AdaptHealth Q4 2024 Earnings Call Transcript

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Provided by Quartr
February 25, 2025

Key Takeaways

  • In Q4 2024, Adapt Health delivered revenue flat year-over-year but 3% above guidance midpoint, adjusted EBITDA of $200.6 million beating its high guidance and free cash flow of $73.1 million, up 10% from last year.
  • Under the OneAdapt initiative, the company added senior leaders, reorganized into four segments, and launched automation features in its MyApp such as self-pay and CPaaS self-scheduling to streamline patient experience.
  • In the Diabetes Health segment, new leadership and integration with Sleep Resupply reduced attrition to a two-year low in Q4, grew resupply orders and NuStart starts sequentially, but the segment remains below prior-year levels.
  • Adapt extended its multiyear capitated arrangements with Humana, signed several smaller contracts, and cited a strong pipeline as validation of its outcomes-driven model.
  • For full-year 2025, Adapt expects revenue of $3.22–$3.36 billion (-1% to +3% yoy), adjusted EBITDA of $670–$710 million (∼21% margin), and free cash flow of $180–$220 million, with Q1 revenue down 3%–4% and 16%–17% margin.
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Earnings Conference Call
AdaptHealth Q4 2024
00:00 / 00:00

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Operator

Good day, everyone, and welcome to today's Adapt Health Fourth Quarter twenty twenty four Earnings Release. Today's speakers will be Suzanne Foster, Chief Executive Officer of Adapt Health and Jason Clemens, Chief Officer of Adapt Health. 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 the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding financial results for 2025 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.

Operator

Adapt Health 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, 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. This morning's call is being recorded and a replay of the call will be available later today.

Operator

It is now my pleasure to introduce the Chief Executive Officer of Adapt Health, Suzanne Foster. Please go ahead.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Good morning, everyone, and thank you for joining the call. As we close out 2024, I'm encouraged by the progress we've made towards strengthening our foundation and positioning the company for long term success and growth. Before I get into that, I'd like to take a moment to review our fourth quarter results. We are pleased that revenue, adjusted EBITDA and free cash flow each exceeded the high end of our guidance ranges for the fourth quarter of twenty twenty four, acknowledging that this followed by the reduced expectations we shared in early November. Fourth quarter revenue was effectively flat versus the prior year quarter, but beat the midpoint of our Q4 guidance range by three percent as our Sleep Health and Respiratory Health segments delivered year over year growth, offsetting contraction in our Diabetes Health segment.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Compared to prior year quarter by segment, fourth quarter Sleep Health revenue increased 3.4%, respiratory health increased 1%, wellness at home declined 0.8 and diabetes health declined 7.3%. Fourth quarter adjusted EBITDA contracted 2% from the prior year quarter, but was well above the high end of our guidance range. While our adjusted EBITDA margin was 23.4%, modestly narrower than the 23.8 reported in prior year quarter. Free cash flow was strong in the fourth quarter at $73,000,000 up 10% from prior year quarter and well above the high end of our guidance range. As you know, last August, we identified five areas of focus, which included our OneAdapt initiative, accelerating the application of AI and automation, increasing our clinical relevance, delivering organic growth and strengthening our balance sheet.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

And I'm pleased that we are already making progress on all fronts. Starting with OneAdapt, we're taking action to standardize work and cultivate a mindset of continuous improvement to ensure that we deliver exceptional service and quality of care to patients. We began by assembling a team of talented and experienced leaders, recruiting several senior professionals to the company over the last seven months. This includes new leaders for operations and strategy who both joined in the second quarter. It also includes the appointment of a Chief Commercial Officer, a new Chief Legal Officer and an SVP of Supply Chain this past quarter.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

In this coming month, we are looking forward to welcoming our newly appointed senior leader to build out our Adapt Operating System or AOS. We made all of these additions while holding the line on our adjusted EBITDA margin. Just as important, we are empowering these individuals and the teams they lead through an organizational structure that prioritizes accountability, coordination and trust. Among other changes, starting in the fourth quarter, we moved to a segment structure for managing the company with general managers appointed to each of these four segments. This new structure provides visibility into the needs of our customers, coordinates our efforts around service excellence, drives accountability throughout our organization and allows us to measure and improve our business performance.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Further, we are harnessing the abundance of talent and experience in our workforce by enlisting employees across all metals of the organization to participate in training on problem solving methods by challenging them to proactively identify opportunities for improvement in our processes and operations and by inviting them to work with their colleagues to implement changes that will increase the quality of the work we perform. One of DApps is about superior execution. It is about being the best operator in the industry and building an unrivaled reputation for patient service excellence. In short, it's about being the best version of what we already are. And at the same time, we recognize we must evolve how we do what we do today.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

And that means leading the home health industry in innovation and expanding the value we deliver for patients. A prime example is our focus on harnessing the power of automation and AI. We have several initiatives underway that will simplify the patient experience, streamline the work we do for them and free up resources that could be reinvested in creating additional patient value. To name just two, in October, we introduced a self pay feature in our mobile application called MyApp. And following through on an initiative I mentioned last quarter, in December we launched a CPaaS self scheduling feature in MyApp.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Our self scheduling feature eliminates the need for patients to interact with customer service representatives to schedule a CPAP setup. These new features provide additional convenience and simplicity. Similarly, we see an immense opportunity to increase clinical relevance. We are already investing heavily in our adherence programs, helping more patients stay on critical therapies for longer and reducing the incidence of costly rehospitalization. The next phase in our evolution is harnessing the massive quantities of physiological, behavioral and environmental patient generated data from our in home equipment and using that data to deliver actionable insights to patients, physicians and payers.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

This is the direction we will follow to build a best in class health services business that drives improved health outcomes and reduced costs to benefit all of the stakeholders in The U. S. Healthcare system. While we are in the early stages of realizing this ambition, we view our recent success with capitated arrangements as a strong vote of confidence in our ability to appropriately manage patient care and a solid indication that we have passed to an expanded role, which brings me to the next area of focus, delivering organic growth. In the fourth quarter, we realigned our sales organization under our new Chief Commercial Officer, Russ Schuster, who brings a wealth of experience and proven track record of growing large businesses and who will oversee our commercial strategy and revenue generation.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Under Russ' leadership, we also implemented sales quotas for the first time in many years. These quotas will provide clear performance benchmarks and inject the proper incentives needed for driving sales effectiveness. Further, we are strengthening the connective tissue between our commercial and operations teams who are partnering to improve workflow around order intake and conversion of orders to revenue. We are also focused on resuming organic growth in our diabetes health segment. To this end, we commenced a diagnostic review of the causes of our underperformance, Notwithstanding structural reimbursement pressures that have weighed on all operators in the medical benefit channel, we simply weren't keeping pace with the competition.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Among other causes, our review determined that we had lost focus on how we manage patient interaction. Excessive patient outreach elevated our attrition rates with existing resupply patients and depressed diabetes NuSTAR by damaging our standing with referring physicians. As I mentioned last quarter, we made swift moves to course correct our diabetes business. We installed a new leadership team for the segment, aligned under an experienced General Manager and we integrated Diabetes Resupply into our Sleep Resupply operations to leverage the experience and leadership that has made Sleep Resupply a center of excellence. In the fourth quarter, we remodeled our diabetes patient outreach program from our sleep resupply operations to deliver an experience that makes sense for patients.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

I am pleased to report that we are beginning to see promising signs that these actions are working. On the resupply side, we grew orders year over year in December. Our Q4 twenty twenty four attrition rate was the lowest we have seen in two years and we exceeded our Q4 twenty twenty four diabetes resupply five revenue forecast, albeit on with our reduced expectations. On NuStart, we are working hard to rebuild trust with our referral sources and we were encouraged to see a sequential increase in new diabetes diabetes patients during Q4 twenty twenty four, which contrasts with the sequential contraction we saw in the prior year quarter. One quarter did not make a trend with performance, but I have confidence that the team is executing well on its plan to shore up the processes and we are cautiously optimistic that diabetes will become less of a drag on our overall organic growth rate over time.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Also related to delivering organic growth, we continue to see opportunities to grow our business through capitated fee arrangement with payers and we are encouraged by how our existing arrangements are performing in terms of outcomes, cost and satisfaction for both payers and patients. In fact, I am pleased to announce that this past week, we agreed to a multiyear extension of our capitated contract with Humana. Finally, turning to our objective of strengthening our balance sheet. In the last year, we reduced debt outstanding by $170,000,000 including another $50,000,000 in the fourth quarter. And at year end 2024, our net leverage ratio stood at 2.8 times.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Also during 2024, we refinanced our senior secured credit facility to extend our maturity and reduce our interest expense. Further, we have continued to exit non strategic product lines. In the third quarter, we completed a transaction to sell certain custom rehab assets. In the fourth quarter, we reached a definitive agreement to sell certain incontinence assets to a third party. And in 2025, we will continue to explore the potential divestiture of an additional non core product line.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

We expect this to be accretive to our adjusted EBITDA margin and to generate proceeds for further debt reduction. In closing, our five areas of focus are just the first steps along our journey to realize our full potential as a healthcare services company. In many respects, it is an execution roadmap designed to help our new leadership team lock on things to keep us focused on what we need to accomplish in the near term. Undoubtedly, all of you are keenly interested in understanding more about the strategic direction of the company and I can assure you that is forthcoming. Our strategy team is already sharpening our vision for how best to create value from our opportunities and establishing a plan for resourcing and executing that vision over the next several years.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

I look forward to sharing more about that as 2025 progresses. With that, I will turn it over to Jason.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Thank you, Suzanne, and thanks to everyone for joining our call. Today, I'm going to review full year and fourth quarter twenty twenty four results. I'll follow that with a review of our balance sheet and our plans for capital allocation before finishing with our outlook for 2025. Starting in the fourth quarter, we moved to a multiple segment structure for reporting our results to align with how we are now managing the company. We believe this reporting change will increase transparency into our business performance and I look forward to sharing our segment results for the first time today.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

For full year 2024, net revenue of $3,260,000,000 grew 1.9% versus the prior year. Notably, our 2024 revenue growth overcame pressure from the divestiture of certain custom rehab assets and the termination of the public health emergency seven thousand five hundred and twenty five blended reimbursement rates originally introduced in response to the COVID pandemic. Underneath these headwinds, we produced growth from new capitated revenue and strong sleep resupply volumes, partially offset by weakness in the Diabetes Health segment, which reflected payer shifts to the pharmacy reimbursement channel for Diabetes and as Suzanne discussed earlier, operational missteps that we are in the process of correcting. By segment, net revenue growth for full year 2024 was 4.5% in sleep health, 6% in respiratory health and 1.9% in wellness at home, offset by revenue decline of 6.9% in diabetes health. Our fourth quarter revenue was roughly flat versus the prior year quarter, but landed just above the high end of the guidance range we provided in November.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Our Sleep Health business continues to be an area of strength. Sleep Health net revenue increased 3.4% year over year to $356,500,000 Sleep Health NuStart surpassed $120,000 for the third consecutive quarter and our Sleep Health Centers now stands at 1,660,000 up another $23,000 sequentially and up 6.5% from year end 2023. Our CPAP survey now indicates that fifteen point three percent of respondents are using GOP1s to manage diabetes or weight loss. We are still seeing a modest increase in CPAP adherence for GLP-one patients versus non GLP-one patients and we continue to see an immaterial difference in resupply work patterns between the two cohorts. Respiratory Health net revenue was $165,300,000 in the fourth quarter, up 1% compared to the prior year quarter. Despite a slower than normal start to flu season, our oxygen census set another record, now surpassing 330,000 patients actively on service. We continue to help patients reduce time spent reordering tank refills by providing tools that eliminate the need to interact with an Adapt customer service representative, including new technology launched in the Adapt Health MyApp. Fourth quarter diabetes health revenue of $171,300,000 decreased 7.3% from the prior year quarter.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

However, sequential growth of $30,200,000 over the third quarter was the most produced in the last three years. But we are not satisfied with that performance, results were better than we anticipated due partly to some early results from the operational changes Suzanne mentioned earlier and characterized by better than anticipated starts and patient retention. For Wellness at Home, which includes all other product categories, fourth quarter net revenue was $163,500,000 down 0.8% from the prior year quarter driven by revenue disposed with the sale of certain custom rehab assets. The remaining products in this segment grew as expected. Turning to profitability and starting with our full year results.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Adjusted EBITDA was $688,700,000 for 2024, up 2.7% from full year 2023 and about 2% above the high end of the guidance range we provided in November. We held the line on adjusted EBITDA margin, which was 21.1% for 2024 versus 21% for 2023 even as we made investments in leadership, technology and processes that we expect to support our long term growth. By segment, adjusted EBITDA margin for full year 2024 was 25.8% in sleep health, 30.7% in respiratory health, 9.9% in diabetes health and 12.3% in wellness at home. Our Sleep Health adjusted EBITDA margin contracted 120 basis points, driven predominantly by product and payer mix. Our Respiratory Health adjusted EBITDA margin expanded 190 basis points as a result of a full year of key capitated contracts.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Our Diabetes Health adjusted EBITDA margin contracted two twenty basis points on lower revenue as we maintained sales and operations capacity in anticipation of resuming revenue growth. Wellness at Home adjusted EBITDA margin expanded 200 basis points also benefiting from the full year of key capitated contracts as well as the disposition of certain custom rehab assets with lower margins. For the fourth quarter, adjusted EBITDA was $200,600,000 Adjusted EBITDA margin of 23.4% contracted 40 basis points from Q4 twenty twenty three, primarily driven by increased labor costs, reflecting the aforementioned investments we are making to support growth. Moving to cash flow, balance sheet and capital allocation. For full year 2024, cash flow from operations was $541,800,000 up 12.7% against full year 2023.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

CapEx was $306,100,000 or 9.4% of revenue, down from 10.5% of revenue in 2023. And free cash flow was $235,800,000 compared to $143,200,000 a year ago. For Q4 twenty twenty four, cash cash flow from operations was $150,400,000 CapEx of $77,300,000 was 9% of revenue, down from 10.3% in the fourth quarter of twenty twenty three and slightly below the full run rate for 2024. Free cash flow was $73,100,000 40 1 point 1 million dollars above the high end of our guidance range provided in November. For the $73,100,000 in free cash flow, we deployed 9,500,000 to a tuck in acquisition in Southeast and we used $50,000,000 to reduce the balance on the Term Loan Act.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

The remainder went to unrestricted cash, which stood at $109,700,000 at year end. Days sales outstanding for Q4 twenty twenty four was $43,800,000 down from the previous quarter as accounts receivable continue to normalize following the change healthcare situation earlier in 2024. We are working on opportunities to improve our revenue cycle management, streamline financial operations, improving inventory management and capturing cost efficiencies, all of which are increasing the level of our cash flow. As of year end 2024, net debt stood at $1,930,000,000 and our net leverage ratio was 2.79 times, down from 2.87 times at the end of last quarter and down from 3.16 times at the end of twenty twenty three. As Suzanne mentioned, we've been using free cash to reduce debt resulting in a $170,000,000 reduction in our TLA balance over the last year.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Recall that last quarter, we introduced a target of 2.5 times net leverage. Between the progress we made in 2024, our expectations for free cash flow generation in 2025 and our near term capital allocation priorities, we are already well along the path toward achieving this target. In terms of capital allocation, our current priorities are investing to accelerate organic growth and reducing our debt to further strengthen our balance sheet. As noted earlier, last quarter we completed a transaction to sell certain custom rehab assets. And in the fourth quarter, we reached a definitive agreement to sell certain incontinence assets to a third party.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

In 2025, we will explore the divestiture of one additional similarly sized non core product line. In aggregate, these non core assets represent approximate. For now, we expect M and A activity to be modest. Further on the horizon, we will continue to look for strategic acquisitions of home medical equipment providers to round out our geographic footprint and increase patient access. Turning to guidance, for full year 2025, we expect revenue of $3,220,000,000 to $3,360,000,000 or negative 1% to positive 3% growth.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

This assumes approximately zero to four fifty basis points in underlying growth, partially offset by a 40 basis point drag related to the disposition of certain custom rehab assets, on cash drag from changes in the mix of purchase revenue versus rental revenue. Rental revenue requires advertising assets over their useful life, effectively deferring revenue to future periods. We expect this to disproportionately affect the first quarter and be smaller in the remaining quarters of 2025. We expect the shape of quarterly revenue to look similar to that of 2024. And as a reminder, our guidance does not include any impact from acquisitions or dispositions not yet close.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

We expect full year 2025 adjusted EBITDA of $670,000,000 to $710,000,000 or approximately 21% in line with full year 2024. We expect to see the aforementioned 90 basis point impact to flow entirely to the bottom line in 2025. Finally, we expect full year 2025 free cash flow in the range of $180,000,000 to $220,000,000 dollars Similar to our results in 2024, we expect approximately one third of that estimate in the first half of the year and the remainder in the second half of the year. For the first quarter of twenty twenty five, we expect revenue to be down between 34% versus Q1 twenty twenty four. We expect an adjusted EBITDA margin of 16% to 17% for Q1 twenty twenty five.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

These expectations reflect ongoing weakness in our diabetes health performance as well as the drag from the mix of purchase versus rental revenue proportionally affects the first quarter and drops entirely to the bottom line. As usual, we expect Q1 twenty twenty five free cash flow to be modest. In summary, our fourth quarter results exceeded our expectations. We expect 2025 to be another strong year for free cash flow generation and are making good progress in our balance sheet. While we expect 2025 to be somewhat of a transition year for growth, we are executing on our five areas of focus to strengthen our foundation and are confident that we're on a path to accelerated growth in 2026 and beyond.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

That brings me to the end of my remarks. Operator, would you kindly open up the call for questions?

Operator

Thank you. Our first question Thank you. Our first question will come from Ben Hendricks with RBC Capital Markets. Your line is open.

Ben Hendrix
Ben Hendrix
Vice President at RBC Capital Markets

Great. Thank you very much. Can you talk more about the conversations you've been having with carriers over additional capitated arrangements? Specifically, are we at a point yet with the Humana arrangement that you can kind of demonstrate to payers clinical outperformance, reduction in admissions or other data to support more incremental adoption of those capitated programs? Thanks.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Yes. Thanks for the question. I'll start with that. So two parts, we have ongoing conversations going with a variety of proposed capitated arrangements in our pipeline that are progressing well. In terms of the data and conversations with Humana that relationship remains very strong.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

We meet regularly and review our performance including some of the data about how managing their patients and they've been very complementary about the performance that we're having.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Ben, I'd add that since the last quarter, we have in fact signed additional capitated arrangements. Now these are nowhere near the size and scale of the Humana arrangement, but we are making progress. I think in terms of kind of voting, if you will, I mean, Humana has been pretty clear. I mean, in signing the contract extension, I think both parties have said that things are going quite well and we'd like to continue the relationship over multiple years.

Ben Hendrix
Ben Hendrix
Vice President at RBC Capital Markets

Great. Thanks. And if I could just squeeze one more in real quick. You noted revenue cycle and inventory measures as well as normalization in DSO following the change outage. Can you talk more about your kind of working capital outlook? How much cash flow improvement we can expect from your various efficiency initiatives and timing to reach those targets? Thanks.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Sure, Ben. Well, first I'd say, we're incredibly pleased with our free cash flow performance in 2024. Really all levers of working capital have made progress. Now on the DSO front, certainly we were handicapped by the change out earlier in the year, but in the revenue cycle and AR is starting to normalize following that impact. So we expect seeing more better DSOs over the course of 2025.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

On the payables front, we had some significant movement in payment terms throughout the course of the year. Now certainly, we're not expecting all of that to recur in '25, which is why you'll notice that at the midpoint, we're committing to $200,000,000 of free cash flow. And then on inventory and CapEx, as Suzanne talked about our Initiate Operating Officer that joined us very recently. We're thrilled to have him and the team that he brought with him as well as the rest of the folks that are here to Daphne that he leads every day and we're making demonstrable improvement in inventory management and in CapEx management.

Ben Hendrix
Ben Hendrix
Vice President at RBC Capital Markets

Thank you.

Operator

Thank you. Our next question will come from Matthew Blackman with Stifel. Your line is open.

Mathew Blackman
Mathew Blackman
Managing Director at Stifel Financial

Hey, Jason. Hey, Suzanne. I want to do a quick confirmation question upfront before I get to my follow-up. On the guidance for this year, you talked about the 40 bps drag due to the disposal of asset. That's just the assets in the fourth quarter and not the planned disposal of one additional line in 2025, correct?

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Yes, you got it.

Mathew Blackman
Mathew Blackman
Managing Director at Stifel Financial

Okay. And then on the diabetes business, I'm curious what you're thinking about for the contribution to 2025 guidance. You've got somewhat improving trends in pump the last several quarters. I'm curious how that progressed during the fourth quarter and then also very obvious improvement in CGM, curious what you're baking in to the guidance this year? Thank you.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Sure, Bob. So for public pump supplies, in the third quarter we reported some modest growth from first time over the prior year by about $1,000,000 might have been two. In the fourth quarter it was about the same, we were down $1,000,000 but effectively flat. So I think as it relates to pump and pump supplies, we're at a stable revenue jump off point and we do expect to start showing some modest growth in pump and pump supplies. As it relates to CGM, which is the largest part of the diabetes segment, we said last quarter that we're not going to commit to growth in that segment, Frankly, until we've proven it, we don't want to get too ahead of ourselves.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

There are a lot of moving pieces in the big business. We are making progress and we intend to do that for the balance of 2025. But we're not getting ahead of ourselves. We're not committing yet to growth in the diabetes segment until we're able to improve it.

Mathew Blackman
Mathew Blackman
Managing Director at Stifel Financial

And you did see a minor uptick in capitated revenue arrangement revenues during the fourth quarter. Should we expect that 4Q to be a reasonable quarterly run rate for 2025?

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Yes, we signed these agreements in the fourth quarter. They will actually start in early twenty twenty five. I think a very modest increase in capitated revenue over the course of the year is just the right way to think about it.

Operator

Thank you. Our next question will come from Brian Tanquilut with Jefferies. Your line is open.

Brian Tanquilut
Equity Research Analyst - Healthcare Services at Jefferies & Company Inc

Hey, good morning and congrats on the quarter. Suzanne, maybe I'll just follow-up to Jason's last comment, not committing to growing the diabetes business yet. So from where you sit today, I mean, you've been here to digest the whole enterprise. Do you still see synergies and strategic value to owning diabetes at this point?

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Yes. Thanks for the question. At this point, I do as a hypothesis. One is, we see the potential for growth coming from two areas. One is with our hospital customers and the value proposition of the one stop shop in the broad portfolio is playing out for us well.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

So that continues to be good feedback that we're receiving from our bigger hospital systems where we seem to be winning and we'll continue to track that to see if the full breadth of the portfolio is a value. But at this point, we believe it is. And the second reason for that is on future capitated arrangements. We think that there is an opportunity here as well where payers are intrigued by the breadth of our portfolio and our geographic reach that seems to be the value proposition and that value profit is holding up well as I mentioned earlier with a strong pipeline there. So at this point, if we can get diabetes performing well and the breadth of our portfolio, we think that's a winning combination.

Brian Tanquilut
Equity Research Analyst - Healthcare Services at Jefferies & Company Inc

I appreciate that. And then maybe Jason, my follow-up, I think about your guidance ranges. So first, free cash flow, the mid point of $125,000,000 guidance below last year's and then you mentioned you're expecting margins to be flat. I know you mentioned some of that is just the business that you've sold. But any other things we need to think about is puts and takes in terms of the cash flow guidance and EBITDA?

Brian Tanquilut
Equity Research Analyst - Healthcare Services at Jefferies & Company Inc

Is it just conservatism or is there anything else we need to be considering there? Thanks.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

So regarding free cash flow, yes, at the mid we are showing about a $35,000,000 last free cash flow in 2025. I mean, really that's a result of the payment extensions, payment term extensions that we talked about in 2024. We did a lot. We really moved the needle in important ways there. But to do that a second year in a row, it's just not possible frankly.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

And so we've adjusted that free cash flow expectation for that reason. I mean I think to the ups on free cash flow, look we're going to have considerably less interest in 2025. I mean we're making significant progress there And this is the first quarter and the fourth quarter in a long time. I mean, interest expense was under $30,000,000 We intend to keep going and we intend to continue to fuel the cash flow machine that we're building here. I'd say in terms of margins, we feel that we put out a very appropriate guide. I mean, certainly, if we can get revenue going and growth going in some of these areas of the company, I mean, that'll all contribute and should flow through at higher margins. But it's early in the year.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

We've made some key investments. There's a lot of new people here in the company and we think they're all incredibly sound and they're going to do great things, but we just got to let that play out a little bit.

Brian Tanquilut
Equity Research Analyst - Healthcare Services at Jefferies & Company Inc

Awesome. Congrats again. Thank you.

Operator

Thank you. Our next question will come from Richard Close with Canaccord. Your line is open.

Richard Close
Richard Close
Managing Director at Canaccord Genuity Group

Yes. Thanks for the questions. Good news on the diabetes progress. Can you, Susan, just talk a little bit about the changes you've made there, the reworking of the resupply outreach program and then process of rebuilding that trust from the referral standpoint?

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Sure. Thanks for the question. So it started with the new leadership team. We put in a very experienced operator, Gary Sheehan, who was the CEO of his own company and then did some remarkable work here at Adapt. So he brought that HME thinking, if you will, and structure and organization to the business.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

So there was a lot of just great blocking and tackling and getting back to the basics of how we run a business that he brought on early in Q4. In addition, at that same time shifting the resupply business over to Matt Cox in Nashville entirely resupply. That engine was well had a big foundation for us to put in the diabetes business. And what I mean by that is that team understands that patients like a variety of different outreaches. And we had in the former diabetes resupply business allowed our processes to get out of control where we were excessively contacting patients and not providing the right loop back if you will information to how to reach us back, but rather just continuing to reach out which caused frustration on their end and there was a lot of attrition that had stopped.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

And it was remarkable to see how quickly that bleeding stopped, but more importantly with the right outreach program how we were able to win back patients fairly quickly within the quarter. So I'm incredibly pleased with the expertise that that team down in Nashville has been able to do. So that has the penetration and retention. On the new starts, our new sales leader, Graham Ward came in, has focused the team on better selling techniques, but more importantly has partnered with our very large H and E team and has taken a one adapt approach where they're going in and selling our value prop to hospitals, improving the way that we communicate about what we need for a good referral. Sometimes we were getting information that we just couldn't process and so that team has been retrained on how to get the appropriate information so that we can move that referral and get that patient the product that they need.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

So that team is partnering the 15 or 70 or so salespeople with our several hundred HME teams and they're now out there in force together. So on all fronts, both on the new starts, the resupply and then the leadership under Gary, I'm pleased with the progress you just made that blocking and tackling strong execution. Execution.

Richard Close
Richard Close
Managing Director at Canaccord Genuity Group

That's very helpful. And then as a follow-up, you talked about implementing the sales quota first time for that. Can you talk a little bit how that was received? Did that create any changes in the sales force, anything along those lines?

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Yes, really excited by this initiative. So back in really right after I got here that was one of the first projects we started. Originally our sales force or at that time was just paid on volume and no quota setting. And so we kicked off a very deep analysis, did the work upfront through 2024 to make sure that this rollout would be done with as close to perfection as possible because we all know that that can be a delicate situation. The team rolled that out January 1 and it has been the sales force has responded very favorably.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

They understand it's a fair program. We did it in a way that it really over the next two years gets us to really where we want to be. And so you always know when these go well where there's pretty much silence from the sales force. And that's what we've experienced is everyone understands it, they've rallied around it, it's allowed us to set quotas that will make our forecasting more predictable. So all in all this has been very successful and it really came through good leadership of our new sales leadership team and it also was supported heavily by our operations team who were managing the sales force.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

We're very supportive in the transition. So this is one of the highlights from a performance perspective of the team this past year.

Operator

Our next question will come from Eric Coldwell with Baird.

Eric Coldwell
Senior Research Analyst at Baird

So on this purchase versus rent, I'd like to dig in a little bit. Why is it happening? What is happening? What segment? It looks like if I understood the commentary correctly, you've got something in the ballpark of a, I don't know, maybe $25,000,000 30 million dollars impact in Q1 revenue and then I assume that revenue starts coming back in Q2 and beyond, but just hoping you could dig in on that one a little bit.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Sure, Eric. This is Jason. Well, firstly, it is really focused in our sleep business. I mean, all components across all product lines, I mean they're reimbursed differently for different reasons. I would say that as technology has evolved over time, components that in the past might have been separatable, but as tax improves, they're really now core to the pieces of equipment.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

That's changed the way not the way that we get reimbursed, but does change the way that we account for that revenue. And so in sleep as an example, as you know, most products are appreciated over about thirteen month cycle. And so that's what we're looking at here is really a change in that mix. And so the revenue, you've got that couched correctly about $25,000,000 to $30,000,000 top line. We really expect that to be delayed.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

So it will be a bigger impact in the first quarter. It will lane in the second and the third and over the course of the year until we pass the thirteen month cycle.

Eric Coldwell
Senior Research Analyst at Baird

All right.

Eric Coldwell
Senior Research Analyst at Baird

My next topic, I was hoping we could get a final tally on the impact of $75.25 for the year and the fourth quarter. And just confirming that or checking that there's no other reimbursement or regulatory changes, things out of DC post PHE impacts that are material to 2025 and beyond or if there are, what might those be?

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Sure. So we previously discussed about a $25,000,000 top line and bottom line pressure in 2024. We came right in that area. For the fourth quarter, frankly, just due to more revenue activity in the other quarters of the year that represented close to 30% of that pressure in the fourth quarter. And so as we look at 25%, we would frame the reimbursement environment as stable.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

There was a Demi Funds fee schedule increase awarded in early December that one affected in January of this year. That's accounted for entirely in our full year guidance. And then across the fair landscape, just normal course operations, we're working on contract by contract to get reimbursed what we think deserves reimbursement. But overall, we view it as very, very stable.

Eric Coldwell
Senior Research Analyst at Baird

And if I could do just one more. You had a competitor that recently alluded to a change in one of their capitated contracts and expected change that seems like a bit of a headwind to them. You've just extended the Humana deal and have announced some other wins. You sound very happy with them. I'm curious, are there any color you could provide on the renewal here in terms of pricing, concessions, term changes, limitations, expansions of of products or states, is there any update or was it pretty much a we like what we're doing, we're going to keep doing it for longer agreement?

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Yes, Eric. I don't know if we have comments on any of our competitors and their contracts. I will say for us, the pipeline continues to be robust. We've got a full dedicated team that focuses on selling value proposition of these arrangements every day of pricing them, of tracking utilization management. We have built a real core capability here at DaxHealth and we're not accounting for any new wins for CapExator arrangements in our 2025 guidance. However, we are hard to work at it.

Eric Coldwell
Senior Research Analyst at Baird

And any changes or updates on the big contract that was extended? Anything you would nuance?

Jason Clemens
Jason Clemens
CFO at AdaptHealth

I mean, you can really think of it as just an extension of terms that I think both sides view very favorably today. So it has no relationship, I think, that you're talking about competitors and other things. I mean, for us and Brickmana, I think that the original deal makes a lot of sense. We're all very pleased with it and we're extending it for multiple years.

Eric Coldwell
Senior Research Analyst at Baird

Perfect. Thank you very much.

Operator

Our next question will come from Pito Chickering with Deutsche Bank. Your line is open.

Kieran Ryan
Kieran Ryan
Analyst at Deutsche Bank

Hi, there. This is Kieran Ryan on for Pito. Thanks for taking the questions. Just wanted to start on diabetes. I think you've commented on kind of the new starts and resupply sales dynamics already.

Kieran Ryan
Kieran Ryan
Analyst at Deutsche Bank

Can you just talk a little bit about that other factor you called out in 3Q around pricing pressure from the shift to all pharmacy for certain payers. Just wanted to know if that was in line with your expectations for the quarter and if we should see that continue at a stable rate into 2025 absent any other expansion there?

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Sure, sure, Karen. I mean, if we look at 2024 as a whole, payer reimbursement for diabetes went largely as we expected. We spoke about a couple of key states that within their Medicaid agencies made determinations on reimbursement and that again played out as expected. I think as we stand here today, we believe that any shift to any kind of shift to a pharmacy reimbursement will be muted versus what happened last year. But certainly as we hear policy change, if one occurs, we'll be sure to update that in our guidance.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

But as we see here today, we feel very good and see where they're stable

Kieran Ryan
Kieran Ryan
Analyst at Deutsche Bank

Thank you. And then just on Sleep, just outside of that sales first rental dynamic, if there's any color or puts and takes you can provide around how would you think about 2025 growth there coming off of some few quarters in a row of really strong underlying demand. Just want to understand how you're thinking about kind of 2025? Thank you.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

Sure, Karen. I mean, we just introduced our segments. I mean, we're not in position to guide on segments in any way. I mean, what we can offer for perspective, when you look at the enterprise growth for 2025, we do expect compression in diabetes. We intend to do better, but that is what we have modeled in our assumptions.

Jason Clemens
Jason Clemens
CFO at AdaptHealth

We do expect respiratory and wellness at home to produce some modest but compounding and consistent revenue growth each quarter over the prior year. And we do expect things to make up a difference from that meetings to the enterprise. So that's what we can offer. We're looking forward to a solid year in sleep and other segments.

Kieran Ryan
Kieran Ryan
Analyst at Deutsche Bank

Thank you.

Operator

It appears we have no further questions at this time. I'll now turn the program back over to Suzanne Foster for any additional remarks.

Suzanne Foster
Suzanne Foster
Chief Executive Officer & Director at AdaptHealth

Thank you everyone for participating in our call today. Just to wrap up, the key takeaways is that we've made a lot of progress on our five areas of focus in a relatively short time. And we have a lot to accomplish still, but the team is invigorated and I'm confident that we are on the path to realizing our full potential as a health services company. So we look forward to meeting with you, as many of you in person in the coming weeks. Thanks again.

Operator

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.

Executives
Analysts
    • Ben Hendrix
      Vice President at RBC Capital Markets
    • Mathew Blackman
      Managing Director at Stifel Financial
    • Brian Tanquilut
      Equity Research Analyst - Healthcare Services at Jefferies & Company Inc
    • Richard Close
      Managing Director at Canaccord Genuity Group
    • Eric Coldwell
      Senior Research Analyst at Baird
    • Kieran Ryan
      Analyst at Deutsche Bank
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