AdaptHealth - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered stable topline and improved profitability vs Q1: revenue $800.4M (–0.7% YoY), Adjusted EBITDA $155.5M with 19.4% margin, slightly above the high end of Q2 guidance; free cash flow was $73.3M, ahead of internal expectations.
• Announced a transformative 5‑year, $1B+ capitation partnership as the exclusive HME provider to a major national health system (10M+ members); once ramped, at least $200M annual revenue at enterprise margins; ramp begins 2026 with exit-2026 annualized run-rate ≥$200M, full service by 2027; a key stock catalyst.
• FY25 guidance: revenue maintained at midpoint (narrowed to $3.18–$3.26B), Adjusted EBITDA lowered to $642–$682M on timing of payer rate negotiations and maintaining infrastructure for the new contract; FCF guided to $170–$190M; Q3 revenue ~ $800M and margin 20–21%.
• Operational momentum: Sleep new setups highest since Q2’23 recall recovery; Respiratory strength (oxygen census record for a second quarter); Diabetes showed a second consecutive quarter of improving trends, positioning for potential growth in H2 2025.
• Balance sheet de-risking continues: reduced debt by $150M in Q2 and $175M YTD; net leverage down to 2.81x with 2.5x target in sight; OBBA tax law expected to significantly reduce cash taxes, supporting capex for 2026 ramp.

What Went Well and What Went Wrong

What Went Well

• Signed a 5‑year exclusive capitation deal (10M+ members), expected to add ≥$200M revenue at enterprise margins once ramped; management: “historic and transformational development” with halo growth potential beyond the core contract.
• Execution improved across segments: Sleep new setups reached highest level since recall recovery; Respiratory oxygen census hit a second-quarter record; Diabetes showed improving starts and resupply retention for a third straight quarter, potentially turning positive in H2.
• Profitability and cash flow: Adjusted EBITDA margin of 19.4% came in slightly above the high end of guidance; free cash flow of $73.3M exceeded expectations, with deleveraging progress and net leverage reduced to 2.81x.

What Went Wrong

• Revenue declined 0.7% YoY; Adjusted EBITDA and margin contracted YoY (20.5% → 19.4%), driven by Diabetes mix/price pressure and Sleep purchase-to-rental mix shift falling to the bottom line.
• FY25 Adjusted EBITDA guidance was cut by $20M due to timing of payer rate negotiations slipping to 2026 and the decision to maintain infrastructure ahead of the capitation ramp; near-term margins pressured.
• Policy overhang: CMS proposed adding CGMs and supplies to competitive bidding and reducing the number of contracts; management expects industry cost pressure but believes scale can capture share in a more consolidated landscape.

Transcript

Speaker 3

Good day, everyone. Welcome to today's AdaptHealth Corp. second quarter 2025 earnings release. Today's speakers will be Suzanne Foster, Chief Executive Officer of AdaptHealth Corp., and Jason Clemens, Chief Financial Officer of AdaptHealth Corp. 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 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 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. I am now pleased to introduce the Chief Executive Officer of AdaptHealth Corp., Suzanne Foster. Please go ahead, ma'am.

Speaker 4

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

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

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

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

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

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

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

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

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

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

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

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

Should the right opportunity emerge, we will rigorously evaluate. That said, with our strong free cash flow, industry-leading platform, and meaningful opportunity to unlock value by simply maintaining our internal focus, we are operating from a position of strength. We are under no pressure to pursue acquisitions, and we can remain selective and patient. I want to close by thanking the AdaptHealth team for their commitment to serving over 4.2 million patients while preparing to serve millions more as a result of our new partnership. Although this new partnership is the largest in the company's history, we know what to do, and we are committed to executing on our commitments. As today's discussion reflects, we've made meaningful progress, and our momentum continues to build. With that, I will turn it over to Jason.

Speaker 2

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

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

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

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

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

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

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

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

Speaker 3

Certainly. Thank you, Mr. Clemens. Ladies and gentlemen, at this time, if you do have any questions or comments, simply press star one on your telephone at this time. If you find your question has been addressed, you can remove yourself from the queue by pressing star two. Once again, star one for questions. We go first this morning to Eric White Coldwell of Robert W. Baird & Co. Incorporated.

Speaker 1

Thanks very much. Good morning. A lot to absorb there at the end with the capitation agreement. I wanted to dive in on that $200 million, minimum $200 million a year of revenue. Is that, I guess, several questions on that. Is that anticipated to grow over time? Is it based on just a simple calculation on the number of patients under that health system over time? Are there inflation riders? Any kind of additional details on how that revenue may ramp and when exactly it kicks in and hits full productivity, full revenue capture on a monthly basis would be very helpful. I might have a couple of follow-ups. Thank you.

You got it. I'll text this. Yeah, you're saying about it basically right. We will start, you know, first patient rolling in here basically in Q1, and it will ramp. There are several different regions that we, in several states that we have to go to, and we're going to do that in an orderly fashion. You'll see that ramp, the service to those over 10 million patients throughout the course of 2026, going into a full service by 2027. That is why 2026 will be a ramp year, and the following four years will be more consistent based on that membership that we serve. I'll have Jason Clemens walk through a little bit more detail on how to model that.

Speaker 2

Yeah, I might add, Eric, you are thinking of the core agreement the right way. It's a, you know, generally a per member, per month type agreement, similar to our Humana contract and other capitated arrangements that we support here at AdaptHealth Corp. I know you asked if there is a growth baked into this. We are not setting an expectation in these numbers of at least $200 million of revenue. We're not setting the expectation of growth. However, we do know that there's a halo effect with these capitated arrangements. I mean, our public competitors have talked about those pressures of our Humana award and other business we have. It's logical to think that as we drop in sales folks into these territories where we don't have a sales presence now, we were laying in that infrastructure to support what to us is a huge contract.

We're going to have capacity to support more. It's reasonable to assume that that number can grow over time. Again, we're trying to outline what we think is a very clear and conservative number with this award.

Speaker 1

To be clear, with the contract ramping and starting in 2026 through 2026, are you anticipating at least $200 million in 2026, or was that more of a five-year average?

Speaker 2

Think of it as our exit of 2026. We're quite confident we'll be at at least $200 million. Suzanne said, I mean, first place, first patient, you know, shows up at the beginning of the year, and then that'll ramp over essentially the first half into kind of early third quarter. As we're in Q4, we should be exiting at at least $200 million of revenue.

Speaker 1

Thank you for all of this. $200 million a year, minimum 10 million patients minimum, would imply a capitated rate of something, if I've done the math quickly here, right, about $1. I think it was about $1.67 a month. I know it could be more patients than that, which could bring that per month number down to something like $1.50. Am I thinking about that correctly in terms of the per patient per month revenue stream?

Speaker 2

Yes. That is a different structure than, for example, our Humana contract, which was Medicare Advantage HMO only. Different patients in different cohorts, like commercial, as an example, have very, very different utilization history and patterns. That has been factored in. Yeah.

Speaker 1

That's what I was getting to. It seemed like a low per member per month, but it's all encompassing. You have a lot of healthy patients in that 10 million plus count.

Speaker 2

You've got it. We're very pleased with how we've priced this out. We're very confident we'll deliver the enterprise margin on the contract.

Speaker 1

Very good. Thanks so much for all the questions.

Speaker 3

Thank you. We go next now to Philip Chickering of Deutsche Bank AG.

Hey, good morning, guys, and thanks for taking my questions. Just one question on the adjusted EBITDA guidance, certainly down $20 million for the year. Could you break down the impact from these bet shares versus investing in a new capitation agreement versus anything else on the core side?

Speaker 2

Yeah, Peter, this is Jason. Sure. It's really two factors that are driving the $20 million change to adjusted EBITDA. It's not related to the disposition of assets. We accounted for that last piece when we announced about two months ago, I guess, a month and a half ago, when we announced the last deal, and we adjusted guidance accordingly for that. It's unrelated to disposition. The two factors are, you know, a little more than half of that is the timing of certain payer rate negotiations. We have literally dozens of payer rate negotiations going on at any time in the company. We got a couple of larger ones that we are working very hard at, but that timing is slipping. We expect, however, to pick that up in 2026. You can think of it as kind of an easier comp in 2025 and more to come in 2026.

The rest of that is infrastructure. We talked about people, technology, locations, vehicles. We were working through, as you'd expect, this time of year, we worked through ways of tightening up the middle of the P&L. We decided that given the magnitude of this win, we're going to stay put. We think we need everything we've got, plus some. That's accounting for the rest of that. Again, kind of timing impacted. If you just think of the magnitude of this win and what it's going to take to stand it up, although we are lowering our implications for 2025, 2026 obviously just went up in a big way.

Okay, fair enough. I think the follow-up, looking at ResMed sales in the U.S. this quarter as a comp, there's nothing different between what you guys did this quarter versus what they did. You know, we talk about new scheduling and order intake and new starts accelerating. Can you help us bridge sort of what the market growth was in the U.S. this quarter and where your share went and when the new starts that are increasing begin to flow through into growing at market growth rates?

I think it depends on how you define market growth rate. If you're anchoring to ResMed's U.S. device number, I believe they were around 7%. Of course, that includes volume as well as rate on their side of the equation. I'd say for us, if you look at our starts, the 128,000 that we talked about, that's up 3% over the prior year. We were very pleased with that. We think there's more to get. As our time to set up is decreasing and our access and ability for patients to have their preference in how they get set up continues to improve, we're feeling pretty good in the second half about continuing to strengthen momentum in sleep starts.

We will start to see a full quarter as we move into Q3 of the changes that we've implemented really taking hold. Like we talked about in the Q1 report out, those things were kind of being identified, and then they were ramped into Q2. Now we'll have the benefit going forward of starting to see that full quarter execution of those changes we made.

Speaker 3

Great. Thanks so much. Thank you. We go next now to Brian Gil Tanquilut of Jefferies LLC.

Hey, good morning. Maybe, Suzanne, just a question on competitive bidding. As we think about this proposal out of CMS and changes to the diabetes reimbursement structure, just curious how you're thinking about that or strategizing around pricing, you know, pricing dynamics and discussions with the suppliers. I mean, do you feel like you can pass on some of that potential adjustment to the suppliers and what those discussions are like? Thanks.

Yep, sure. I think in terms of just stepping back, it's hard to speculate. We don't have a ton of information yet. Like I said, the intent of driving down costs while also consolidating providers is a unique opportunity for scale players like AdaptHealth Corp. We already are the best cost option, if you will, given our scale. In the work that we're doing in the middle of the P&L, particularly in diabetes, to remove the people administrative burdens, we're implementing technologies and streamlining that business, which I think will prepare us for a future where we have to perhaps potentially sacrifice some rate but be able to keep the profitability of that business. We are confident that with additional volume and the work that we're doing, we should weather the storm very well on that front.

In terms of our work with the manufacturers, yes, there are conversations going on, of course, about how we partner in this new world. Those conversations, I'm not going to go into much detail, but there is a partnership mentality about how do we make sure that the HME channel for these technologies stays alive and profitable. There will be a partnership approach to entering into the new world of competitive bidding for DME if continuous glucose monitors go in that direction.

No, I appreciate that. Maybe, Jason, just to follow up, I believe Peter's questions, as I think about some of the comments you made last quarter about some challenges and share losses you were seeing at local market levels in the sleep business. Just curious if you can share with us any updates on what you're seeing in those markets and, broadly speaking, if you're seeing improvement or incremental degradation in share. Thanks.

Speaker 2

Yeah, we're absolutely seeing improvement. Brian, I mean, it's really related to that speed to set up. In these markets, we cut off a week of lag time from the day the patient gets diagnosed until the day they can get their CPAP. There's more to go there. We're very confident that we'll continue to compress that time to set up and increase our conversion factors. When we put out the Q1 point of view, it was really predicated on, look, we have good plans in place. We think we're going to make this up. In the event we don't, we don't want to call it flat-footed later in the year. It's very clear that Q1 was a one-off and we're back to some pretty solid growth and we expect that to continue.

Awesome. Great to hear. Thanks.

Speaker 3

Thank you. We go next now to Ben Hendricks of RBC Capital Markets.

Hi, this is Michael Marion for Ben. I was hoping you could expand on the M&A environment. Where are you seeing the opportunities? Any specific business lines? What do valuations look like, and what leverage level would you be comfortable going to for the right acquisition?

Yeah, I'll start with just saying that what we're seeing is really across the board of all sizes of players out there. We've had some inbound around the small regionals and some indications that there are some larger assets coming to the market. What I can say, like I said earlier, is what we're particularly interested in is staying within our core competencies of sleep and respiratory, which a lot of these assets are focused on. That would be the type of assets that we're reviewing and looking at to see if it strategically fits for some reason. For example, gives us pockets of the geography where we may be light or some other thing that it brings to us that we would benefit from. We're being extremely disciplined.

We think the broader market dynamic, like we talked about, with competitive bidding for DME on the horizon and the shrinking of the potential number of providers, in addition to even just additional capitated type arrangements coming our way, does put pressure on the industry. We would welcome assets that add to the strength and strategic position of AdaptHealth Corp. I'll turn it over to Jason for comments on valuation and how we think of that.

Speaker 2

Yeah, I'd say that, I mean, I think the industry is well aware of our trading multiples as well as our competitors. It's a reasonable thing that anything we buy would be at a trailing 12 lower multiple than that, and you can apply synergy there. In terms of your leverage question, at what point would we go up to for the right acquisition? I think, as we stand here today, we wouldn't. We're quite confident that if there are a little more acquisition than we originally committed to, we would bring those assets in totally self-funded through free cash flow and over that first year ownership actually drive down leverage.

Okay, that's really helpful. Just a follow-up. I appreciate the color on the diabetes. You know, the performance, I think, was better than expected in the quarter. How should we think about diabetes revenue in the back half of the year? Should we expect year-over-year declines to turn positive by year end? Thanks.

Yeah, like we stated, there is real momentum going on there. Not only are they adding new patients, that's translating into better retention rates in our resupply business. I couldn't be prouder of the team and how quickly they've turned this business around. If the momentum continues and the execution continues as we're seeing, we do expect that business to, as I say, remove the parentheses around the growth number and turn positive in the back half of this year. It's on the right path forward. It really does come down to our execution, which, as I said, the team is currently delivering very well on.

Thanks so much.

Speaker 3

Thank you. Just a quick reminder, ladies and gentlemen, star one, please, for any further questions today. We'll go next to John Penning with Canaccord Genuity. John, your line is open if you do. It appears we lost John, ladies and gentlemen. Again, ladies and gentlemen, any further questions today, please press star one at this time. Ms. Foster, it appears we have no further questions this morning. I'd like to turn the conference back to you for any closing comments.

I want to thank everyone for joining us today. It's been an exciting quarter, as hopefully you can see. I mean, we continue to just one brick at a time, I think, turn this business into something that is really starting to show how the size and scale of what we've put together matters. This is a historic contract that we are announcing today that will basically transform our business, provide, you know, a future of a lot of growth and a lot of patients that we have to go after to serve. All of the hard work that the team has done over the last year towards improving the middle of the P&L will begin to really start to show those spikes are sprouting. I appreciate everyone's support over this past year.

I look forward to delivering, you know, next quarter and the quarter after our progress on how we're preparing for a big 2026. Thank you again.

Thank you very much, Ms. Foster. Thank you, everyone, for joining us today for AdaptHealth Corp.'s second quarter 2025 earnings release. That does conclude today's conference call. We ask you all to disconnect at this time and have a wonderful day. Goodbye.