AdaptHealth Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

There are 8 speakers on the call.

Operator

Good day, everyone, and welcome to today's AdaptHealth 4th Quarter and Full Year 2023 Earnings Release. At this time, all Today's speakers will be Richard Barish, Chairman and Interim CEO of Adapt Health and Jason Clemens, Chief Financial Officer of Adapt Health. Josh Parks, President of Adapt Health 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.

Operator

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 should have no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, the company will reference certain financial measures such as EBITDA, adjusted EBITDA and free cash flow, all of which are non GAAP financial measures. This morning's call is being recorded and a replay of this call will be available later today.

Operator

I am now pleased to introduce the Chairman and Interim CEO of Adapt Health, Richard Barish.

Speaker 1

Good morning, everyone, and thank you for joining us this morning to review Adapt Health's 4th quarter and full year 2023 performance. Stated simply, we had a terrific 4th 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 4th 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 not 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.

Speaker 1

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.

Speaker 1

Turning to our product lines. Our Sleep product line was the primary driver for our full year and Q4 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.

Speaker 1

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 4th quarter. Here again driven by the expertise of our respiratory therapists, we believe we have increased our share and are striving to become number 1 in this product category 2. Diabetes continues to be a work in progress, but the progress is tangible.

Speaker 1

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 4th 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.

Speaker 1

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. 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.

Speaker 1

We also believe that increased insurance coverage of CGMs, especially in the government sector, is a strong tailwind. SESPLEE excuse me, 1st 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. This study shows a modest increase to adherence when CPAP users also take GLP-1s.

Speaker 1

This is consistent with what we are seeing in our population. A recent survey 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.

Speaker 1

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-one 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 of providing care in the home and community.

Speaker 1

Adapt Health is at the epicenter of the movement to improve the people of 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 1,500,000 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 resupply needed equipment.

Speaker 1

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.

Speaker 1

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?

Speaker 2

Thank you, Richard, and thanks to all for joining the call. Like Richard, I was very pleased with the 4th 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. Adapt Health's net revenue grew 7.7% over 2022 and non acquired growth was 7.3%, led by our sleep and respiratory product categories.

Speaker 2

Adjusted EBITDA grew 13% over that same period as we delivered on cost management program that we announced in early 2023. Cash flow from operations of 480,700,000 dollars grew 28.6 percent over the prior year. Free cash flow of $143,000,000 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 20 22. Turning to 4th quarter results.

Speaker 2

Net revenue of $858,200,000 increased 10.0% compared to the Q4 of 2022. Fleet revenue of $328,800,000 grew 15.2% compared to a year ago. Patient demand for new PAP equipment was steady and up a touch from the 3rd 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 1,550,000 patients with electronic reordering now over 40% of total orders.

Speaker 2

Not only is electronic reordering easier for the patient, it also drives more efficiency in our operations. Respiratory revenue of $151,000,000 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 Q4 of 2022.

Speaker 2

As expected, we continue 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 twenty twenty four 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.

Speaker 2

4th quarter adjusted EBITDA of $204,600,000 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 $300,000 grew 60.2 percent over the Q4 of 20.3. CapEx of $88,600,000 representing 10.3 percent of revenue beat our expectations resulting in free cash flow of $66,600,000 in the 4th quarter. For the full year, free cash flow was $143,200,000 or 4.5 percent of total revenue, exceeding our goal of 3% to 4%.

Speaker 2

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 45,000,000 dollars of our term loan, including a $10,000,000 voluntary payment in the 4th quarter as a result of our strong free cash flow. During the Q1 of this year, we expect to pay down our TLA by approximately $25,000,000 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 4th quarter results, we recorded a $318,900,000 pre tax write down to goodwill as we announced in our earnings release this morning.

Speaker 2

This non cash pre tax charge was triggered by the reduction in our stock price as of December 31. We also recorded a $25,000,000 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 $3,250,000,000 to 3,350,000,000 dollars adjusted EBITDA to be between $650,000,000 $710,000,000 and free cash flow to be between 150,000,000 $1,180,000,000 Let me share with you some assumptions that support our views on guidance. The 75.25 reimbursement for non competitively bid, non roll MSAs expired on January 1.

Speaker 2

And although it is possible the rates will still be extended, we are budgeting approximately $25,000,000 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 demand pent up following the supply chain shortages faced in 2022 early 2023. We recently doubled our dedicated sales force for our diabetes products And although we expect limited growth in the first half of twenty twenty three, as that ramp 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.

Speaker 2

We expect to improve free cash flow generation over 2023 by 15% at the midpoint 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 percent over the Q1 of 2023. Free cash flow to be approximately 0 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 and have built a solid foundation to grow. We look forward to keeping you updated as the year unfolds.

Speaker 2

I'll turn it back to Richard for his closing remarks. Thank you, Jason. And now

Speaker 1

I'd like to add some color to Jason's remarks on 2024 guidance. We know that one of the risks in the healthcare is reimbursement changes and the non extension of the 70 five-twenty 5 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, not as large as Humana, but certainly large enough singly and in the aggregate to boost growth. We can continue to pick up share in the sleep and respiratory categories.

Speaker 1

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 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 4,100,000 people who rely on us for needed medical devices and supplies. Operator, please open the line for questions now.

Speaker 1

Thank you.

Operator

Thank We'll take our first question from Brian Tanquilut with Jefferies. Your line is now open.

Speaker 3

Congrats on the quarter. I guess, first question I would ask is 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?

Speaker 1

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 is 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.

Speaker 1

So broad we can talk about the broad vote. Let's get through 2024 to get to the specifics thereafter.

Speaker 3

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

Speaker 2

we need to be considering? Thank you. 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.

Speaker 2

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.

Speaker 3

Awesome. Thanks and congrats again.

Speaker 2

Thanks Brian. Thanks Brian.

Operator

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

Speaker 3

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 'twenty three and how much that was down?

Speaker 3

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?

Speaker 2

Sure, Eric. This is Jason. So firstly, as we have reported previously, pump revenue in 2022 was about $160,000,000 and we expected about 120 dollars in 2023. So we came right in line with that expectation. We had previously talked about a $35,000,000 to $40,000,000 headwind and it literally came square in the middle of that.

Speaker 2

We think as we stand here today that the headwind in 2024 will be about half that. So call it in the range of high teens to $20,000,000 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 base pump and you wanted to move to a tubeless pump, you've made

Speaker 3

that

Speaker 2

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 tubeless pumps in terms of new starts. And so again, it will take some time for that to work through the system, if you will.

Speaker 2

But those are the thoughts on pump and pump supplies for the year.

Speaker 3

That's great detail. Thank you. And then on the sleep mid single digit growth, not a surprise there at all, but I am curious how does I I would think the resupply would be up stronger than mid single digit, rental may be flat to down, but I was hoping to get a little more detail on that, if

Speaker 2

you will. 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 the number of products per order as well as improving our adherence rates. So just continuing to compound that census.

Speaker 2

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.

Speaker 2

But again, this is not anything other than a tough comp period and just larger number of patients rolling off from a year ago.

Speaker 3

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 Q4?

Speaker 3

And then what are the major structural or thematic changes in your CapEx requirements that perhaps could be sustainable?

Speaker 2

Sure. So maybe start with a level setting of 23 by quarter. In Q1 in 2023 CapEx represented 12% of revenue. And as reported, that was related to a purposeful stockpiling of CPAPs that we felt was necessary to meet the continued demand in sleep therapies. And then that dialed off to kind of high 10%, mid 10% and then low 10%, 10.3% for Q4.

Speaker 2

And so that kind of mid-ten percent range is a good run rate. We think we'll get half a point out in 2024, which is why free cash flow conversion is up half a point. Structurally, what's changing here is technology, really related to the Oracle fixed assets and inventory digitalization project that we've been hard at work on for about a year now. That is taking hold. We just went live within the last few weeks in our first sites for HME.

Speaker 2

And we're finding benefit there of compressing our days hand on inventory and just getting more efficient about the way we order, how we order and just kind of what we're comfortable with in terms of MIMs and Max's and we expect to bring more improvement throughout the year.

Speaker 3

Thanks very much. Nice seeing the good progress here. Congrats. Thanks, Eric.

Operator

Thank you. We'll take our next question from Matthew Blackman with Stifel. Your line is open.

Speaker 4

Good morning, guys. This is Colin on for Matt. I thought I'd start by asking for a bit of a state of a union of sorts on the diabetes franchise, particularly on the CGM side. Are you seeing any lift from basal patients, particularly the Medicare coverage decision that went through last year or any new sensors like the G7 launch? And is the government mix going to stabilize this year?

Speaker 4

What are your thoughts around that? I know that's still a priority.

Speaker 1

It's a compound question. Let me start and then I'll turn this is Richard. I'll turn it over to Jason. We're not seeing the benefits yet from the extensions in Medicare and in some of the other governmental programs, But we think we will in 2024. So that's a pillar of why we think we can ultimately get back to more growth.

Speaker 1

So that we see as upside for going forward. Jason, why don't you repeat? You asked a compound question. Jason's got it. Yes.

Speaker 1

I'd say, Colin, on as it relates

Speaker 2

to newer products and those trends, we are distributing the newer models for both Dexcom and Abbott. They've been great partners and we're continuing to run that transition frankly faster than we had planned for or expected. And we think that's a good thing obviously for our patients and then certainly for our economics. I guess I'd say in terms of the government split, we think that we will grow that government census a touch more in 2024. And the reason is the doubling of the sales force is really intended to go after geographies that we've never been in before.

Speaker 2

And so as you'd expect a lot of data and analysis went into where the business is, what we think these geographies, particularly urban areas will produce. And we're pointed directly at a primary care sale and which happens to be a very heavily government patient population. And so we again, we do expect to grow in that area in 2024 and particularly in the second half of the year, we expect to get back to growth mode.

Speaker 4

And then I had one follow-up on the gross margin outperformance during the quarter. Was that primarily a function of dynamic or any one time items? Or was it just the underlying business and the COGS efficiencies that you've put in place this year? How should we think about that kind of progressing into 2024? Thanks.

Speaker 2

I'd say all the above, Colin. I mean, we were just pleased. I mean, frankly, we beat on essentially every assumption, every measure. Humana, to your point, we have done a good job transitioning patients and we have gone faster than we committed to, which is resulting in a big improvement in Q4 over Q3. Secondly, in reference to the cost management program, when you look across labor, OpEx and G and A, I mean Q4 is essentially flat over the prior year.

Speaker 2

And so the company was able to deliver on that cost containment program and then also deliver what I think is about $80,000,000 of growth over the prior year. So I mean it's really those couple of factors that drove the performance in the quarter.

Speaker 4

Thank you so much.

Operator

Thank you. We'll take our next question from Pito Chickering with Deutsche Bank. Your line is open.

Speaker 5

Hey, good morning. Thanks for taking my questions. Going back to Sleep Rentals for a second, I understand the flat growth guidance for 2024 is due to really tough comps in 'twenty three. If I just sort of plug 2024 into a CAGR from 'twenty two, it's about 12%. Is that the right growth we should be thinking about for 2025 for Sleep Rentals?

Speaker 2

Well, I'd say, Peter, Sleep as a category, mid to upper single digit, as Richard alluded to across the enterprise. We think that sleep growth will continue to be healthy.

Speaker 1

Once you get to a point that

Speaker 2

you your comparable period is clean, then yes, I mean both whether it's rental or resupply, it should grow at approximately the same rate.

Speaker 5

Okay, great. And then a few follow ups here on diabetes. What percent of your pumps today are tubeless versus tubed? What's the cost severance for patients if they get a tubeless pump in a pharmacy versus a DME? And then where do you think that the payer mix ends the year?

Speaker 2

For 2024? Yes. Yes. I'd say to take that last part first. It's probably up a point or 2.

Speaker 2

So the 79% that we just reported, we think it's up a couple of points as we exit 24%. Regarding pumps, the tubeless pumps that we are putting out, which are Omnipod 5 as well as a new entry of Beta Bionics, I mean we're running those through the pharmacy. I mean, we're tapping our pharmacy capability and running those through the pharmacy channel today. So there really is no differential versus like a DME channel because those products are really going through EME channel because those products are really going through pharmacy.

Speaker 5

Okay. So what percent of your revenues for diabetes are pharmacy versus DME? And I guess if you're guiding the whole sector to be flat for the first half of the year and the growing levels in the back half of the year, any sort of color on how is your thinking about DME growing versus pharmacy?

Speaker 2

Yes, I'd say, Peter, we haven't we're not ready to put out a split of revenue on pumps tubeless versus pump I'm sorry tubeless versus tube based. But I will say for the quarter, our new starts, it was outweighed in 2 Bliss. And so that will take some time as you get a pretty long length of stay for pump patients. That will take some time for that to start equalizing. In terms of the getting back to growth in the second half, really got 2 factors.

Speaker 2

You got the pump pressures, we think will be heavier in the first half and lighter in the second half. And then secondly in CGMs, we think growth will be lighter in the first half as sales team starts ramping and then we'll deliver in Q4, so Q3 and Q4. So we think the second half is going to be stronger than the first.

Speaker 5

Okay, great. And then sort of quickies here, the other revenues are sort of pretty big driver in the quarter. Can you just remind me what other is? And then free cash flow conversion, is this like the right ratio for the next couple of years about sort of 24% free cash flow conversion versus adjusted EBITDA?

Speaker 2

Yes. On free cash, that's an easy one. And the reason is we think that conversion from EBITDA down to cash flow from operations and then just better CapEx efficiencies, you get to that same place. And I'm sorry, Peter, the first part of the question was related to?

Speaker 5

It's revenues in other, I guess, can you just Yes, sure.

Speaker 2

Yes. So historically and currently, other included items such as e commerce, hospice, orthotics. So it's kind of a grouping of various lines of business. Since July, it also includes the PMPM revenue from capitated agreement. And so that's why you're seeing a large growth in Q4 over Q3 sequential.

Speaker 1

Makes sense. Thank you so very much.

Speaker 2

Thanks, David.

Operator

Thank you. We'll take our next question from Kevin Calinaro with UBS. Your line is open.

Speaker 6

Hi, good morning everybody. It's Andrea Alfonso in for Kevin. Thanks so much for taking the question. I actually just have a follow-up to those last set of questions. I just think on free cash flow, you talked about some of the moving parts there that underlie your expectations for 2024.

Speaker 6

If we sort of just single out certain improvements like cash collections, for example, how do you think about the next tranche there of capturing some of those benefits? And maybe if there are any working capital commitments from the ramp of Humana, how do you balance those improvements against that? And then I have another follow-up question.

Speaker 2

Sure, Andrea. Good morning. I'd say firstly, in terms of DSO and kind of the AR side of things, I mean we brought DSOs down considerably over the last 12 months. And as previously discussed, that was really a result of big investment in technology, particularly claims editor engine that we built as proprietary tech that we own and operate. And that was just a home run of an investment and that's really the people and the processes within the restructure look back on DSO.

Speaker 2

We're not anticipating much of a shift in DSOs versus the 2023 by quarter. We are however actively investing in particularly the denial management portion of rev cycle. We've got big tech and new process going in there. And so we're not ready to talk about it. But again, we're investing 1,000,000 and we will expect to do some improvement from that point.

Speaker 2

But you're really looking more at 2025. When you look at the earlier the working capital, you'll note inventory a little bit better job in inventory management over the course of 'twenty three, particularly the end of 'twenty three. We're expecting that whether you call it inventory management or CapEx improvement, we're expecting 0.5 on revenue over the course of 2024.

Speaker 6

Thanks. And just again, a follow-up question on Tito's prior question about the other revenue line. So if I look at kind of that $7,000,000 or so that you reported on the sales line, is that how do you think about the cadence going forward? Was there some sort of a capture of an accelerated benefit that's not expected to recur? Thanks so much for taking my question.

Speaker 2

Sure. So that other revenue category, if you look at the Q3 of 2023 sales other, we reported $64,000,000 of revenue and that's now up in Q4 to $77,000,000 of revenue. So again, the PMPM revenue from capitated agreements is inside of that category. And so as we far outpace the patient transitions that we committed to as part of a key agreement in Q4. Those cap deductions came down significantly and that's a top line and bottom line impact.

Speaker 2

So both good guys. So that's the predominance of what you're seeing there in that sales other growth.

Speaker 6

Thanks so much.

Speaker 1

Operator, is there another question?

Operator

Yes, sir. I apologize. We'll take our question from Ben Hendricks with RBC Capital Markets.

Speaker 1

I wanted to just get a little deeper into the Humana contract conversion. Just want to get an idea of where we are in that process. You said you've had some good success lately and getting that ramped up. If you could quantify perhaps the PMPM contribution to that $77,000,000 And then again, just how that does, how you expect that portion of it to track through the year?

Speaker 2

Hey, Ben. This is Jason. We won't comment much on the economics of the arrangement. But to help out, I would tell you that we have committed to being substantially complete with patient transitions by the end of this quarter, the end of this Q1. And if we are able to execute on that, you'll see a fully loaded quarter that we've essentially removed those cap deductions.

Speaker 2

So it's in other words kind of a fully loaded quarter and then you can run the math from there.

Speaker 1

Okay. Thank you. And then just to follow-up on the diabetes and pharmacy channel shift commentary. If you could describe a little more detail about your efforts and the penetration into the pharmacy channel, what does that look like and kind of where are we in that process and timing? Yes.

Speaker 1

We should have something more significant to say about this in the Q1. We're working in Q1 call, we're working diligently to identify appropriate partners to work with us on this. Entering the pharmacy channel is not a small enterprise for us. We've got 50 state pharmacy, but we do need the backup tools and pipes in order to do this as efficiently as some of our competitors. So we are going to we are in fact spending time and resources to get ramped up in this quarter and hope that's something to talk about in a couple of months.

Speaker 1

Thank you.

Operator

Thank you. We'll take our next question from Joanna Gajank with Bank of America. Your line is open.

Speaker 7

Hi, good morning. Thanks for taking the questions. So I guess first a follow-up on the questions around the Humana contract and the other revenue. So there was the $92,000,000 I guess, revenue in this quarter in Q4. It sounds like there's still more ramp up to the question.

Speaker 7

Is this $92,000,000 a good starting point or if there's more? And I guess when it comes to thinking about this being a strong quarter overall, was there some sort of pull forward of this revenue from Humana or some adjustments from 2024 into 2023 into Q4?

Speaker 2

There were no adjustments or unusual items in the quarter. The $92,000,000 you're referencing the total other revenue, I think earlier we were talking about the other sales revenue at $77,000,000 But as we said, Joanna, we expect to be substantially complete with patient transitions before the end of the Q1 2024. And if we're able to execute on that, that should give you a good run rate within that sales other category of what we believe is our baseline, our new baseline.

Speaker 7

Okay, great. Thank you. Appreciate it. And so I guess just coming back to the performance in the quarter, so you said it came and EBITDA came in at more above your higher end of your range. And you said the revenue that came with higher margin and obviously the Humana contract and a couple of other things.

Speaker 7

Any way to quantify any of these things? Or you would say that equally contributed to the outperformance?

Speaker 2

Yes, I mean, a little bit here, a little bit there, a little everywhere, adds up to some real numbers, I guess. I'd say if we look back at what we said in Q3, we had expected sleep and diabetes sequentially, the resupply growth to be about $20,000,000 I mean it was $40,000,000 right? And so you've got all the flow through on that. I mean we had various other lines that beat and like I said it's kind

Speaker 3

of a

Speaker 2

couple of million here, a couple of million there. Certainly on labor and OpEx, we put out conservative expectations and we beat them. So that was about another $5,000,000 of sequential improvement across labor and OpEx.

Speaker 7

Thank you. And another, I guess, follow-up. When it comes to the expiration of the 7525 rule, which, I guess, product category will be hit the most? Would it be, I guess, respiratory and sleep?

Speaker 2

Yes. I mean, it would generally fall in line with the size of those businesses, right? So sleep being almost about 40% of our revenue, right, would arguably be impact most. But this is down at an MSA level and actually a product HIC pick level. And so there's a lot of detail and nuance there.

Speaker 2

But for a proxy, it's safe to assume that it spreads across the business based on the size of the products.

Speaker 7

All right. Thank you for that. And just talking about, I guess, the government exposure, as it relates to diabetes business rates and you talk about the sense of being almost 80% and I guess growing from here. So when you talk about this government payer exposure, how much I guess in that bucket is from Medicare fee for service versus Medicare Advantage, Managed Medicaid? And also, when it comes to these payers, these Managed Medicare and Managed Medicaid, are those payers largely in the pharmacy benefit or medical benefit?

Speaker 7

Is there, I guess, still potential for some movement in some of these payers that are actually in the government bucket, but they have more flexibility versus the fee for service? Thank you.

Speaker 2

Jane, I'd say that I mean, we're not going to provide a lot of detail of the components that you're asking for to make up the total. The reason that we are categorizing it as government sponsored payers is that we believe that this part of the business is fairly well insulated from the risks that you're highlighting. And so that's the reason we're reporting it that way.

Operator

We do have a follow-up from Eric Coldwell with Baird. Your line is open.

Speaker 3

Thanks. I wanted to go back to the reimbursement and regulatory environment. In the recent past, CMS has issued a few private final rules that help rein in Medicare Advantage and Managed Medicaid Programs for things like improper denials, resolution and also more transparency. I mean, it would seem like those would all be good guys for Adapt and the rest of the industry. But I'm curious, it's very early here, obviously, with the last final rule.

Speaker 3

I'm curious, have you seen any benefit or change payer behavior since this came out? And what are you expecting? Thank you.

Speaker 1

No, we haven't seen nothing so far. But your intuition that this is all positive for us is, I think, correct.

Speaker 3

Have you incorporated any forecasting of a potential lift or benefit in your guidance? No. Yes. So anything that happens would be upside potential.

Speaker 2

That's right. Okay. You got it.

Speaker 3

Thanks very much.

Speaker 1

Thanks, Eric.

Operator

Thank you. And we have no further questions in the queue at this time. I would now like to thank everyone for joining today's call.

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Earnings Conference Call
AdaptHealth Q4 2023
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