improve the patient experience and time to therapy. Now obviously referencing things like going scheduling 25% touchless does come with some benefit.

30:08 We have been reinvesting that back into the business where we had gaps. And so I've been out there saying that any benefit from financial benefit from implementation of technology will be back half of the year, but really more of a 2027 story because we've needed to make some investments in the rest of the business as we right size places that we're under invested in. That's helpful. Can I ask you a quick follow-up? Have you seen any changes to sleep apnea coverage amongst payers? Is that did anything hit in 1Q that was different? No, that's all consistent. Sleep apnea has enjoyed a stable quarter, nothing on the horizon that we see in terms of changes at this point. Great. That's super helpful. Thank you.

30:56 Got it. Thank you. We will take our next question from Ben Hendrix with RBC Capital Markets. Please go ahead. Your line is open. Hi, this is Michael Murray on for Ben. Thanks for taking my question. With the capitated contract expected to reach 20% EBITDA margin at full ramp in the base business continuing to improve, what's the right way to think about Adapt's steady state EBITDA margin over the next two to three years? Is there a path to low 20% on a sustained basis? Yes, sure. This is Jason. I guess I'd start with our expectations for 2026. At the midpoint of our guidance, we're showing just a touch over 20% for our adjusted EBITDA margin. And as we get into 2027, a couple of key items to note.

31:54 Firstly, in the first quarter, of course, we'll have a full quarter of capitated revenue versus the first quarter of twenty twenty six. And the variable labor that we discussed and some of the fixed costs that we saw in the first quarter, we expect at that point that we'll have pulled that back out of the P and L thus increasing margin profile as we get into 2027 and beyond. And I think just adding on to that, how we think about is assuming a fairly stable fee for service reimbursement landscape coupled with increased capitated revenue over the next couple of years driving additional census and the underlying operational improvements including the technology I referenced.

32:43 Those things over the next twelve months really into 2027 will allow us to hold that EBITDA and slightly improve it as we move forward. That's helpful. Thank you. And then do you have any update on the pipeline or timing of potential new capsulated arrangements? Are you seeing any acceleration in inbound interest? Thank you. Yes, sure. Well, like I said, we're very positive about the movement of our pipeline. It's moving through and you should expect that we'll be coming out with an announcement soon on that. All right. Thank you. Got it.

33:29 Thank you. We will move next with Brian Tanquilut with Jefferies. Please go ahead. Your line is open. Hey, good morning, guys. Maybe I'll ask first on the de novo. I think you mentioned that expansion with de novo is well ahead of guidance. So just curious what you can share with us in terms of what operational milestones kind of like allow this acceleration during the quarter? Yes. You're talking top line, right, Brian? Yes. Yes. So this capitated arrangement came in multiple stages or phases. As we stand here today, all phases are complete, but they were staggered. And so they were back half weighted to the first quarter.

34:16 That's really why we're seeing the raise of revenue, particularly in the second quarter as we'll experience the entire quarter with that full revenue flowing. So at this point, the contract is fully operational across all eight states. And as Suzanne said, 35 new locations in support of that business. And so we're very pleased to report the successful delivery and we're looking forward to moving forward. And the milestones that we focused on, remember this was a three way transition and so all three parties had to be ready. And given that the other two parties were ready, we had to step up and make sure that we accelerated our go live. And so getting those new getting all the new employees in place, a lot of the labor that was in one region or allocated to one phase of go live, we had to repeat very quickly. So we couldn't use they were not done onboarding the first phase and we couldn't use them for the second phase. So we had duplication in onboarding based on the region. That's why we say we're confident that will be coming out because there's not a list there, a lot of labor, but there's duplication.

35:34 Okay. That makes sense. And then maybe Jason, just thinking of free cash flow here. I think you said in the prepared remarks, it's in line with expectations, but also you mentioned some of the asset purchases slipped into Q1. So just curious how we should be thinking about the makeup of free cash flow for the quarter and how we should be thinking about the cadence of it for the rest of the year? Sure, Brian. So for the first quarter, we came right in line. We had guided negative 20 to negative 40. And so at negative 27.5, were pleased with the cash flow performance despite the additional cost on the P and L. I'd say as we get into Q2, we are signaling a step up in CapEx for the second quarter versus where we were ninety days ago.

36:19 Again, that's to support the capitated arrangement and just ensuring that we've got all inventory locations stocked and fully ready for all new patient volumes that are coming in. So that's going to steer the second quarter down from what we were originally thinking. We still think we'll be positive for the second quarter, but it will likely be modest. As we get through that normalization of CapEx, we're very confident that the third and fourth quarter will both be very strong in the neighborhood of $100,000,000 in each. Thank you. Thank you. We will move next with Richard Close with Canaccord Genuity. Please go ahead. Your line is open. Yes. Thanks for the question. Congratulations.

37:08 Just maybe hitting on potential new capitated business going forward. Obviously, a large portion of this most recent agreement was relatively new territory for you. So as you think about potential announcements of new business this year, next year, how are you thinking about the level of investment that that's going to require for any potential new wins? Start with Dean. Richard, on investment side, we do see elevated CapEx, particularly as we're starting up the arrangement. Now the reason for that is if that business is taken or won from an incumbent provider, of course, there's patients that are still in service.

38:03 So there's a CapEx requirement typically to start up the arrangement. And then there's an ongoing CapEx commitment that is priced right in line with our standard CapEx, so call it 11% to 12% of revenue is what to expect for ongoing operations for those businesses, but it does require some startup CapEx to get into the new market. And let me address the part about how and where we're looking at this. So this the one we referred to today, our new agreement was primarily in a geography new to us, which we knew we had to make investment to set up the fixed costs and locations, etcetera. And obviously long term right now those new locations are only servicing our new strategic partner. And over time as we stabilize, it'll give us a footprint to expand upon of course.

38:55 With the pipeline that we have in place and now with this new footprint, there's very little area where we don't already have existing locations with teams that know how to do this business. For example, when we took on the first phase of this new capsulated agreement, it was on the East Coast where we had a dense grouping of locations and really without a blip, we were able to onboard that effectively. And so as we consider new capitated agreements, we're looking at where do we have locations or can we buy locations to pick up operations. And we expect that it will be a much different and obviously a much smoother than opening up 35 De Novo locations to service hundreds of thousands of patients on day one.

39:46 Okay. That's helpful. And then just on diabetes, obviously progress there. Can you talk how you're thinking about diabetes business as we progress through the rest of the year? Any updates would be helpful. Sure. So we're super happy with the team, positive growth. As I mentioned, I can't applaud them enough for digging in. All of the improvement has been on execution. We're not seeing anything different in the marketplace. It's pretty much the same in terms of pharmacy and med benefit referral patterns, all of that. So the improvement that the team has made over the last year has been the internal focus on us doing the best job possible.

40:33 I have said that diabetes is in the past I've said first, we got to fix it, which to check the mark and two, we're always looking at do these what in our portfolio is strategically fit in for AdaptHealth and we'll continue to review diabetes for strategic fit as we do all portfolio. Okay. Thank you. Thank you. And this concludes our Q and A session as well as our conference call. We appreciate your time and participation. You may now disconnect.