AHCO - NASDAQ

Good day, everyone, and welcome to today's AdaptHealth Fourth Quarter 2025 Earnings Release. Today's speakers will be Suzanne Foster, Chief Executive Officer of AdaptHealth; and Jason Clemens, 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 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. 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 and free cash flow, all of which are non-GAAP financial measures. You can find more information about these non-GAAP measures in 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. I am now pleased to introduce the Chief Executive Officer of AdaptHealth, Suzanne Foster.

Thank you. Good morning, everyone, and welcome to the call. The fourth quarter of 2025 capped a tremendous year of transition for us. Over the course of 2025, we implemented a new operating model that drove standardization and process maturity across our enterprise. We closed the largest capitated contract in the history of the industry, and we honed our portfolio by disposing of noncore assets, using those proceeds and our strong free cash flow to pay down debt and strengthen our balance sheet. . The work we completed last year not only positions us for accelerated growth and improved financial performance in 2026 and beyond, but is essential to achieving our aspiration to become the most trusted and reliable partner in home medical equipment and services. In the fourth quarter, we continued that momentum, with broad-based patient census growth and strong revenue performance, along with meaningful operational improvements and commercial progress. Let me walk you through the details. Starting with the financial results. Full year revenue of $3.245 billion and Q4 revenue of $846.3 million, both exceeded the midpoint of our guidance range. Organic revenue growth, which does not include changes in revenue from divestitures or acquisitions, was 1.7% for both the full year and Q4. Underlying this revenue performance, we set patient census records in sleep health, respiratory health and wellness at home and a retention record in diabetes health. In sleep health, new starts were up about 6% year-over-year and just a few hundred shy of the record set in Q1 2023 during the post-Philips recall demand snapback. Sleep health patient census grew 4% year-over-year and set another new record. In respiratory health, oxygen, and vent new starts were up about 4% and 5%, respectively, and patient census for both product lines hit new all-time records. Vents for the third consecutive quarter. In wellness at home, new starts for wheelchairs and beds were about 6% and 5% year-over-year, respectively, with patient census for both hitting all-time records. And in diabetes health, patient retention was better than we have ever experienced, driven by the decision we made last year to integrate diabetes resupply into our sleep resupply operations. Diabetes patient census was flat year-over-year as the improved retention rate offset slower new starts. Turning to profitability. Adjusted EBITDA was $616.7 million for the full year and $163.1 million for Q4. Both periods included a $14.5 million legal settlement and about $10 million of accelerated costs to bring our new capitated arrangement live in December, ahead of schedule and to ensure an on-time go-live for the next phase scheduled for Q1. Excluding these 2 items, adjusted EBITDA was in line with our full year 2025 guidance as we continue to demonstrate discipline on labor and operating expenses. The underlying earnings power of our business remains intact, and we are maintaining the 2026 guidance previewed on our Q3 earnings call. We continue to make progress on our balance sheet. During the quarter, we reduced our debt balance by another $25 million, bringing the year-to-date total to $250 million. And S&P and Moody's, both upgraded our credit ratings, reflecting our focus on debt reduction and our strong free cash flow, which was $219.4 million for the full year. Let me take you behind these financial results to the operational progress that is beginning to show up in our numbers. The patient census growth, I highlighted previously, reflects our continued focus on rapid service delivery and clinical outcomes that drive physician referrals and patient retention. Central to that focus is the standard operating model implemented in Q3, which realigned our organizational structure and standardized workflows across the company. As part of that transformation, we centralized order intake in sleep in Q3, and we extended that to vents in Q4. This change is contributing to improved setup times and order conversion rates. In sleep, referral to setup improved to 9 days, down from 10 days in Q3 and from 23 days a year ago. In respiratory, referral to setup improved by 3 days year-over-year for both oxygen and vents. We also operationalized new CMS documentation requirements for vents, requirements, we believe, could be challenging for smaller competitors and a tailwind for our vent share in 2026. We also continue to produce industry-leading clinical outcomes. For example, in sleep, adherence continues to be 10 percentage points above the industry top quartile. We are deploying technology to further enhance service delivery. And AI pilots for sleep order intake significantly reduced processing time and our conversational AI for PAP self-scheduling meaningfully reduced patient phone times. Given the success of both pilots, we plan to roll them out to additional regions in 2026. We are also advancing our digital patient engagement capabilities, with the self-scheduling feature we introduced in earlier 2025, helping to more than double myAPP users to over 327,000 at year-end. Another element of our operational transformation, the centralized patient services contact center introduced in Q3 proved critical to successfully onboarding the Mid-Atlantic cohort of patients for our new capitated contract, achieving 98% answer rates. That success is early proof of something that will matter enormously over the coming year, our ability to execute complex large-scale transitions. Our new capitated contract is a massive undertaking, the largest service transition in the HME industry's history. To put that in context, when fully operational, we'll be serving over 10 million patients nationwide with approximately 1,200 dedicated employees across 30 locations. We went live with the 3 Mid-Atlantic states in December, covering approximately 50,000 members. This was earlier than planned and the transition has been remarkably smooth, thanks to 7 months of preparation by our team and exceptional collaboration with both the incumbent provider and our customer. As I mentioned earlier, we have also been investing in the infrastructure and staffing required for the upcoming start dates. The preparation, collaboration and forward investment give us confidence in our ability to onboard the remaining patients on schedule in the first half of 2026, while maintaining continuity of care as they transition between providers. It also gives us confidence in our ability to deliver on the contract's performance requirements, metrics like speed to serve, responsiveness and patient satisfaction. We know we can meet these requirements because they essentially mirror what we've been delivering under the Humana capitated arrangement, which has demonstrated we can execute this model at scale. Turning to our commercial progress. We continue to strengthen our sales organization in the fourth quarter. We deepened sales leadership across the organization and standardized daily management routines, giving our teams aligned data, clear structure and shared accountability. These are the building blocks of sales force maturity. We continue to focus on building our capitated pipeline, several years of demonstrated performance under our Humana arrangement, combined with the scale of the contract we won last year, have established us as a proven partner for large capitated arrangements. We believe our operational capacity, technology infrastructure and focus on service excellence uniquely positions us to help payers and integrated delivery networks align incentives and keep patients healthy at the lowest sustainable cost. On the regulatory front, we received a favorable outcome from CMS on the upcoming round of competitive bidding, with our core sleep and respiratory products excluded from the next round, providing stability and clarity in our longer-term outlook. On the business development front, we closed the acquisition of a Hawaii-based HME provider, expanding our footprint to our 48th state. The deal provides the infrastructure needed to support our capitated contract in the state and establishes a beachhead for winning other business there. We also completed one divestiture in the fourth quarter, exiting a small remaining infusion asset in our Wellness at Home segment as part of our ongoing effort to sharpen our strategic focus and redeploy capital into our core businesses. Our acquisition pipeline remains active, and we continue to target home medical equipment providers that expand our footprint and increase patient access. In summary, as we enter 2026, we believe our house is in the best condition it has ever been. Our operational foundation is stronger. Our portfolio is more focused. Our balance sheet is healthier. Our patient census is growing, and our capitated contract is ramping. The work of 2025 was hard but necessary, and we are confident it has positioned us to deliver on our commitments to patients, partners and shareholders. We look forward to showing you what we can do. And with that, I'll pass the call over to Jason to review our financials.

Thank you, Suzanne, and thanks to everyone for joining our call today. I'll cover our full year and fourth quarter 2025 results, then review our balance sheet and capital allocation before finishing with our 2026 guidance. For full year 2025, net revenue of $3.245 billion decreased 0.5% versus the prior year on a reported basis. Organic revenue growth was $56.9 million or 1.7% over the prior year. Full year revenue increased by $19.5 million because of acquisitions and decreased by $92.4 million because of dispositions. The dispositions were primarily attributable to the 3 businesses we sold within our Wellness at Home segment during 2025. For the fourth quarter, net revenue of $846.3 million decreased 1.2% versus the prior year quarter, but increased 1.7% on an organic basis, consistent with our full year rate and was impacted by the disposition actions noted a moment ago. Sleep health net revenue was $372.3 million, up 4.4% versus the prior year. New starts were approximately 130,600, up about 6% year-over-year and just a few hundred shy of the all-time record set in Q1 2023. Sleep health patient census grew 4% year-over-year to a new record of 1.73 million patients. Respiratory health net revenue was $178.2 million, up 7.8% versus the prior year. Oxygen new starts were up about 4% year-over-year and vent new starts were up about 5%. Oxygen patient census of approximately 335,000 patients set a new all-time record for the third consecutive quarter, and vent patient census also hit a new all-time record. Diabetes health net revenue was $158.5 million, down 7.4% from the prior year quarter. While new CGM starts remained soft, patient retention hit a new all-time record, the direct result of the changes we made to our resupply operations in late 2024. CGM patient census of approximately 153,000 patients was flat versus the prior year, but the shift in payer mix from commercial insurance to government payers resulted in lower CGM reimbursement per patient. Pumps and related supplies remained on track, growing patient starts and net revenue over the prior year. Overall, we are pleased with the continuing stabilization of the Diabetes Health segment. Wellness at home net revenue of $137.3 million declined by 16.1%, driven primarily by the disposition of certain noncore assets completed during 2025. New starts for wheelchairs and beds were up about 6% and 5% year-over-year, respectively, with patient census for both hitting new all-time records. Turning to profitability. Full year adjusted EBITDA was $616.7 million with an adjusted EBITDA margin of 19.0%. Fourth quarter adjusted EBITDA was $163.1 million with an adjusted EBITDA margin of 19.3%. As Suzanne noted, both periods were impacted by a $14.5 million legal settlement and over $10 million of accelerated expenses to onboard our new capitated contract faster than we originally anticipated, which together account for the variance to our guidance. Before leaving profitability, I want to note that our Q4 GAAP results include a noncash goodwill impairment charge of $128 million recognized as part of our annual goodwill impairment assessment and related to the estimated fair value of the Diabetes Health segment relative to its carrying value. This charge is excluded from adjusted EBITDA and has no impact on our cash flows or operations. Moving to cash flow. Fourth quarter cash flow from operations was $183.2 million. Capital expenditures were $103.9 million or 12.3% of revenue, reflecting continued investment in patient growth as well as forward investment to support the capitated contract ramp. Free cash flow was $79.3 million for the quarter. And for the full year, free cash flow was $219.4 million, meaningfully exceeding the top end of our guidance range. Turning to the balance sheet. We ended the year with $106.1 million in unrestricted cash. Working capital of $16.5 million was lower than normal due to the aforementioned legal settlement and infrastructure expenses. We continue to compress our cash conversion cycle over the course of 2025, and we ended the year at 40.8 days sales outstanding, the lowest since the Change Healthcare outage in 2024. Net debt stood at $1.694 billion at year-end with a net leverage ratio of 2.75x. This is up modestly from 2.68x at the end of Q3, reflecting the impact of the litigation settlement and pre-revenue contract costs on trailing adjusted EBITDA. We remain focused on our 2.5x net leverage target and continue to view debt reduction as among our highest capital allocation priorities as we believe a strong balance sheet is essential to unlocking and sustaining value for shareholders. We decreased interest expense by approximately $21 million versus the prior year, and the recent credit upgrades from both S&P and Moody's in the fourth quarter reflect the progress we've made as an organization. On capital allocation, our priorities remain investing to accelerate organic growth, debt reduction and selective tuck-in acquisitions that expand our geographic footprint and increase patient access. During 2025, we deployed $250 million to debt reduction and approximately $42 million to acquisitions, self-funded entirely through our free cash flow and disposition proceeds, recycling capital from noncore assets into businesses with stronger returns and better strategic fit. This disciplined approach to capital allocation is how we intend to drive improved return on invested capital in 2026 and beyond. Turning to guidance. We expect net revenue of $3.44 billion to $3.51 billion, adjusted EBITDA of $680 million to $730 million, free cash flow of $175 million to $225 million. Our underlying assumptions for revenue represents 6% to 8% growth over 2025. We anticipate that organic growth of 7.5% to 9.5% will be offset by about 1.5% compression, net from acquisition and disposition revenue from previously closed deals. We expect 5% to 6% growth over 2025 revenue resulting from a new capitated agreement, and we expect another 2.5% to 3.5% growth from the rest of the business. We believe sleep health and respiratory health will grow faster than that range, offset by generally flat expectations for diabetes health and wellness at home. For the first quarter of 2026, we expect revenue growth of 2% to 3% over the prior year quarter. Over the course of the year, we expect ramping capitated revenue to result in adding a few points of incremental year-over-year growth each quarter peaking at low double digits by Q4. Our 2026 midpoint for adjusted EBITDA translates to approximately 20.3% adjusted EBITDA margin, a full percentage point better than 2025. For the first quarter of 2026, we expect adjusted EBITDA margin of approximately 16%, as we expect to carry capitated infrastructure expenses in the first part of the quarter prior to revenues ramping in the back half. We expect improving margin throughout the year as the capitated revenue ramps, particularly in the back half. And similarly, we expect free cash flow to be negative $20 million to negative $40 million in the first quarter, with improvement throughout the year as the capitated revenue ramps and the associated infrastructure costs are absorbed. As usual, we expect to generate approximately 1/3 of our full year free cash flow in the first half of the year with the remainder coming in the back half. I have one last point regarding the infrastructure investments we are making to support our new capitated contract. As you'll note in our forthcoming 10-K subsequent to December 31, 2025, we acquired certain assets of a provider of home medical equipment for total consideration of $47.6 million. To support that acquisition and potential similar future acquisitions, we drew $100 million from our revolving credit facility. We believe that these equipment acquisitions will support smooth patient transitions, and we expect to pay down the revolver as free cash flow builds throughout the year. That brings me to the end of my remarks. Operator, will you please open up the call for questions?

[Operator Instructions] We'll take our first question from Eric Coldwell with Baird.

I just wanted to hit on the legal settlement. I wanted to confirm if this is the civil debt collection class action from North Carolina that was initiated several years ago? And is the $14.5 million a final settlement or an estimate? Does it cover all similar or potential claims? In other words, can we expect that this is onetime and won't repeat? And then finally, obviously, these claims relate to activities that began many years ago under different leadership. But what steps has the company taken to prevent similar complaints or issues in the future?

Appreciate that, Eric. Yes, to all of your assumptions above, meaning that this was a claim that was brought against the company in 2022. And to your point, it deals with the technicality and debt collection practices. It does -- it is the final amount and settles all claims in that state. And since then or even right after that, those -- on the technicality, we do not or have fixed anything that would be perceived as a violation of that technicality. Not saying that we thought that we are in violation of it to begin with, However, anything that could be interpreted as such has been fixed. And we decided to settle this rather than pursue this litigation as a means to further derisk the business. We have so much to look forward to the next couple of years that we thought getting this legacy lawsuit behind us, made a lot more sense at this point.

Eric, this is Jason. I might add that since 2022, there's been significant maturing in the overall control environment here at AdaptHealth, so much so that you'll note in the forthcoming 10-K this afternoon that you'll see for the first time, AdaptHealth has achieved an opinion from our auditor with a clean bill of health regarding our SOX environment. And so prior year material weaknesses, really at various points along the way have been remediated, which we're very happy about.

We will move next with Kevin Caliendo with UBS.

And Jason, thanks for the color on the cadence. I just want to make sure I understand fully how to think through the impact of the investment in 4Q and the guidance, like the margin cadence for fiscal '26. It sounds like it's going to be different than fiscal '25 a little bit, right? There's a mix of business in your onboarding. How should we think about it in the context of over the course of the year? I know you made comments around 1Q and free cash flow, but any more specifics there as we just think about modeling it to start?

Sure. Yes, Kevin. So we started with the Q4 guidance of top line at 2% to 3% revenue growth, and adjusted EBITDA margin of approximately 16%. And so particularly as the new capitated arrangement starts ramping, we expect revenue as we get into the second quarter, to be up another 3% or so incremental from Q1. We expect Q3 to be up another 3% or so incremental in terms of growth against Q2. And then as we said in our prepared remarks, we expect in Q4 over the prior year to grow revenue in the low double digits. To go in line with that revenue growth, again, we're facing that pressure in the first quarter from carrying significant expenses on the P&L prior to really the substantial contract dates really starting here in the first quarter and on throughout the year. We expect margin to be at or near 20% as we get into that second quarter. And then we think we'll add about 1.5 points to that in each of the third and then incremental again into the fourth quarter. So again, full year, we think that revenue growth will be 7% at the mid. We think the full year adjusted EBITDA margin will be just over 20%, representing an incremental point over the prior year.

And just a quick follow-up. You mentioned the 2 pilots for fiscal '26. Are they material in any way to your financial performance here? How should we think about that? Is there update that we get on these over the course of the year?

Well, Kevin, I'd say that they're not yet material, certainly, in the Q4 that we just reported nor in the Q1 guidance, the formal guidance that we brought forth this morning. We do, however, believe that we will get operating leverage over the course of the year related to these technology investments, and that is embedded in the guidance that we brought forth.

Our next question comes from Richard Close with Canaccord Genuity.

I'm curious if you guys can talk about the pipeline of capitated agreements. Obviously, a strong start to this large contract and continued execution on the previous Humana. So maybe just a lay of the land on the opportunities that exist going forward on that front.

I'll start there. We are out there, obviously responding to some inbound and obviously some outbound requests to discuss how we operate that business, the value to both sides and the patient under these types of arrangements. As I've said before, we can service this business, whether it's fee-for-service or capitated. And I think there is some market interest in getting to a place where incentives are aligned. So there is many conversations going on that are proceeding for us, but these do take time. If you think about the contract we just won, that was over a year, call it, 2-year conversation. There's infrastructure and IT systems and things that have to happen, especially if it's a new capitated arrangement. So we're going to continue to push forward and have those conversations, but I do see that there is market appetite for these, call it, not for fee-for-service arrangements.

Richard, the last thing I'd add there is that we view the capitated pipeline, much like we do our M&A pipeline is that we are continuing to pursue both, but we do not assume any impact inside of our guidance until or unless we close deals.

Okay. That's helpful. And then maybe just really quickly on diabetes. I appreciate the success on the retention and consolidating that with the sleep. I'm just curious when you expect that from a new start perspective to, I guess, begin to show growth? Or what are your long-term thoughts on the growth of that segment?

Sure. I'll start there. Yes, thank you for calling out the hard work that our resupply Nashville team has done around really improving substantially how we service our resupply patients and the retention rates are proof of that. We knew going into the turnaround that we initiated, what, 18 months ago or in the fall of 2024 that our -- the confidence in the team down in Nashville would produce a sooner, better outlook for diabetes and that it takes time to build up the sales force, retrain them and to earn the trust back of the referring providers. And so that has been the work over the past year to the point that we have also started to see improvements there in pockets of the country. And we've also made the decision to grow our diabetes sales force to improve our CGM, particularly our CGM new starts in 2026, notwithstanding that we're holding the expectation too flat until that proves out. And then missed the last part of that question.

Yes. I'd say, Richard, if we think about the components of the segments, in CGMs, we've got the resupply, as Suzanne referenced. We've got new start activity that we are making key investments in an attempt to jump start the start activity from our field force as well as our pharmacy operations. And so we feel pretty good about being able to achieve that as we get later in the year. And then finally, don't forget pumps. I mean, we had a good year with pump revenues. And in Q4, both new starts and net revenue for pumps was up low double digits.

Our next question comes from Brian Tanquilut with Jefferies.

This is Meghan Holtz on for Brian Tanquilut. I just wanted to begin with, can you provide us any update on the infrastructure readiness for this new national health care system partnership this year? Are there any additional investments we need to be thinking about? Or are you in line with your initial outlook?

Meghan, I would say that we are right down the fairway with our initial outlook. The investments that we made in Q4 and that we're carrying through Q1, they have shored up a February 1 start date on the West Coast that we are now taking care of a lot of patients from this new capitated arrangement. We do have subsequent start dates as we get into the back half of Q1 and on throughout the year. We've made key investments there. We talked about the Hawaii acquisition, which is a terrific business on its own, and it will be part of supporting Hawaiian operations for this contract as that start date occurs later in the year. And then finally, we referenced the $100 million draw on the revolver in reference to an acquisition that's already closed in support of that February start date, and we are pursuing similar acquisitions to support the rest of the West Coast operations. And so we're not we're not celebrating yet. I mean there's still a lot of work ahead. But overall, we're very pleased with getting the December and February start dates secured, and we feel good about the rest of the year.

Okay. And then as a quick follow-up, as we think about free cash flow guidance, CapEx stepped up, obviously, in regards to supporting this contract as well. As we exit Q4, is this the right run rate going forward?

Yes, we do think that this is just about the right run rate as a percent of revenue. I mean, I would point out that through the disposition activity over the last, call it, 5 quarters or so, I mean we did take out about 5% of top line revenue. Now none of those businesses sold really had any CapEx at all. And so that alone add about 0.5 point to CapEx and which is why the run rate we're seeing here in Q4, we feel pretty comfortable with going forward.

We will move next with Pito Chickering with Deutsche Bank.

This is Kieran Ryan on for Pito. Just wanted to check in on the sleep business first. Just see if there's anything that we should be aware of there on cadence year-over-year or year-over-year comps or if there's anything that you'd want to highlight around maybe from a price mix perspective? Or should we generally just expect revenues to be tracking with the strong new starts and census you're seeing?

Kieran, it's Jason. I'm glad you're calling this out because there is some noise in the comparable in 2025. You might recall that we had discussed a change in the rental and sales mix within sleep last year related to the accounting of a component of the CPAPs. I mean in the first quarter last year, that was about $15 million, just a touch under. That cut in half approximately in the second quarter and again in the third and then started running out in the fourth quarter. And so that does set up an easier comparable in 2026 over 2025. Otherwise, our start growth, we've been very pleased with. We are nearing record start activity for sleep, and we're feeling very good about the sleep business for 2026.

And then just a follow-up once more on diabetes. Just kind of wanted to check in and see what you're seeing on the DME versus pharmacy side there. I know I think you've seen most of that shift already occur on the CGM side. So kind of just wondering if that's stable and then more so just what you're seeing in pumps as we see more pumps kind of moving into that channel?

Sure, Kieran. So I'd say on the CGM side of things, we absolutely saw fewer payer policy changes or notifications as we're starting this year versus what we saw in 2025 or particularly in 2024. So that's a good thing for the business. And then on the pump side of things, we do have full capability within our pharmacy operations to distribute pumps through that channel as well as through the more traditional DME channel, which is part of why we're seeing very good pump growth here in the back half of '25, and we think that will continue in 2026. .

We do have a follow-up from Eric Coldwell with Baird.

And I just wanted for posterity, I wanted to go back to the capitated contract onboarding expense in the fourth quarter of -- I think it was just over $10 million. Can you remind us how that compared to what was embedded in your guidance previously? Was there any delta on that number? And then I might have a quick follow-up.

Sure, Eric. The delta was just a touch under $10 million at approximately $8 million. Now considering that we guided first week of November, I mean, we certainly had a sense that we were going to overrun and overspend on labor and vehicles and general OpEx within the quarter. However, we wanted to be cautious in communicating that without the corresponding revenue ramp that was going to come with it. So at the end of the day, I mean, we spent more than we communicated. However, the initial outlook we provided in '26 and the revenue that came with that, you'll note that we stepped up the contribution from this capitated arrangement pretty meaningfully. I mean back in November, we said that we believe it would be 3% to 5% growth to be attributed to that contract in 2026. And today, we stepped that up to 5% to 6% growth. So this was timing. Expense came bigger and faster than we said it would. However, the revenue is also coming bigger and faster than we said it would. So we feel pretty good about it.

And then on the Hawaii acquisition I may have missed this, but did you size the revenue contribution? I know you gave us a net impact of M&A and dispositions in the -- embedded in the outlook for growth. But did you size the Hawaii deal specifically?

We didn't, but we're happy to, Eric. That Hawaii ideal, excluding any impact from the upcoming capitated arrangement, the run rate is about a little over $1 million a month. Now we netted that against what we project to be a third and final disposition in our home infusion assets. which was also just over 1 million a month. That deal closed on January 1. So subsequent to the end of the quarter, you'll see that in the filing. And so they really wash out, which is why we didn't mention it.