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    Adapthealth Corp (AHCO)

    Q4 2023 Earnings Summary

    Reported on Feb 19, 2025 (Before Market Open)
    Pre-Earnings Price$7.63Last close (Feb 26, 2024)
    Post-Earnings Price$8.91Open (Feb 27, 2024)
    Price Change
    $1.28(+16.78%)

    What went well

    • AdaptHealth is making significant progress in transitioning patients under the Humana contract, expecting to complete transitions by the end of Q1 2024, which will remove cap deductions and establish a new baseline for revenue growth. ,
    • The company is actively expanding its diabetes business, distributing new CGM models from DexCom and Abbott, doubling its diabetes salesforce to target new geographies with high government-sponsored patient populations, aiming to return to growth in the second half of 2024.
    • AdaptHealth is investing in entering the pharmacy channel for diabetes products, enhancing its capabilities to efficiently compete and planning to provide updates soon, which could open up new revenue streams.

    What went wrong

    • AdaptHealth is experiencing ongoing headwinds in its diabetes segment, facing pressure from shifts to the pharmacy channel and reimbursement challenges, which have led to decreased revenue growth; efforts to expand in the pharmacy channel are still in progress, and the company has not yet seen benefits from Medicare coverage extensions.
    • The expiration of the 75-25 reimbursement rate relief is expected to create a $25 million headwind to revenue and adjusted EBITDA in 2024, potentially impacting overall financial performance.
    • Free cash flow is expected to be approximately zero in the first quarter of 2024 due to seasonal effects and payments related to interest, bonuses, and a $25 million shareholder lawsuit settlement, which may strain cash reserves and limit financial flexibility.

    Q&A Summary

    1. Future Growth Outlook
      Q: What's the expected growth rate beyond 2024?
      A: Management targets mid-to-upper single-digit growth in 2025 and beyond, aiming to bring diabetes back closer to market growth rates, maintain dominance in sleep, and continue strength in respiratory.

    2. Pump Revenue Expectations
      Q: How will pump revenue change in 2024?
      A: Pump revenue was about $160 million in 2022 and $120 million in 2023, aligning with expectations. Management anticipates a headwind of about $18–$20 million in 2024, roughly half of the previous year, with growth in tubeless pump revenue expected to offset declines.

    3. Humana Contract Impact
      Q: What is the status of the Humana contract conversion?
      A: The company expects to be substantially complete with patient transitions by the end of Q1 2024, resulting in a fully loaded quarter with cap deductions removed, positively impacting revenue and margins.

    4. CapEx Efficiencies and Free Cash Flow
      Q: What's driving CapEx efficiencies and is it sustainable?
      A: CapEx as a percentage of revenue decreased from 12% in Q1 2023 to 10.3% in Q4 2023, due to technology investments like the Oracle digitalization project. Management expects further improvements in 2024, contributing to better free cash flow conversion.

    5. Gross Margin Improvement
      Q: What led to the gross margin outperformance in Q4?
      A: The company beat on every assumption, including accelerated Humana transitions and cost management programs, resulting in improvements across labor, OpEx, and G&A expenses.

    6. Sleep Segment Growth
      Q: How are sleep resupply and rental revenues expected to perform?
      A: Resupply operations are expected to grow at high single digits in 2024, driven by increased average sales price and product orders. Rental revenue is expected to be around flat due to tough comparisons from high patient setups in the prior year.

    7. Diabetes Segment Outlook
      Q: When will diabetes growth recover?
      A: Management anticipates returning to growth in the diabetes segment in the second half of 2024, as the sales team expansion ramps up and benefits from Medicare coverage extensions for CGMs materialize.

    8. Regulatory Environment Benefits
      Q: Any impact from recent CMS rules on payer behavior?
      A: While no changes have been seen yet, management agrees that CMS's final rules aimed at reducing improper denials and prior authorization delays are positive and could benefit the company in the future.

    9. Pharmacy Channel Expansion
      Q: What's the plan for entering the pharmacy channel for diabetes products?
      A: The company is working diligently to identify partners and enhance capabilities to enter the pharmacy channel, with more significant updates expected in the first quarter call.

    10. Impact of the 75-25 Rule Expiration
      Q: Which product categories will be affected by the 75-25 rule expiration?
      A: The sleep category, being about 40% of revenue, may be most impacted, but effects will vary by product and region due to the rule's application at the MSA and HCPCS level.

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