AdaptHealth Corp - Ordinary Shares - Class A Stock

Good day, everyone, and welcome to today's AdaptHealth Second Quarter 2026 Earnings Release. Today's speaker will be Suzanne Foster, Chief Executive Officer of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth.

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 2026 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'm now pleased to introduce the Chief Executive Officer of AdaptHealth, Suzanne Foster.

Good morning, everyone, and thank you for joining our call today. I'm going to cover 3 topics this morning. First, we delivered 16% organic growth with record volumes gains across the business. Second, we made significant progress sharpening our portfolio and focusing on the core business, announcing the sale of our diabetes business, exiting other noncore products within Wellness-at-Home and contributing our e-commerce business into a new joint venture to improve how we serve the direct-to-consumer market. And third, I'll speak to 2 near-term profitability challenges we're navigating, our West Coast capitated contract and a material price increase from one of our largest manufacturers.

Starting with our financial results. Given the agreement we signed to divest our Diabetes Health business, I'll walk you through our results on a continuing operations basis, which excludes Diabetes Health included for prior year period comparisons. Revenue remains a bright spot. Second quarter net revenue from continuing operations was $740.3 million, up 12.7% versus the prior year quarter and 15.9% on an organic basis.

Our West Coast capitated contract contributed 10.7 points of that organic growth with 5.2 points coming from our base business. Sleep Health net revenue was $386.5 million, up 15.5% versus the prior year. Respiratory Health net revenue was $194.4 million, up 14.1%. Wellness-at-Home net revenue was $159.4 million, up 4.9%. Total capitated revenue grew to $103.3 million in the quarter and now represents approximately 14% of our continued operations net revenue. This is more than 3x the prior year with our West Coast capitated contract driving nearly all of that increase. Second quarter adjusted EBITDA from continuing operations was $132 million, with an adjusted EBITDA of 17.8%, driven by elevated West Coast capitated contract costs, which I'll speak to later.

Now turning to the work we have done on simplifying and focusing our business. Over the past 2 years, we have systematically reshaped AdaptHealth around our core sleep, respiratory and supporting home medical equipment businesses, the parts of our portfolio where we have the strongest value proposition and the clearest path to growth. In July, we took the most significant step yet in that effort. We signed a definitive agreement to sell our Diabetes Health business for $235 million, a move that we expect will ultimately improve our growth rate, enhance our margin profile and allow us to sidestep looming industry risks.

We also took a further step in focusing our portfolio on the core by discontinuing proactive sales of certain product categories within our Wellness-at-Home segment. This action removes nonstrategic, low-growth and low-margin product lines from our portfolio. And last week, we signed an agreement to contribute the CPAP Shop, a direct-to-consumer e-commerce business we've built within our sleep segment into a newly created joint venture with a leading e-commerce competitor and a telehealth prescriber network.

The JV will have an unrivaled set of capabilities to fulfill its strategic ambition to reach the vast undiagnosed OSA population through home sleep testing and a digitally enabled path from diagnosis to treatment. Our growth strategy is focused on improving our service levels in our core business, expanding our capitated relationships where it makes sense and growing the number of large health systems we serve.

This quarter, we made progress on all 3 fronts. In May, we signed a new capitated agreement with Humana OneHome, successfully transitioning 478,000 new members in South Florida and Texas without disruption. Our capitated relationship with Humana now spans 33 states plus the District of Columbia and South Florida. We have a proven track record of successfully serving Humana patients under capitation over the past 3 years, and we're building on that experience as we take on this expansion.

Our newly formed enterprise sales team exclusively focused on large health systems, secured preferred provider agreements with several multi-hospital health systems. These customers recognize the clinical expertise we bring, the value of having our liaisons embedded in their systems to coordinate access to our services and care and the operational excellence that shapes how their patients experience it.

Now let me turn to the more difficult part of the quarter, starting with the challenges we are facing with our West Coast capitated agreement. Having spent the first half of this year executing the largest patient transition in the history of home medical equipment, we spent the second quarter working to stabilize that operation on the West Coast. Standing up a new geography this quickly, new buildings, new routes, new inventory, new people and a new customer relationship has posed new challenges, some of which we did not fully anticipate, but which have become clearer as the contract fully scaled.

Throughout, we refused to compromise patient care and have remained fully committed to serving patients, whatever it took. With the benefit of a full quarter of operating this contract, here is what we know. Order volumes are running higher than expected, primarily in sleep resupply and enteral products. The outsized sleep resupply volume largely reflect transition-related pent-up demand and should prove transitory, while enteral volumes will require further intervention. As we solve these 2 items, we believe gross margins will recover toward our original expectations.

Second, there are inefficiencies in the inherited workflows, including the nonstandard use of urgent orders. These are contributing to unanticipated logistics costs downstream, which in turn have caused labor costs to remain elevated. We have met these elevated demands, but doing so at this level is not a sustainable model. We are working with our partner to align ordering practices with the original assumptions of the contract while rapidly introducing technology to streamline the workflows, shifting more of our fulfillment to drop ship rather than in-person delivery and rightsizing our fleet and labor accordingly. The combination of these items represents $40 million of expected impact on profitability relative to our prior projections for the second half of this year.

We remain confident that with sustained work and additional time, the contract will be a strong contributor to our profitability. Our long-term profitability outlook for the West Coast contract has always assumed we'd be able to use the footprint we built to serve additional business beyond the current capitated membership.

Currently, we are only able to serve our existing patients through our 40 new West Coast locations, and that will remain the case until the government-imposed DME moratorium put in place last February is lifted, and we can secure new PTANs, which are the Medicare billing numbers required to serve fee-for-service patients from these locations. Once that happens, we see substantial opportunity to serve patients who use our customers' health system but are insured through other payers and to sell proactively to other customers located near or within our new footprint.

That incremental fee-for-service revenue will help absorb the fixed cost infrastructure we've built out on the West Coast. To help offset the cost pressures I just described, we made the difficult decision in the second quarter to restructure our workforce, delivering $19 million in annualized savings while maintaining full operational delivery across every function. This required real sacrifice from our team who took on more so that we could continue serving patients without interruption.

The other lever we're pulling on is technology, using it to fundamentally reengineer the patient journey from diagnosis to treatment, improving patient experience and accelerating cost efficiencies along the way. We are already seeing what a digitally enhanced patient experience looks like in practice.

Our myAPP platform now connects nearly the entire patient journey. Let me walk you through it. It starts with a digital front door. Patients can enter our platform before they are even officially a patient. It's as easy as scanning a QR code. From there, AI-powered intake walks them through insurance setup. They receive real-time order status tracking, and they can instantly self-schedule a virtual or in-person path setup without a phone call, order supplies in the app and access live or AI-powered chat support.

And this quarter, we added our newest feature, an AI-powered mask fitting tool, which converted 92% of in-app scans to completed orders in its first 2 weeks. With early signs that it has reduced mask refittings that delay therapy. These features and the ease of use are driving rapid adoption of myAPP, which with users standing at 512,000, up 56% since the end of 2025 and an app store rating of 4.8 stars. This and similar work to reengineer the patient and provider experience share a common thread.

By removing the human intermediary, it frees up our people to focus on higher value, higher touch work and in return, supports our efforts to improve our cost basis. Addressing the key manufacturer price challenge I mentioned earlier, we were notified on June 30 by the manufacturer of their decision to terminate our contract and impose an immediate price increase effective July 1. As it stands, this results in a $30 million impact in the second half of the year. We are actively working with the manufacturer to secure improved pricing and terms. But at this point, we've reflected the full impact in our outlook.

That brings me to guidance. Our underlying base business continues to grow and is performing in line with our expectations. However, between the portfolio actions we've taken, the challenges we currently have with our West Coast capitated contract as well as the manufacturer's price increase, we must reset our full year outlook.

Let me close with how we're thinking about the road ahead. Everything we are doing is to enhance the important role we play within a critical part of the health care ecosystem upon which millions of patients depend. The portfolio actions we've completed position us as a more focused company built around Sleep and Respiratory, where we have the strongest value proposition. Our rapid growth demonstrates that health care providers see the clinical and economic value of the services we provide.

And in addition, with all the realities facing our industry, we are well positioned to benefit from the industry's ongoing consolidation with the size and scale to take on significant volume. We acknowledge that growing this fast over a period -- short period of time has stressed our cost structure. These near-term pains come with a silver lining.

Our growth is pushing us to think differently, to leverage technology and innovate in ways we never thought possible. These innovations are benefiting patients and providers today and over time, will lower our cost to serve. Ultimately, these growing pains will make us a stronger, more efficient company. And with that, let me turn it over to Jason to review the financials.

Thank you, Suzanne, and thanks to everyone for joining our call today. I'll cover our second quarter financial results, followed by a review of our balance sheet, capital allocation and outlook. As Suzanne noted, given our agreement to divest Diabetes Health, all figures I'll discuss are on a continuing operations basis, including prior period comparisons, unless otherwise noted. For the second quarter, net revenue of $740.3 million increased 12.6% versus the prior year quarter with organic growth of 15.9%.

Second quarter adjusted EBITDA was $132.0 million versus $136.4 million for the prior year quarter. As Suzanne discussed, this reflects continued elevated costs associated with the West Coast capitated contract ramp. Second quarter adjusted EBITDA margin was 17.8%. Discontinued operations produced approximately $23 million of adjusted EBITDA, covering $14 million of corporate overhead expenses that remain in continuing operations. The West Coast capitated contract missed our expectations by $15 million, so we are adjusting for this run rate in full year guidance that I will cover later.

Turning to the balance sheet and cash flows. We ended the quarter with a consolidated total leverage ratio of 3.06x. After quarter end, we triggered the $325 million delayed draw term loan secured as part of our April refinancing and used the proceeds to redeem our 6.125% senior notes due 2028. This action eliminated our highest cost tranche of debt and extended our overall maturity. We intend to prioritize repayment of our revolving credit facility over the remainder of the year and remain committed to our net leverage target of 2.5x. We intend to direct a significant portion of the proceeds from the Diabetes Health divestiture to further debt reduction.

Regarding goodwill, the Diabetes Health divestiture required us to reallocate shared corporate costs previously carried by that segment across our remaining reporting segments and the resulting revision to Respiratory Health and Wellness-at-Home triggered a $144.2 million noncash goodwill impairment. Free cash flow was negative $20.9 million for the quarter, driven primarily by $166.2 million of capital expenditures to support the capitated contract, including approximately $25 million of onetime equipment and vehicle purchases.

I'll note that our Diabetes Health divestiture closes, cash flows from that previously reported segment will continue to be presented on a consolidated basis with the cash flows from continuing operations. Our capital allocation priorities remain unchanged, investing to accelerate organic growth, reducing our leverage and pursuing disciplined smaller tuck-in acquisitions.

Turning to guidance. On a continuing operations basis, our full year 2026 net revenue projection is $2.85 billion to $2.89 billion, which excludes $630 million of the anticipated full year revenue from Diabetes Health that is moving into discontinued operations. At the midpoint, this represents an increase of roughly $15 million from our prior guidance, reflecting the net impact of second quarter revenue outperformance, the revenue contributed to the e-commerce JV that will no longer consolidate and the revenue disposed with the exit of certain noncore assets in Wellness-at-Home.

On a continuing operations basis, our full year EBITDA guidance is $490 million to $520 million, and let me bridge that to our prior guidance of $680 million to $730 million. First, the impact of the Diabetes Health divestiture is $100 million, which includes approximately $40 million of the anticipated full year adjusted EBITDA moving with that segment into discontinued operations and an additional $60 million of corporate overhead that had previously been allocated to Diabetes Health but will remain with continuing operations. We expect roughly half of that stranded cost to be removed within 12 months of closing the deal.

Second, $55 million of guide down relates to our revised full year 2026 expectations for our largest capitated contract, which includes a miss of $15 million versus our prior expectations for Q2 and $40 million of revised projections for the second half of 2026. We continue to view a margin of 20% as the right long-term target for this contract but reaching it will take continued work and additional time. We expect sequential improvement over the next several quarters, reaching run rate profitability next year.

Third, as Suzanne mentioned, we recently received notification that a large supplier has increased prices effective July 1, which we anticipate will have a $30 million impact in the second half of 2026. Finally, we are reducing our second half projections by $15 million for other intentional actions we took to focus and strengthen our portfolio. As Suzanne described, we recently made the decision to wind down certain noncore wellness products. The company has already started the process of shutting down sales channels for these products, so revenue will quickly decrease.

However, the cost of servicing our existing census will continue until we transition patients to other providers over the next few quarters. Stepping back from the current year financial expectations, we want to provide perspective on how to think about these areas beyond this year. We believe that we will eliminate roughly half of the stranded corporate overhead within 12 months of closing the Diabetes Health transaction. We expect to achieve our long-term profitability target for our West Coast capitated business next year. We expect to negotiate the recent notification by a large supplier and take actions to otherwise mitigate the impact.

And finally, for Wellness-at-Home, we will reduce our labor and operating expenses as patients transition. For the full year 2026, we expect free cash flow of $80 million to $120 million, which, as noted, includes cash flow from our Diabetes Health segment. For the third quarter of 2026, we expect net revenue of $720 million to $740 million. We expect modest sequential growth to offset approximately $20 million of revenue coming out of the second quarter run rate following the JV and portfolio management actions.

We expect an adjusted EBITDA margin of approximately 17.9%, and we expect free cash flow to be approximately $50 million. That brings us to the end of our prepared remarks. Operator, please open the call for questions.

[Operator Instructions]

We'll take our first question from Ben Hendrix with RBC Capital Markets.

This is Michael Murray on for Ben. The revised guidance includes $30 million impact from the manufacturer price increase. I'm sorry if I missed this, but what segment did this impact? And given the magnitude, what levers do you have to offset this, whether through contract renegotiation, passing costs through to the payers? -- or other operational actions? And over what time frame should we expect those offsets to materialize?

Sure. At this point, given we're in active negotiation, I prefer not to say which segment it is hitting, but I can talk about what we're doing now. Obviously, mid-year, we do not, as a company, have the opportunity to pass through price. We are hopeful that we'll be able to resolve this.

But in the meantime, the actions we would have to take are things like looking at supplier mix and profitability of those products within the mix would help offset it. We have CPI-U coming. But this is kind of a TBD right now with this situation until we really get through the negotiation, which we'll be able to update you at the end of this quarter.

Okay. And then just another quick one. The revised guidance also includes a $15 million impact from other portfolio actions. Can you walk us through what those entail? Are these additional divestitures, product line exits, restructuring of existing operations? And should we think of this as a onetime headwind or an ongoing drag?

Yes, this is Jason. You should think of this as a one-time headwind. And the reason for that is we have already started shutting down certain sales channels that produce new patient volumes and the related revenues that come with it. And so the way to think about this as $1 of revenue comes out for these product lines, we drop off about 35%, which is the gross profit of that revenue.

So significantly lower margins than the rest of our business from a cost of goods perspective. And so that work has already happened. However, we're still taking care of the patient census that we've got in the third quarter as we had in the second quarter. We're actively working to transition those patients to reputable and proper providers. And that will take us a little time.

So we're going to continue to carry the labor and operating expense associated with taking care of those patients. We do believe we'll get through this over the next couple of quarters, which is why for out years '27 and beyond, this won't be a repeating expense.

We will move on now to Brian Tanquilut with Jefferies.

Suzanne, moves you're making. As I think about is there a strategy there a direction here to shrink the business essentially? I mean I get the idea of streamlining but balancing that with the deleveraging of the corporate overhead. Just walk us through how you and the Board are thinking about all these strategic moves and the direction that you want to take the company to eventually? Like what is the goal? And where -- what is that endpoint?

Yes. Thank you, Brian. Let me remind everyone that this company was built through a series of over 150 acquisitions. And when we did the portfolio review a couple of years ago, what we found is a whole host of subscale products, channels, dogs and cats that were baked into our different segments, which was really one of the reasons we ended up going the segment route to get our arms around really what were we offering in the product portfolio. Coupled with those types of acquisitions or the number of acquisitions, you can imagine the different workflows and the different ways of working.

And so 2 years ago, we really set out on this path to say we need to simplify and focus on the portfolios where we have the biggest growth opportunity, highest profitability, which really equates to the best value proposition. And through that portfolio management, we identified a series of moves we had to make, which we've had and seen incontinence, custom rehab, home infusion. These were all products that we were subscale at that would require additional investment should we want to bring those to being #1 or #2 in the market.

And so this quarter is the completion of that strategy. All of them are good businesses. Diabetes is a great business. E-commerce, some of these urology, ostomy -- but with the looming threats out there of competitive bid of having to invest to grow, we thought it would be better to shrink down to our core and build from there. So this very disciplined portfolio pruning has been a journey that we're on that really came to this point in time. This is the quarter where we can say we have finished that divestiture path that we've been on.

And now all of our additional dollars that we generate can be invested back into our Sleep and Respiratory business and where it makes sense or in support of our home medical equipment business. But it has to be in service to our Sleep & Respiratory business where we serve either fee-for-service, capitated or more recently, a real focus on our enterprise health systems because we're trying to build density and proximity in the major markets.

And so yes, there is, to your point, a shrinking in order to improve the growth outlook and the long-term EBITDA margins of the portfolio, which I believe will make us a stronger company. And the last point I'll make is a couple of years ago, we believed that we knew AI and technology is great, right? We knew it could improve our business. But the problem we had was nothing was standardized. Like we had no processes that we could easily put that technology on and deploy it at scale.

And so as we shrink down to sleep respiratory and a focus -- simplified focused business, what we've seen now over the last few quarters is this ability to roll out technology at a much faster pace, deploy AI where it makes sense. And we think that we can speed that up under the current portfolio and the way that we're structured.

Understand. And then maybe, Jason, just as I think about the West Coast contract, I mean, obviously, there's some execution there in terms of trying to get the utilization to where it needs to be. But just curious, I mean, what exactly operationally needs to be done? And are there opportunities to maybe reprice given the higher-than-expected utilization?

And then maybe, Suzanne, kind of related to this, just as we think about the Humana contract expansion, are there further opportunities there? How did that work given that I think the other half of that contract was with a different provider. So are you pulling business away from that other provider? Or is Humana kind of piecing that out at this point?

Yes. I'm actually going to take both of those, and Jason can assist me after if I missed anything. So starting with our West Coast contract, what exactly has to happen. There's 2 buckets that I tried to explain but let me give you a little bit more color. We -- I'm proud of the team that we really understand now through operating this contract over the last 1.5 quarters, what is going on. And our relationship with our partner there remains incredibly strong. I want to get that out there.

So if in an event we can't fix some of the operational issues, I can't promise to any kind of renegotiation. But what I can say is in partnership of serving those patients, there is a recognition that both companies have to do so profitably. Now back to what we have to do. There's -- it's easy. It's 2 line items. Order volume and utilization, we have to understand, and we have to make sure that it's being utilized and the volumes are appropriate.

So the example I gave on sleep resupply, we had to send patients at the time of the transition, all of the incumbent -- all of the sleep resupply patients that were being served by the incumbent, we had to send them a letter stating we're a new provider. What we believe happened was people who were maybe not adherent with their therapy, but still have the equipment in their house said, you know what, I need to get back on that therapy. And we saw an incredible spike happen once we sent that letter.

Now we have seen subsequent to the quarter that, that volume is coming down. So we believe it was like all of us, right, an intention to get healthy and then that behavior drops off. So we -- that's why we call that out as transitory. But there are some other types of product lines that we're seeing running outside what we expected. At the same time, it seems that are running below is what expected. So an ongoing discussion with our partner around that portfolio and the utilization of that portfolio is part one.

And then part 2 is there's no data in the world or diligence that we could have done that us and our partner knew about that could have predicted some of these inherited messy workflows. And so from day 1, it kind of sent our operations into a bit of a tail spin because we were not expecting the level of the example, I gave urgent orders being the biggest one. It's outside the bounds of what we thought. But you can imagine, right, it's much easier for a provider to say, urgent, even though they really don't need that product in 4 hours, but we were taking that order at face value.

And since then, that has been the primary focus of correcting or getting this contract under control on both sides with us and our partner because that is something we cannot solve alone. So that's about -- the rest of it is noise. If we -- as we get those 2 things under control, -- that will be much better for us and our partner. But despite all that, at those elevated rates, we are performing under our SLAs. We're hitting targets. So I'm super proud of the work we've done to come up to speed. But now that we're effective, we have to make this efficient. And I have no doubt that we will make that happen.

Now on your Humana question, yes. So we, like I said, are in 33 states, 33 states, District Columbia, Florida -- South Florida is new for us. Florida was not a state we service. That does not mean we took it from the provider that has Florida. This piece of business was being handled by Humana, and they decided to get out of that business. So we -- they RFP'ed it. We took it over, purchased the assets, and we have now the new operator in that space, which is a new geography for us.

But with our history with Humana, that's just kind of like a tuck-in for us. We know how to operate these businesses. We've had 3 years of experience, and that contract performs not only operationally, but financially very fair for us. So we're thrilled about that new announcement. And then just in perspective, I think you asked a question around just CAP in general. We're up to about 10 or so different contracts, Humana and our West Coast one, obviously, being the largest.

But that's the reason I sit here confidently and say that over the next 4 to 5 quarters, I have no doubt that we'll figure out how to make our West Coast operations not only strong, but financially sustainable in partnership with our customer there.

We'll move on now to Pito Chickering with Deutsche Bank.

Just following up on that line of question just on the capitated contract. I mean, can you split out the $55 million sort of between the increase of sleep demand versus the increased actual demand versus the logistics?

And does this sort of change your view around capitated contracts in general versus the simplicity of fee-for-service, maybe you go and just become a standard fee-for-service at a lower cost than trying to underwrite these capitated agreements, which take a lot of inherent risk.

Okay. I'll start that discussion and turn it over to Jason for the split out. But Pito, this is one of my favorite topics to debate with you, as you know. My contract -- I didn't mean my contract, my view on capitated has not changed. Now do I wish that we had a different first 6 months in understanding what this transition would look like? For sure.

However, as I mentioned earlier, the idea -- the strategic value of capitation to get into a footprint and own a majority of those patients exclusively and have those ordering patterns come to adapt, there is a halo effect as we have talked about previously with the Humana deal that once you start piling up a few different exclusive deals, you become the provider of choice naturally in the provider's eyes just by ease of it has to go to this supplier anyway.

So we have not been able to capitalize on the halo effect in the West Coast because of the DME moratorium. We always believed we would, one, secure the operations of the capitated membership. We would two, then secure the 10% to 20% that is not capitated within those health systems that are in that territory and then eventually layer in salespeople to go get additional sales and accounts that, that footprint could service. that's been put on hold.

Now we do hope that the moratorium expires in August 24. But right now, we're acting as though that moratorium extends until we know better. So I think a mix of capitated, and fee-for-service is our future. I don't believe there'll ever be a majority, but I think that having some piece of capitated, much like Humana and the other capitated agreements we have is a healthy mix for us. Your second question was on.

On the split out, this is Jason. I can handle that. So it's roughly 2/3 volume, these patient volumes that Suzanne discussed. And the remainder of that is labor. In terms of our outlook, we have planned very modest improvement sequentially from Q2, about $1 million a quarter, better into Q3 and then into Q4. So we're pretty comfortable with the changes that Suzanne talked about and the impacts that, that will drive.

And one last thing I forgot to mention, I think it's important to understand that in a capitated arrangement, those accounts don't require us to fund the sales force, right? The sales forces go out and ask for the business. In these accounts, you don't have that expense. Now of course, you have liaisons and other clinical folks, but you have that savings long term.

And you also have reduced administrative costs when they cap directly with us because you're eliminating things like the complexity of prior auth and billing efficiencies, et cetera, and also the real-time collections. So there is other nonvisible benefits to our business of entering into these cap deals. Now I don't want anyone to think that I'm disingenuous. I do realize that this count specifically has a lot of work to do to fix our cost basis.

But for all the reasons we stated today and these ongoing savings I just mentioned, that's why I continue to believe that some portion of capitated deals in our portfolio makes sense.

Okay. Then the follow-up here, just about free cash flow. I think your guidance is $120 million for the year. I guess can you break down the split there between cash flow from ops versus CapEx? I think it implies the back half of the year is a positive $175 million of free cash flow versus $75 million use of cash in the first half of the year. I guess, can you just walk us through sort of the bridge in the back half of the year and how we should think about leverage ratios EBITDA less equipment CapEx?

Sure, Pito. So in the first half, I think your number is closer to about $47 million, $48 million was the use of cash in the first half. And so we're saying for Q3, we expect to deliver approximately $50 million of positive free cash flow to offset that first quarter -- I'm sorry, the first half. And then the remainder will come in the fourth quarter.

Cash flow from ops should follow a pretty similar shape as what you've seen in the past from us. And then CapEx will start dialing back as some of the overstock that we have built up to support not just the West Coast capitated agreement, but also national CPAP overstock, that will start working through and dial back the CapEx in the back half.

We'll move on now to Richard Close with Canaccord Genuity.

Yes. Just maybe back on the capitated and this halo impact. I think or maybe remind us what your target margin expectation is for capitated agreements like this? And is that dependent on getting that halo effect? Or is the halo effect separate from that target margin?

You got it, Richard. No, we've always said that our capitated target is enterprise margins, which is 20%, which does not include any halo effect. Even with our Humana or any other capitated business, we target that and that the halo effect has always been upside for us.

Okay. That's helpful. And then with respect to the overhead on the diabetes, you called out getting half of that out of the business within 12 months. What are you thinking about on the other half? Does that stay with you? Or do you get that out over an extended period of time? How are you thinking about that?

Yes. For that remaining $30 million of stranded costs, Richard, we believe through organic growth as well as accretive M&A, we'll bring more revenue onto the rails -- and so that will eat away at some of that $30 million of overhead as well as we'll continue to be disciplined in our expense structure.

I think we demonstrated that in the quarter with a $19 million restructuring program to rightsize primarily the corporate overhead to the revenue base. And so that work will continue overtime. But that first $30 million, we're quite confident, comes out in the first 12 months.

We'll move on now to Kevin Caliendo with UBS.

My questions are on the contract and the idea that a contract gets ripped up on June 30. I mean, we work on Wall Street. We know how contracts sometimes work, but it just seems like an unusual event to have something like this happen. So I guess how shocking is it that a company can do this? And then more specifically, what was the magnitude of the price increase? Meaning like is this a 5% price increase? Is it a 30% price increase? And was there any visibility going in that this was even a risk to happen?

I would agree with you, it's unusual, but it's factual and it's unfortunate. We like to say that we have strong partnerships with our manufacturer, but somehow, we -- whether we're missing each other in communication or what's happening, but it was literally a bit of a surprise to us on June 30. I mean we're always in constant discussion with our suppliers on different situations, volumes, supply, recalls, you name it, right?

So this one did surprise us a bit, notwithstanding that, the price increase notified to us on the 30th did result in an immediate price -- a percentage increase, which, listen, I don't want to say publicly right now what that is because we are working actively to try and get to better price and terms. And where we are in the quarter and having to report today, we made the decision that as we sit today, there is no contract.

So anything we order today is under those new price terms. So we felt it would be disingenuous not to call out that risk. I certainly sincerely hope that it's a different outcome when I'm talking to you next.

Is it -- I mean, isn't normally -- please tell me if I'm just completely off base here, but end of quarter, typically, there's negotiations around lower price and hitting volume targets and things like that. It's just unusual to hear that a company takes a massive price increase at the end of a quarter.

I mean, just tell me I'm wrong, but like that's always how I understood these kind of vendor contracts around the end of quarter, there was always negotiation around price and volume and trying to hit targets and things like that. It was almost never the other way. Those price increases were typically done in advance and were well defined.

Yes. Yes. I think you understand the normal course of business. But at this point, I really -- I can't say what the discussions were at that time.

[Operator Instructions]

We'll move on now to Yujin Park with Baird.

I just wanted to touch on the cybersecurity incident. Can you explain more on what exactly happened? Any disruptions to date and expected cost to remediate and how you treated out that cost if you adjusted or was included in adjusted results and next steps for that?

Okay. Let me just briefly explain what happened. I mean we issued some information on this, and then I'll let Jason talk about any additional financial implications. We were notified that we had a threat actor give some data. And we have closed that out. It is done of the bad situation, it was a good situation, we believe that we've resolved it and we've moved on.

So there is nothing left behind. There's no additional risk. It's kind of old news for us right now, unfortunately, like meaning we've gotten through it and close that chapter. In terms of ongoing cost, I'll turn it over to Jason.

Yes. The settlement expenses to close out the matter are included in our nonrecurring expenses adjusting to EBITDA.

Thank you. And it does appear that we have concluded our Q&A. I'd be happy to return the call to our host for any closing comments.

I just want to thank everyone. I recognize a lot of moving pieces this quarter and -- but I do hope that you can see that the underlying business and the strategic moves that we are making are setting us up for a really successful future. We understand we have a lot of work to do to improve that cost basis, but that's what we're getting after next. Thanks for joining our call.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

[Audio Gap] AdaptHealth, they are one of the largest or maybe the largest provider of medical equipment, I guess, in the U.S. and Jason is here with us. We're going to go right into Q&A. before we start, I guess, Luke is in the audience, too. He's hiding. But in case anybody wants to say hi to Luke, he is right there.

So maybe -- yes, maybe we'll go just right into Q&A and start with first quarter. You guys came in a little bit below on EBITDA line, right? You call out a couple of items. So maybe remind us the elements, I guess, that created the shortfall, right? But also as we think about Q2, right, maybe the timeline of kind of recovery, some of these cost items that kind of were weighing on Q1 EBITDA.

Sure. Sure. I'd be happy to. So it's good to see you again, Joanna. Thanks for having us back at BofA. Yes. So first quarter for AdaptHealth was frankly, extraordinary in a lot of different ways. All 4 business segments grew organically. That's the first time that's happened, I think, since we broke into 4 different business segments. And so the underlying core business of sleep and respiratory, as Joanna mentioned, we're the largest durable medical equipment provider in the country. Both Sleep and Respiratory grew organically year-over-year between 3% and 4%. So we were happy to see that in the core business.

Our diabetes business grew organically for the first time in some time, a little over 2% as we put out more CGMs, a lot more pumps. Pumps are having a pretty good run for the last couple of quarters. So that was good news. Wellness at home, which encompasses the true bent metal as we affectionately refer to it, beds, wheelchairs, walkers, that type of DME that's in service of patients with Sleep and Respiratory conditions primarily. That business line grew as well organically year-over-year. We did have several dispositions in the prior year. So reported, that segment was down, but ex those dispositions, that business was up as well. So the core in total was up a little over 4% organically year-over-year.

The big news was that we have started a very, very large capitated agreement with a large West Coast-based hospital system and IDN. We're now covering over 12 million members in a capitated arrangement. So for those not familiar with capitated arrangements, they are at-risk contracts. We get paid a per member per month fee for managing an entire membership of a particular plan. And then we manage the utilization, which in DME happens to be extraordinarily steady and stable. As you can imagine, folks that need DME, that curve doesn't bend so quickly. You either need home oxygen or you don't, and those trends don't change too rapidly. So we take that risk. And so total organic growth was over 9% for the first quarter. So that was kind of the headline of what happened with revenue.

Now with that did come additional carrying costs for that capitated arrangement above and beyond what we thought we would do for the first quarter. We thought we'd come in around $128 million of adjusted EBITDA. We came in at $121 million. And so we beat revenue by about $20 million. So that added certainly to the top and the bottom line. But at the end of the day, we were about $12 million over in labor for the first quarter. Now most of that was variable in nature, about $8 million. And so those were dollars spent for sign-on bonuses, incentive pay, overtime and contract labor as we were bringing on hundreds and hundreds of thousands of patients, all within about a 5- to 6-week time frame.

So the amount of work and effort that went into that was challenging to predict, I guess, is how I would frame that. But we were very pleased that with all that additional variable pay, we were able to secure the revenue earlier than what we had originally anticipated. The rest of that $12 million was higher salary expense, more W-2 employees than we had predicted. That is essentially more staff. Over time, we will work to rightsize that staffing model with the new contract. So again, the headline, I think, for the year and for Q1 is that we are now fully transitioned for this capitated arrangement. What was partial revenue in the first quarter will now start flowing for the second quarter and throughout the rest of the year, which is why we show such a significant step-up in profitability as we work through the rest of 2026.

Right. And you gave the Q2 guidance where you talk about 19% EBITDA margin, right? So that also implies a step-up. So it sounds like some of it is normalization or just having more of the revenue flow through on top of the labor costs that you already have in place.

That's right. I mean our revenue ex patient equipment depreciation flows through about 60% gross margin. And so the effect in Q2 is that we step up revenue from $820 million to $850 million. And so that $30 million of incremental revenue is essentially all capitated business. It's expected to flow through right around 60%. So that sequentially adds a little under $20 million. As usual, throughout our history, collections are tougher in the first quarter. They step up pretty significantly into the second quarter and throughout the course of the year. That's the impact of patient deductible resets as well as those deductibles start capping out, the patient pay portion becomes lower and the patient dollar is a little harder to collect than the insurance dollar. So that means collection performance improves. So that should add about $10 million in the second quarter.

And then finally, a lot of that variable labor has already run out that won't repeat and supporting the onboarding of the capitated arrangement. So you're seeing about a $40 million step-up in profitability, and those are the 3 bridge points to get there.

Right. This is very helpful. And on this capitated program -- contract, sorry, very exciting, right? I mean it sounds like you guys were talking about previously that those should be kind of running at an above-average margin versus like the consolidated.

That's correct. We expect -- yes, we expect at least 20%, so essentially the enterprise margin.

But just kind of walk us through the ramp-up. It sounds like kind of a lot of investments have been done and now you're, kind of, just capturing that sort of any time line or any kind of ramp-up to get to that margin?

Sure. So for perspective, the ramp-up in the infrastructure really started in earnest around September of last year. And so for perspective, we de novoed 35 brand-new locations. from September up until, call it, mid-February. We hired well over 1,200 employees all within that time frame. Some of them came from the incumbent DME provider as employees were displaced through the loss of that contract, we were able to convert many of those employees as well as new employees that we recruited on the open marketplace.

Over 300 vehicles were procured, vehicles and sites were outfitted, hundreds and hundreds of thousands of active patients were converted onto our systems and our platforms, and we were able to acquire a little over $80 million worth of active patient equipment from the incumbent provider. So all of these things happened on the course of end of September through, call it, mid-February and then a little bit more into early March as the final phase of the contract started. So all that carrying cost was there pre-revenue or without the revenue to support it. So although we carried significantly more costs than we originally anticipated upfront, now that the revenues started, those margins start locking in quite rapidly. And so that's why we expect to see that step up over the course of 2026.

And would you say, as you exit '26, you're going to be at that margin target margin for that particular contract?

Yes. Yes, we would expect that.

Okay. Perfect. And I guess you do now have 2 large contracts, right? So the obvious question is like...

For now, we are working on that.

Exactly. So maybe walk us through that. Like should we expect another large one or there's more like the smaller ones, kind of how we should think about that step up.

Sure. Yes. Yes. So I would characterize the capitated pipeline or the opportunity is basically small, medium, large. The Humana capitated agreement that covers 33 different states in the District of Columbia that we started over 3 years ago now, that at the time was the largest transition of capitated business in the history of the industry. It was a very large contract. It was over 1 million covered lives. And certainly, with Humana membership growing in '26, we benefit from that as well as those plans have more membership and we take care of more of those patients. But that was a very large agreement.

Prior to securing the Humana contract, I couldn't tell you that anyone inside of AdaptHealth thought that it would be possible to win the Kaiser agreement. Once we did, and we were able to now convert all of these patients successfully, the amount of inbound interest for this type of payment structure is elevated. We've now proven for the second time that we can transition huge populations of patients from incumbent providers onto the AdaptHealth platform. And in doing that, we become the single service provider for that plan. We provide the daily, weekly, monthly metrics around patient satisfaction, contact center measures, of referral provider satisfaction and operational metrics such as emergency orders arriving in that patient's driveway within 4 hours of discharge of that hospital.

And so being a single operator as opposed to traditionally hundreds of DME operators in each state across the country, that's a huge benefit for insurance plans. Certainly, we're happy to offer some reimbursement compression in exchange for a tremendous amount of volume that economically makes a lot of sense for us. So that's an added benefit to the program. We are actively pricing small and arguably medium-sized contracts. We do have a dedicated team that's focused on this. They price them, they pitch them. Ultimately, they integrate them and then pass them off to operations for continuing that book of business. And Suzanne did allude to getting pretty close on a new opportunity in the last earnings call. And so with a little luck, we might have something to talk about by the next call.

So I guess a couple of follow-ups here. So first, this Kaiser versus Humana experience, right? With Humana, I guess it was a much bigger contract, right? Because initially, there was some disruption there.

Actually, it was much smaller.

Smaller initially.

The -- yes. So this is a tale of 2 different contracts. I think maybe what you're getting at is in the start-up of Humana, we incurred significant penalty payments from Humana. So we did open some de novo locations to support that Humana contract but it was 5 or 6, not 35 like we've done now with Kaiser. The other difference was that we were taking business literally from hundreds of DME operators, some of them just mom-and-pop single or 2-site location entities. And the communication of AdaptHealth to those members from Humana to those members, educating the referring providers that if you're a Humana Medicare Advantage plan on HMO, AdaptHealth is the only place that you can refer membership to for DME products.

That was a considerable amount of disruption to handle all at the same time. And effectively, day 1, we got paid the per member per month. However, if a patient was serviced on home oxygen by a different provider at roughly $120 a month, that single patient would deduct from our payment. And so that took essentially 3 quarters to work through the system until the point that we were fully integrated, which was 2 years ago in early '24.

The difference with Kaiser is that it was all coming from an incumbent -- a single incumbent provider. And so there was a very respectful and professional relationship built between us and that competitor that was established to essentially lift and shift those patients and transition them smoothly to AdaptHealth. And so there were no penalties incurred. That concept didn't even exist in the second opportunity. The difference was that we de novoed 35 sites, essentially all in geographies that prior to Kaiser, we didn't have footprint in.

And so the opportunity that's in front of us now is as that contract is now fully transitioned, and we're starting to rightsize the staffing model to handle the volumes and to handle that relationship. The next thing we're doing is bringing in new sales force into these parts of Northern Southern California, Oregon, Washington, essentially everywhere Kaiser has a hospital footprint. And now those sales folks are selling into referring providers outside of the Kaiser network because we've got all that fixed cost essentially paid for, and now we can go find additional opportunity to bring in at a much higher flow-through of every new dollar of revenue.

And I guess on Humana a follow-up because you alluded to this idea of Humana is going to grow their membership much faster this year. Does that require more investments on your end?

It does not -- it does not. Well, I said that quickly. No fixed costs or additional infrastructure investments. Certainly, it will require a little more CapEx investment because the bigger membership means that the flow-through will be additional patients that are utilizing. So there'll be some CapEx that will come with that. But again, that contract also operates at or better the enterprise margins.

It's already there. Okay. And then on this capitated revenue exposure, I think you said, I guess, 9% in Q1 but obviously, there was partial Kaiser in there. So how should we think about the exit rate, like magnitude of things?

Yes. So as you said, about 9% of enterprise revenue is capitated in the first quarter. We expect to be exiting the year closer to 15%. Now much of that will come through the ramp as we fully transition and that revenue will start flowing in Q2 and beyond. That's a big part of it as well as we are working on pipeline.

And I guess coming back to, I guess, the core business outside of capitation but the sleep business is doing pretty well.

It's doing great.

Yes. So I guess walk us through the drivers there in terms of like what's driving that? And kind of you guys also alluded to this idea of like there's still a lot of undiagnosed patients out there and it sounds like that's improving. So kind of walk us through, does that change your view of this business and kind of growth algorithm for that particular service line because of this.

Well, I'd say that it doesn't change our view of the growth algorithm. I mean both Sleep and Respiratory, which represents almost 70% of the business, we expect that to grow in the 3% to 4% range over time. Respiratory, a little lighter than that, sleep a little heavier than that. That's our general growth outlook for the businesses. Now GLP-1s, certainly, there were a lot of concerns, I guess it was maybe 2 years ago, we were sitting here talking about this or even 3. Certainly, the top of the funnel, and we don't have data to show this, but we expect -- certainly, there are patients that they're on a GLP-1 either for diabetes or for weight loss.

That's helped them with their OSA condition. Maybe their AHI has come down to a level that they're comfortable not sleeping with a CPAP. And so certainly, there must be some compression at the top of the funnel. However, the cross current is essentially coming from devices, wearables, watches, rings, other indicators that suggest a patient might have a sleep, might have sleep apnea. They are more detectors than they're not actually diagnosing. But that is creating a tremendous amount of volume in not just in sleep centers, but also at-home sleep testing, which is exploding. And so those cross currents are resulting in double-digit referral growth year-over-year.

I've been in this business now 6 years. I've not ever seen that kind of referral growth. That doesn't mean you convert all of them ultimately as patients for a whole host of different reasons. But the top of the funnel, the demand for sleep, and we think just the environment and the awareness of sleep health is going to be here for many years to come. For perspective, there's slightly fewer than 7 million Americans that are on a CPAP. They sleep with a CPAP today. 25% of them are on our census. So we're by far the largest operator in the space. Moderate to severe sleep apnea, there's approximately 33 million Americans with moderate to severe sleep apnea. Mild sleep apnea, I mean, there's 80 million Americans. And many of those patients would also benefit from CPAPs or mouth guards or other products to treat OSA.

So in terms of that top of the funnel, we're very confident. There's good growth ahead for sleep. Respiratory is also underdiagnosed, not nearly to the extent of sleep but there's millions of Americans, the American Lung Association believes, that have underdiagnosed or undiagnosed COPD, and so our sales force is also selling into those call points to help diagnose patients faster. When that happens, you're able to treat them with nebulizers and nebulizer medications. Ultimately, COPD only progresses. There is no cure. So that patient at some point will need oxygen, either portable, stationary or both. And at some point, the lungs will no longer ventilate, so the patient will need ventilation. We provide that entire product catalog to patients.

And so many of our respiratory patients are on service more than a decade. And that business is continuing to slowly compound. We refer to that as a little bit of our bread and butter in the business. It's a great business, and we expect it's going to continue to compound over time.

So before we talk about the respiratory, but the sleep, so you said faster than 3% to 4%, would you say much faster, like close to high single digits or...

It depends on the quarter or the year.

But say like a longer term, would you...

[indiscernible] in that area.

Because also when you said your, I guess, referral growth was double digits, but also in the oxygen starts, that number was up a lot in this quarter, right? I mean I...

Well, that was capitated, but yes, yes. I mean if you take out the capitated and if you look at our segment revenue year-over-year ex CAP, both Sleep and Respiratory were up between 3% and 4%. We do expect that to continue for the foreseeable future.

And I guess for that business, there's some reimbursement changes that sounds like may be favorable for respiratory. Is there something that also could explain why maybe you're seeing more of a tailwind there?

Well, more of a tailwind there. Potentially, reimbursement change that would be a tailwind. The SOAR Act, S-O-A-R is still moving through Congress. There is a fair amount of support for that business, essentially reestablishing the rates that were in place during the COVID pandemic. Those rates were installed temporarily to incentivize particularly rural providers, which we provide a lot of rural respiratory service with increased reimbursement to make sure that the supply chain was healthy and patient access was not disrupted. So there is opportunity there. We'll see. We don't count any of that until or unless it's announced. I'd say there was also a national coverage determination, an NCD announced several months ago around ventilation. This one is interesting because Medicare is essentially requiring same or similar levels of monitoring of that equipment and the patient utilization as what's already required within our sleep health. We monitor the machines to understand is the patient utilizing or not that's required for Medicare billing claims.

I'd say on the respiratory side, many years ago, we established an advanced respiratory team that are licensed respiratory therapists. They have been actively monitoring patients on our vents for years. And so the introduction of this NCD within the industry has created a tremendous amount of uproar because most DMEs don't have that infrastructure or that capability to conduct what's required by Medicare. For us, it's a shoulder shrug. We've been doing it for a long time. And so we are seeing elevated referral volume for ventilation. We do believe that this is some of the reason for that. But overall, the respiratory regulatory and reimbursement environment is very steady to arguably trending positive.

And I guess the last piece, right, diabetes. So there was a lot of disruption. It sounds like growth is still there, right? But like the margins are quite low. So kind of how are you guys thinking about strategically this business? Like do you expect margins to get better? Or should we think about sort of low single digits for that business?

Well, I'd say strategically, as we think through Diabetes, if we were making a decision today to invest a new dollar into that business, I don't know that we'd do that today because over time, particularly since Suzanne Foster arrived from Danaher 2 years ago, we thought through and reassessed how much volume does that product category drive to Sleep and Respiratory. I mean the answer is de minimis. Through the underwriting years ago, it was believed that, look, many patients with diabetes also have sleep apnea and vice versa. And so there was a belief of a cross-sell opportunity. That never panned out. There's operational reasons why attempting a cross-sell is complicated and arguably more risky than what it's actually worth. And which is why we say that if we were making the decision today, I don't know that we'd be moving into the product category.

That said, it's the business we're in. It is only about a 3% EBITDA margin in the first quarter. It's becoming such a small piece of the pie. We have a de minimis amount of diabetes capitated revenue, not with Humana, not with Kaiser, with some smaller California plans. And so it's not critical in terms of selling new capitated opportunity. And again, it does not drive ancillary patient volume into the core, which is Sleep and Respiratory, over 70% of our revenue. And so for that reason, we intend to run it as best we can. It's still cash flows, but that's where we stand with Diabetes.

And since you mentioned capital deployment, so maybe we should talk about that.

Sure.

Right? You have target 2.5, right, net leverage ratio rate. And I guess you did some refinancing earlier last year, I guess, or maybe this year, was it some things you were changing up. So maybe talk about sort of your priorities in terms of leverage, M&A, investments.

Well, Joanna, I mean, arguably, the best bank out there led us through that refinancing. So we're grateful a couple of folks here in the room today. So thank you for that. That was an opportunistic deal. We have -- I mean, our next tranche of notes come due in August of 2028. They are our lowest cost bonds. They're at 6%, but we're raising money right now at 5%, basically 5% even. Once we hit our leverage target of 2.5 and potentially lower, that there's some potential improvement there as well. And so that alone, we intend to take out those '28 in August once the prepayment penalty goes away, and that move alone should save us about $3.5 million a year of interest. So that was a no-regrets move.

With that, we did modestly upsize the revolver. The reason for that was we drew $100 million to acquire the patient equipment assets of this third-party DME in support of Kaiser. And so we're still carrying that revolver as of the end of the first quarter. For the year, we expect $200 million of free cash flow, slightly less than what we've produced in the last 2 years. A lot of that is the capital requirements and standing up Kaiser.

In terms of allocating, Suzanne and I have targeted somewhere between 1 point to 2 points of M&A of revenue and arguably about the same amount of capital, $35 million to $70 million or so of M&A. We'll see if we get all that done in a year or not, but we work a pipeline. We've been extremely disciplined. Just as many DMEs that we look at these days, we actually walk away from more deals in diligence than we end up closing because of compliance concerns or they might be making business decisions that were -- just aren't going to work for AdaptHealth. But there is still opportunity. It is still worth running that pipeline, and we intend to do some deals. After M&A and certainly after supporting organic growth, I mean, we'll continue to delever and deploy more cash towards the balance sheet.

We only have 2 minutes. There are 2 topics I want to hit but you mentioned something I want to also touch base on in terms of the compliance issues at the smaller DMEs because we're hearing a lot focus in D.C. around fraud and abuse...

Well, there's a new moratorium in place.

Right, exactly. So kind of what does it mean to you guys? Does it open up kind of more markets to you to grow even maybe you don't have to buy, but just take over...

Well, patients. Our view is that the regulatory environment, which can include the Medicare competitive bidding program as well as the current moratorium that's in place for essentially new PTANs or new Medicare billing numbers within DME. For us, I mean, we've got 670 locations all over the country. And so our footprint is essentially everywhere already. So a moratorium doesn't hurt us. It might hurt others in a different way. But bigger picture, there are several vectors. [Audio Gap] The first is the regulatory environment is making it harder for smaller players. [Audio Gap]

I want to hit on that topic, AI, right, very hot topic. And I guess you guys been historic focused on technology and kind of streamlining. So maybe give us a quick overview where you stand there and also in terms of like how much more there is to, I guess, utilize this technology.

Well, I'd say with -- now with 12,000 employees on staff, that's a lot of manual work and labor that's happening in our business. There's another roughly a little over 4,000 employees or FTEs that are offshore as well. By definition, they're kind of picking things up and putting things down, copying on one screen and pasting on the other. So the opportunity set in front of us is large. I don't know that I'm ready to quantify it just yet. But we are making tremendous progress in certain areas of our business, one being the revenue cycle. We have deployed bots and other AI that is reducing the amount of offshore labor. You'll see that in our filings that those number of headcounts are continuing to come down. We expect that will continue in '26 and beyond.

The second area is a combination of the myAPP, which is our patient app, now over 400,000 patients registered. Those numbers are going -- growing at a very, very rapid clip. And within the myAPP, it gives the patient choice and potential to resupply and order on their own without talking to an AdaptHealth employee or they can talk with our AI chatbots or call the phone numbers that have conversational AI bots that are -- again, they're doing so many things like scheduling patient setups, like reordering supplies, even paying their bills, that historically, humans were 100% part of that ecosystem. And so we're making great progress. We'll continue to report that, and we think there's a bright future with AI and technology here at AdaptHealth.

All right. I think that's all the time we have. Or is it...

I think we're going backwards.

Yes, we're going backwards. So that means we're done.

Thanks for having us.

Thank you so much. Thanks, everyone.

Good day, everyone, and welcome to today's AdaptHealth First Quarter 2026 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 the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding financial results for 2026 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, organic growth 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, Suzanne Foster.

Good morning, everyone. Thank you for joining us today. The opening months of 2026 has set the stage for what will be a defining year for AdaptHealth. We made significant progress in three areas this past quarter.

First, we successfully completed the transition of hundreds of thousands of active patients to our platform under our new capitated agreement. The second highlight of the quarter was the progress we are making on infrastructure investments as our AI-enabled initiatives and patient-facing digital platform reached meaningful milestones, and we are beginning to drive improvement in our operating metrics. And third, in April, we refinanced our credit facility with improved terms, further strengthening our balance sheet and providing financial and strategic flexibility. Starting with our new capitated agreement, we navigated through one of the most ambitious operational undertakings by completing the largest patient transition in the history of home medical equipment. No HME company had ever taken on a capitated contract of this scale from an incumbent.

Over the past couple of months, we established 35 de novo locations and are now the exclusive HME provider for more than 10 million new members. We had planned to work through this transition over the first a result of completing this transition on a more aggressive time line and delivering strong performance across our legacy business, we delivered revenue significantly ahead of our guidance with solid organic growth across all four segments. Regarding the contract, covered membership count, revenue per member, utilization and product costs are all meeting our expectations. However, we maintained heavier-than-planed labor costs to ensure a responsible transition.

In the first quarter, that amounted to $12 million of elevated labor expense, of which $8 million was variable labor to accelerate the transition, and that should normalize by the end of the second quarter. The $4 million of elevated wages and benefits that will decline as we rightsize and operating -- rightsize to the operating model and to meet the service requirements. Given that this is a 5-year contract with a potentially longer horizon, the extra implementation spend was the right decision for the relationship and the patients. As for Q1 financial results, first quarter revenue of $819.8 million grew 5.4% versus the prior year quarter and exceeded the midpoint of our guidance range by approximately $22 million.

On an organic basis, adjusting for the impact of acquisitions and dispositions, we delivered 9.1% year-over-year growth. Of that, about 500 basis points came from the new capitated contract. The other 400 basis points came from the base business with each of our four segments delivering positive organic growth in the quarter. Sleep Health net revenue of $358.5 million grew 13.3% versus the prior year and PAP new starts set another new record. We anticipate that as accumulating evidence highlights the significance of sleep in overall health, there will be corresponding increase in demand for therapies aimed at improving sleep quality. Currently, up to 80% of individuals with obstructive sleep apnea are undiagnosed.

However, patient awareness is rising, driven by expanded access to home sleep studies, the development of wearable devices for early detection of obstructive sleep apnea and the integration of dual therapies. As more patients experience the advantages of sleep therapy, our commitment remains on focusing -- remains focused on delivering high-quality care and supporting treatment adherence to fully capture the health benefits. Despite a very mild flu season, Respiratory Health net revenue of $178.1 million grew 7.6% versus the prior year and oxygen new starts grew 12.8%. Diabetes Health net revenue of $142.2 million grew 2.4% versus the prior year.

Our investments in talent, process improvement and technology over the past year have taken hold. We had particularly strong results from resupply, further demonstrating that our centralized resupply team is performing well and providing quality and timely care to these patients. Wellness at Home net revenue of $141 million declined 10.3% on a reported basis, reflecting $35.8 million of disposed revenue from noncore assets exited during 2025.

Over the past 2 years, we have carefully pruned our portfolio to product categories that support growth in our Sleep and Respiratory Health segments. After adjusting for these dispositions, Wellness at Home delivered 11% organic growth. In Q1, capitated net revenue made up 9.2% of the total consolidated net revenue.

Capitated membership increased 7x year-over-year to about $15 million. Adjusted EBITDA of $121.2 million fell short of guidance, driven by the previously mentioned labor and benefit costs. While labor costs will keep decreasing post transition, we started a cost containment initiative to stay on track. As a result, we are comfortable raising our full year net revenue projections and maintaining our full year 2026 guidance for adjusted EBITDA and free cash flow. Stepping back from the quarter, I want to spend a few minutes on the playbook we are following because the industry dynamics at work right now are among the most favorable we have seen for a company of our scale.

The business we have built over the past several years is well aligned to these dynamics, which leaves us well positioned to grow in the coming years. Interest in capitated arrangements among payers is increasing as a way to align incentives and lower health care costs, a trend we anticipate will persist. Securing and implementing these agreements is complex, demanding nationwide coverage, strong clinical practices, robust technology and operational expertise. We possess these strengths, which the market acknowledges. Our discussions regarding new capitated deals remain active and promising, and we are optimistic about announcing additional partnerships soon. The regulatory environment is evolving in ways that benefit scaled compliant operators. The government is actively working to root out fraud and abuse in home medical equipment, and we think that effort is long overdue and unambiguously what is needed for patients, for the Medicare program and for the broader health care ecosystem.

The many legitimate hard-working home medical equipment companies that serve millions of patients managing chronic conditions at home deserve to operate in an industry with a reputation be fitting this critical mission. So we applaud the government's efforts, and we see an opportunity and frankly, a responsibility to be a constructive partner as it pursues these aims. The direction of travel here is clear. Greater scrutiny and clearer standards will, over time, separate operators who have made those investments in the systems, process and clinical infrastructure that proper compliance requires. We have made these investments, and we are committed to helping lead the industry toward that standard. Our balance sheet following the refinancing of our credit facility gives us the flexibility to pursue tuck-in acquisitions from a position of strength where it makes sense in attractive geographies for assets that expand our access to patients focused on our core Sleep and Respiratory Health segments. These must be at returns that soundly meet or exceed our thresholds. The last two years reflect that discipline.

We have deployed capital selectively, and we have terminated as many deal processes in due diligence as we have closed. Technology is creating a real separation. We have invested in our patient-facing and operational platforms, and those investments are improving the patient experience and time to therapy. Our conversational AI platform has moved beyond pilot and in Q1 is handling live calls across sleep scheduling, our contact center and resupply use cases.

Scheduling that was entirely manual a year ago is now 25% touchless. Order conversion times have shortened materially, a meaningful improvement in the experience for referring providers and patients alike. Our patient portal, MyApp crossed 412,000 users in Q1. These capabilities matter more as volume scales.

In summary, our focus for the rest of 2026 is to manage patient growth and control costs. We aim for sustainable, profitable organic growth while maintaining excellent service for over 4.5 million patients. With that, let me turn it over to Jason to review the financials.

Thank you, Suzanne, and thanks to everyone for joining our call today. I'll cover our first quarter 2026 financial results, followed by our balance sheet, capital allocation and outlook. For Q1 2026, net revenue of $819.8 million increased 5.4% versus the prior year quarter. Organic growth was 9.1% for that same period with broad-based growth across all four segments. Capitated revenue of $74.9 million outperformed our expectations as we met go-live dates for our new agreement faster than we originally anticipated. Covered membership count, revenue per member, utilization and product costs were all in line with our expectations. First quarter adjusted EBITDA was $121.2 million, representing an adjusted EBITDA margin of 14.8% and coming in about $7 million lower than guidance. Although it required additional labor to start the capitated contract sooner, the elevated labor cost is already declining, and we expect to return to baseline in the next few months.

First quarter cash flow from operations of $93.7 million was essentially flat versus the prior year quarter. First quarter free cash flow of negative $27.5 million was in line with our expectations and driven by capital expenditures of $121.2 million, reflecting patient equipment start-up purchases to stock inventory in support of the new capitated contract. As we move into steady-state operations with the capitated arrangement, we expect CapEx to normalize and free cash flow to improve in the back half of the year. Turning to the balance sheet. We ended the quarter with unrestricted cash of approximately $48 million. Net debt stood at approximately $1.84 billion, and our consolidated net leverage ratio was 3.0x from 2.75x in the fourth quarter of 2025. The increase reflects the $100 million we drew on our revolving credit facility to acquire certain assets from a provider of home medical equipment to support our new capitated arrangement for a total consideration of $84.7 million.

We intend to pay down the balance on our revolver in the coming quarters and remain committed to achieving our target of 2.5x net leverage. In April, we completed a $1.1 billion refinancing of our senior secured credit facility, consisting of a $325 million Term Loan A, a $325 million delayed draw term loan and a $450 million revolving credit facility, all maturing in April 2031. The new facility extends our term loan maturity, lowers our weighted average cost of debt and provides incremental operating flexibility with expanded capacity on the revolving credit facility. It also provides committed capital through the delayed draw facility that we intend to use to redeem our 2028 notes following the call premium expiration in August 2026. The favorable pricing reflects the recent credit upgrades we received from both S&P and Moody's as well as our commitment to further delevering.

Our capital allocation priorities remain unchanged, investing to accelerate organic growth, reducing leverage and pursuing disciplined tuck-in acquisitions. Subsequent to the end of the quarter, we completed the disposition of our remaining custom rehab assets, a small but consistent step in concentrating our portfolio around Sleep, Respiratory and the related product categories that support growth in our core. Turning to guidance.

We are raising our full year net revenue projection by $10 million to $3.45 billion to $3.52 billion. This reflects the first quarter revenue outperformance, offset by the revenue of the custom rehab disposition. Given the steps we are taking to moderate labor costs related to the capitated arrangement, we are maintaining our full year guidance for adjusted EBITDA of $680 million to $730 million and free cash flow of $175 million to $225 million. For the second quarter of 2026, we expect net revenue of $840 million to $860 million and an adjusted EBITDA margin of approximately 19%. We expect free cash flow to be modest as we incur elevated CapEx to support the new contract. With that, I'd like to pass the call back to Suzanne for closing remarks.

Thank you. This really has been a monumental quarter for us. Our team went to extraordinary lengths to complete the largest patient transition in the history of this industry and over an incredibly short period of time. So I want to close by saying thank you to all the adapters that worked nights, weekends, overtime, whatever they needed to do to stand up our new capitated partnership. And a special thank you to all the adapters who ensured that our base business continued to perform. This was truly a team effort. The progress we made this quarter is just another proof point that this team has what it takes to achieve our aspiration of becoming the most trusted and reliable partner in home health care, the one patients depend on and physicians choose first. That brings me to the end of our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] We'll take our first question from Pito Chickering with Deutsche Bank.

On the organic revenue side, are you realizing all the revenues from the capitated arrangements, the 9.1%? Or should we assume acceleration in 2Q from those levels? And also, any color on what organic revenue growth would be, excluding the capitated arrangements? Just trying to figure out sort of what core growth is after all the capitated arrangements are fully realized.

Sure, Peter. This is Jason. So on the organic split, a little over 4% growth in the core business ex capitation, ex the new contract. And to your question on Q2, we do expect acceleration specifically of capitated revenue. That is where we are providing the raise of net revenue for the full year. So we do expect that we're -- we'll be assuming an entire quarter of capitated revenue growth from this new contract in the second quarter that we will accelerate organic growth.

Okay. And then you talked about the $8 million of variable labor from the acceleration and the $4 million of rightsizing. There's just a lot more sort of moving parts, and it's been a little challenging in 4Q and 1Q to sort of model EBITDA. So can you give us some color on how EBITDA should ramp 2Q and then ramp into 3Q and 4Q just because of all these moving parts around these costs?

Sure. Thanks, Pito. So in our Q2 guidance, we are projecting $840 million to $860 million of revenue at an adjusted EBITDA margin of approximately 19%. So that translates to a little over $160 million of EBITDA for the second quarter. The reason for the big ramp is really twofold. Firstly, we will have an entire quarter of revenue from the new capitated arrangement, very different from Q1, where we had portions of that revenue as the staggered start dates rolled out. And so that revenue is going to come in at a very high margin as the fixed costs are already in the P&L as we enter Q2. The second component is really around putting controls around the labor spend.

Certainly, as we were exiting March, we had a surge in variable pay. So incentive pay bonuses, contract labor and as such to support the transition. That came with a lot of call volume as patients were moving from the incumbent provider over to Adapt and a lot of questions about how to continue to access their care and how to work with AdaptHealth going forward. So as that volume settles down as we're moving into Q2, we do expect to get some of this cost out that we referenced in Q1, and we expect to get all of it out at the time of Q3.

Our next question comes from Kevin Caliendo with UBS.

I just want to make sure I understand. So you said you missed Q1 EBITDA by roughly $7 million, but you also said that labor expenses are moderating. Is there anything else improving in the underlying EBITDA outlook ex contract onboarding? Meaning whether it's mix, you cited some AI initiatives. Just trying to understand if those are helping the underlying trends as we see the ramp over the course of the year or if it's just simply the onboarding stuff?

Well, it's certainly the onboarding, Kevin. Secondly, as we get in Q2, we typically see a little over 1 point of improved collections and therefore, lower reserves on our revenue. So that number alone is about $10 million, and that all drops to the bottom line as a pure collections and rate on the revenue side of things. The AI that we referenced this morning, Suzanne may expand on a little more. It's important to see that we're moving out of pilot phase and first starting go-lives as we were exiting the first quarter. So that's going to take some time to scale over the course of the year and into '27. But maybe Suzanne wants to add some color on one specific.

The technology that we're deploying has been -- the goal has been to improve the patient experience and time to therapy. Now obviously, referencing things like going scheduling 25% touchless does come with some benefit. We have been reinvesting that back into the business where we have gaps. And so I've been out there saying that any financial benefit from implementation of technology will be back half of the year, but really more of a 2027 story because we've needed to make some investments in the rest of the business as we rightsize places that we're underinvested in.

That's helpful. Can I ask a quick follow-up? Have you seen any changes to sleep apnea coverage amongst payers? Is that -- did anything hit in 1Q that was different?

No, that's all consistent. Sleep apnea has enjoyed a stable quarter. Nothing on the horizon that we see in terms of changes at this point.

We will take our next question from Ben Hendrix with RBC Capital Markets.

This is Michael Murray on for Ben.

With the capitated contracts expected to reach 20% EBITDA margin at full ramp and the base business continuing to improve, what's the right way to think about Adapt's steady-state EBITDA margin over the next 2 to 3 years? Is there a path to low 20% on a sustained basis?

Yes, sure. This is Jason. I guess I'd start with our expectations for 2026. At the midpoint of our guidance, we're showing just a touch over 20% for our adjusted EBITDA margin. And as we get into 2027, a couple of key items to note. Firstly, in the first quarter, of course, we'll have a full quarter of capitated revenue versus the first quarter of 2026. And the lab -- the variable labor that we discussed and some of the fixed costs that we saw in the first quarter, we expect at that point that we'll have pulled that back out of the P&L, thus increasing margin profile as we get into '27 and beyond.

And I think just adding on to that, how we think about it is assuming a fairly stable fee-for-service reimbursement landscape, coupled with increased capitated revenue over the next couple of years, driving additional census and the underlying operational improvements, including the technology I referenced, those things over the next 12 months really into 2027 will allow us to hold that EBITDA slightly improvement as we move forward.

That's helpful. And then do you have any update on the pipeline or timing of potential new capitated arrangements? Are you seeing any acceleration in inbound interest?

Yes, sure. Well, like I said, we're very positive about the movement of our pipeline. It's moving through. And you should expect that we'll be coming out with an announcement soon on that.

We will move next with Brian Tanquilut with Jefferies.

Maybe I'll ask first on the de novo. I think you mentioned that expansion with the de novos is well ahead of guidance. So just curious what you can share with us in terms of what operational milestones kind of like allowed this acceleration during the quarter?

Yes, you're talking top line, right, Brian?

Yes, yes.

Yes. So this capitated arrangement came in multiple stages or phases as we stand here today, all phases are complete, but they were staggered. And so they were back half weighted to the first quarter. That's really why we're seeing the raise of revenue, particularly in the second quarter as we'll experience the entire quarter with that full revenue flowing. So at this point, the contract is fully operational across all 8 states. And as Suzanne said, 35 new locations in support of that business. And so we're very pleased to report the successful delivery, and we're looking forward to moving forward.

And the milestones that we focused on, remember, this is a three-way transition. And so all three parties had to be ready. And given that the other two parties were ready, we had to step up and make sure that we accelerated our go-live. And so getting those new -- getting all the new employees in place A lot of the labor that was in one region or allocated to one phase of go-live, we had to repeat very quickly. So we couldn't -- they were not done onboarding in the first phase, and we couldn't use them for the second phase. So we had duplication in onboarding based on the region. That's why we say we're confident that will be coming out because there's not only is there a lot of labor, but there's duplication.

Okay. That makes sense. And then maybe, Jason, just thinking of free cash flow here. I think you said in the prepared remarks, it's in line with expectations, but also you mentioned some of the asset purchases slipped into Q1. So just curious how we should be thinking about the makeup of free cash flow for the quarter and how we should be thinking about the cadence of it for the rest of the year?

Sure, Brian. So for the first quarter, we came right in line. We had guided negative $20 million to negative $40 million. And so at negative $27.5 million, we were pleased with the cash flow performance despite the additional cost on the P&L. I'd say as we get into Q2, we are signaling a step-up in CapEx for the second quarter versus where we were 90 days ago. Again, that's to support the capitated arrangement and just ensuring that we've got all inventory locations stocked and fully ready for all new patient volumes that are coming in. So that's going to steer the second quarter down from what we were originally thinking. We still think we'll be positive for the second quarter, but it will likely be modest. As we get through that normalization of CapEx, we're very confident that the third and fourth quarter will both be very strong in the neighborhood of $100 million in each.

We will move next with Richard Close with Canaccord Genuity.

Congratulations. Just maybe hitting on potential new capitated business going forward. Obviously, a large portion of this most recent agreement was relatively new territory for you. So as you think about potential announcements of new business this year, next year, how are you thinking about the level of investment that that's going to require for any potential new wins?

Richard, on the investment side, we do see elevated CapEx, particularly as we're starting up the arrangement. Now the reason for that is if that business is taken or won from an incumbent provider, of course, there's patients that are still on service. So there's a CapEx requirement typically to start up the arrangement. And then there's an ongoing CapEx commitment that is priced right in line with our standard CapEx, so call it, 11% to 12% of revenue is what to expect for ongoing operations for those businesses, but it does require some start-up CapEx to get into the new market.

And let me address the part about how and where we're looking at this. So this, the one we referred to today, our new agreement was primarily in a geography new to us. which we knew we had to make investment to set up the fixed cost, the locations, et cetera. And obviously, long term, right now, those new locations are only servicing our new strategic partner. And over time, as we stabilize, it will give us a footprint to expand upon, of course. With the pipeline that we have in place and now with this new footprint, there's very little area where we don't already have existing locations with teams that know how to do this business. For example, when we took on the first phase of this new capitated agreement, it was on the East Coast where we have a dense grouping of locations.

And really without a blip, we were able to onboard that effectively. And so as we consider new capitated agreements, we're looking at where do we have locations or can we buy locations to pick up operations. And we expect that it will be a much different and obviously a much smoother than opening up 35 de novo locations to service hundreds of thousands of patients on day 1.

Okay. That's helpful. And then just on diabetes, obviously, progress there. Can you talk how you're thinking about diabetes business as we progress through the rest of the year? Any updates would be helpful.

Sure. So we're super happy with the team, positive growth. As I mentioned, I can't applaud them enough for digging in. All of the improvement has been on execution. We're not seeing anything different in the marketplace. There's -- it's pretty much the same in terms of pharmacy and med benefit, referral patterns, all of that. So the improvement that the team has made over the last year has been the internal focus on us doing the best job possible. I have said that diabetes is -- in the past, I said, first, we got to fix it, which to check the mark. And two, we're always looking at do the -- what in our portfolio is strategically fitting for AdaptHealth, and we'll continue to review diabetes for a strategic fit as we do all our portfolio.

And this concludes our Q&A session as well as our conference call. We appreciate your time and participation. You may now disconnect.

All right. We're going to go ahead and get started. With us today, we have Jason Clemens, CFO of AdaptHealth.

We're just going to jump right into the questions because we do have a lot. So I guess maybe let's start with sleep apnea. We get a lot of questions in terms of how the sleep apnea process works. So can you walk us through the CPAP rental and sales process? And then just also just the trial period and how that works and flows into the system?

Sure. Sure. I'd be happy to. Good morning, everybody. Thanks for having us. So for the sleep apnea patient, I mean, I guess I'd probably start at the top. I mean there's somewhere around 33 million to 34 million Americans for the American Academy of Sleep Medicine that have obstructive sleep apnea. The problem is only 20% actually know it and are getting treatment for sleep apnea. So there's a massive underdiagnosed patient population.

Now the future seems bright due to the wearables, right, the oral rings and the Apple Watches and everything else that it seems that all these wearables are promising some sort of detection for a patient that might have sleep apnea. So that's resulting in what we're seeing as record wait times to get into sleep centers. It's also resulting in several at-home sleep test companies servicing these patients and helping them identify that they have sleep apnea. So once the patients determined to have OSA, we'll get a referral from that patient's physician.

And so if we take Medicare as an example, to maybe walk your detailed question. Patient will come see us. They'll get the CPAP. Typically, a respiratory therapist is going to set them up on that device. Additionally, they're going to get their first supply, which will typically include a mask, heated tubes, cushions, things like that. For the next 13 months, if the patient is adherent, we'll get paid, again, for Medicare about $60 a month. So you can kind of think of that as you're kind of paying back your device. And in the meantime, we'll work with that patient to qualify them for a resupply order. Now those resupply orders can come with another mask, typically the tubes, cushions. I mean it's kind of a razor-razor blade model, if you will. And so there's a recurring revenue that comes with that patient. And that will recur as long as that patient is on service with us.

Now within the first 3 months, there are very specific guidelines for the patient to be adherent. So we stay very close on the 30- and 90-day adherence programs. We've got hundreds of sleep coaches that essentially come to work in the morning and they follow the algorithms of who they're going to call next. And they'll work with those patients to figure out why they might not be adherent. Oftentimes, it's a setting on the machine more often than you might believe the machine is not plugged in. So we'll help them with that.

And then there's other reasons. Maybe the mask isn't a good fit for that patient. It might be too big. It might be too small. It might be too heavy or light. And so often, that patient will come back in and we'll get them refit and get them back on adherence. So we know that we are head and shoulders above anybody in the industry in terms of driving adherence. So we run a best-in-class operation there.

What is adherence like obviously, not the first day, but is it close to 90%, 95%...

The industry runs a touch over 70%, and we run over 80% with that adherence. So it's -- I mean, it gets detailed within the first 30 days or within a 30-day period in that first 3 months. The patient is got to be adherent essentially 4 hours a night or more for 20 days within that 30-day period.

Okay. And the $60 that you're receiving, does that cover for all the other consumables that come or attached to the sleep apnea?

No. I mean the consumables, so the average reorder is about $200. And so that will happen again when the patient gets set up on the CPAP. And then again, we'll work ideally every 3 months. Now we don't resupply every patient 4x a year, but we do, on average, resupply patients just under 3x a year. The industry is closer to 2x per year.

And that is mostly associated with the adherence aspect of it.

It is. It's the adherence and it's the monitoring. It's also the technology that is hardwired to each payer's contract. So for that patient, we know specifically what they're eligible for, when. And so our teams are all over that. And as they provide that outreach to the patient, either through physical mail or phone call or text or e-mail, ideally for us through our app, I mean, we've got hundreds of thousands of patients that are registered in our app. And so we'll conduct outreach that way as well to get in touch with that patient and advise them that they're eligible for resupply.

And you've been at this, obviously, for a long time. You've seen and figured out, okay, maybe we could do these little things, make a few tweaks to increase adherence. What has that adherence -- how has that shifted over the years? Has it materially increased? And how do you think about getting or capturing that incremental 10%, 20%?

We have folks that wake up every day trying to get just that a little bit better. Now I will say over the last couple of years, it has somewhat leveled out. I mean, we do drive improved adherence. Maybe surprisingly, patients that are coming in for a CPAP that are on a GLP-1 are adhering better than patients that are not on GLP-1s. So that's also helping a bit in terms of adherence.

But again, I mean, we've got hundreds and hundreds of people. This is all they do, and they follow the algorithms and the success that we've seen with setups even. I mean that can drive a lot more adherence than you might think. And so we have a best-in-class setup. Again, we have workflows when that respiratory therapist is setting up the patient that they'll follow those guidelines, and that also results in better adherence.

So what happens after 13 months?

Well, for that Medicare patient in that example, the rental payment will stop, and it will go into basically a cap period until month 60. So if that patient is still with us at that time, they become eligible for a new CPAP. And so we know that down to every detail and every day. And so we, again, outreach to the patient, let them know that they're eligible for a new CPAP and we'll work to fulfill them there as well.

And that just rotates sets the next step....

Some patients are on service for well over a decade with AdaptHealth.

Yes. Okay. As you think about just in that 13-month period, what is the average rental revenue per patient during that period? Including the consumables.

Yes. I mean for Medicare, it's about $60. So you get $60 a month for 13 months. And then on that resupply, it's about $200 on each resupply.

And on the commercial side?

Well, it depends. I mean, I'm using that as an example. That's more or less how it works.

Okay. And then the -- you talked about GLP-1s, but can you just talk through the source of your prescriptions? Is it mostly all from direct sleep studies? Is it from docs that are prescribing or meeting patients and prescribing GLP-1s and then they come in? How does that -- how is that mix? I know it's shifting from a GLP-1 standpoint, but how has that mix changed?

Well, I mean, a patient can come to us, a sleep patient, in many ways. Certainly, sleep centers, that's a big referral point as are pulmonology groups, sleep specialist doctors and then, of course, primary care. I mean primary care is a huge source of referrals. And so that's why we've got 700 sales folks all over the country that all day long, they're visiting these offices and making sure that we're doing a good job for the referrals, so we continue to get patients.

Okay. As you -- the product, if I'm not mistaken, ResMed, you have competitors that use the same product. So can you just talk about the core differentials between Adapt and your competitors as it relates to the product that they're all selling?

Sure. So as it relates to sleep, really as it relates to all of our products, I mean, the name of the game is to be the easy button for the referring provider. You do that by taking great care of that patient, by driving patient satisfaction because if the patient is not happy, typically, they're not going to tell you, they are going to tell their doctor next time they're in to see their physician. And so over time, if you're not doing a good job and you're not preventing that physician office phone from ringing, you'll get less referrals.

Speed to set up is very important. Last year at this time in the first quarter, we were struggling with time to set up. The national average is about 17 days, and we were actually starting to peak above that. Well, today, that's cut in half. As Suzanne reported in the last earnings call, I mean, we're down to 9 days on average to get a patient set up on a CPAP. So you might ask, well, what takes so long? Well, typically, it is the insurance requirements, prior authorization. It takes time when needed, getting in touch with the patient.

And we've cut that time down because now as you arrive at the patient's office, they'll have a placard with the AdaptHealth QR code that they can download our app. And we've now got AI chatbots that are available when patients call in for setup that reach into our capacity and the chatbot knows the time at each location of our almost 700 locations across the country. It will provide -- for that patient, we know they're dialing in and what their home address is. So we'll provide the nearest facilities. And again, we're taking more humans out of that loop and that interface, which is also increasing the patient satisfaction, but back to that point of referral and their satisfaction.

The TAM for sleep apnea is pretty high and it's increasing.

Yes. We think it's 33 million to 34 million Americans.

And how should we think about just the natural growth with everything that you're doing, how should we think about the growth within the sleep apnea business?

Well, we believe that the sleep apnea market in the U.S. is poised to grow low single digit up to mid-single digit. We are by far the largest operator in the business. We represent about 1/4 of the United States CPAP usage is coming from AdaptHealth. No other competitor is anywhere near that. We are continuing to grow share. I mean, every 6 months, we look at the claims data, and we're continuing to validate that we're growing share. And again, on this last quarterly update, we reported record numbers in census, and we're within just a couple of hundred patients for a record setup quarter. We think that, that's going to happen in 2026.

And then in terms of the share that you have, I mean, 25% of the U.S. market, are there any particular regions where you have dense -- a higher amount of market share? And where are those regions? And what is it about those regions as to why you may have?

Yes. I'd say that -- I mean, Adapt across the board. I mean, we're large and deep. Historically, the one area of the country that we didn't have a huge presence was the West Coast. Now what's so unique about this new capitated contract that we announced that has started in earnest. There will be further start dates throughout the course of the year as we stand up these new markets are that most of these hospital systems are in areas that we operated in before. And so we're setting up de novo locations, about 30 in total, all up and down the West Coast. We just made an acquisition in Hawaii December 1. So we entered that state and with a terrific operator out there.

And so as we get this capitated contract stood up and really humming, the next thing we're going to do is drop in more salespeople into those markets and go compete head-to-head with the local folks and with the nationals as well. So the West Coast is really the only spot that we're not deep, and that's changing here in 2026.

So we'll get to that, the West Coast in a second and also the capitated contracts. But let's just go back to respiratory. I know it has a similar rental and sales process. Can you just walk us through that process?

Sure. So depending on the product, I mean, oxygen concentrators is both stationary and portable are the largest products within that category. We also provide noninvasive ventilation, noninvasive ventilation for patients at home. So for oxygen, it follows a similar structure. Instead of a 13-month period, it's 36. There is still that 60-month cycle that a patient then qualifies for new equipment if they're still on the device. So it's a very similar revenue structure. Now there is resupply that comes with respiratory products, but it's not nearly as much or as important as the resupply for sleep.

And what is the rate that you're getting with on respiratory and the resupply rates?

Well, for Medicare, it can range. It's about $120 a month. And again, that will go for 36 months. And then on resupply, I mean, we're talking dollars. These are cannulas. Typically that are there to make the concentrator effective for the patient.

So we'll go through the other segments. But before we do that, let's talk about the large contract that you have in California. The stand up, just the process. And how deep is this going to go? And when do you think you'll have it fully stood up?

Sure. Well, I guess I'd start by saying that just the magnitude of the contract and what's required in terms of infrastructure. I mentioned the 30 locations, all new, all de novo. We're standing up, outfitting and filling with patient equipment. hundreds and hundreds of vehicles, again, newly acquired from the OEMs, outfitted and on the road. And then 1,200 employees onshore, these are 1,200 employees that we're hiring very, very rapidly. We're actually -- we're at our peak. We're about to hit the goal of having all the people we need in place to support the contract.

So a little bit of revenue did start in December as we reported during earnings. And we then made an acquisition of patient equipment to secure the February 1 start dates. So we feel great about that. There are start dates further in the year. But as indicated in our guidance, I mean, we actually brought our revenue up for this new contract versus what we provided as an outlook in November. And the reason for that is we've secured all this infrastructure, and we're in place ready to go day 1 to take care of these patients.

And this contract, is it mostly all sleep and respiratory? Does it touch on other areas?

Also DME. So like beds, wheelchairs, walkers, things like that.

Okay. So we'll get to the DME stuff in a bit. But just -- and we'll come back to Kaiser. But on Humana, have you maxed the opportunities Humana? And what are -- if not, what are those additional opportunities?

No. I mean, Humana is a massive organization. We'd love to do more with them. We think we're doing a pretty good job as we got a contract extension there as we reported last year, early in '25. So the contract today that we've got capitated, it is for HMO Medicare Advantage patients in 33 states, plus the District of Columbia. So certainly, Humana has grown their share of MA this year. And so that will help us out in terms of membership and another growth vector for our capitated business. But the PPO business, I mean, we are a preferred provider, and we do get a halo effect of being the only provider for HMO. And so that's been great for us. Of course, there are states that we've not capped. There's products that we haven't capped. So I mean, we're going to take care of as many Humana patients as Humana has got, and we do continue to develop that relationship.

In those 33 states, what percentage of those Humana patients do you currently have in your system?

100% of the HMO population.

Okay. And then the additional states that you're referring to, walk us through that process of maybe capturing those additional states? Is it just more continued conversations with Humana? Or is Humana using another service? Are you going to have to displace a service?

Yes. So there were 8 other states awarded a cap agreement back when we secured Humana. So that went to a regional privately-held DME company. Now those states were primarily out West where back to the infrastructure comments I made earlier, we didn't have a lot of depth. And so we price that accordingly that it would have cost us a substantial investment to stand that up. So we didn't win there at that time. Again, we're loading up infrastructure out West, and we'll see what happens here in the future. But our view is that if we continue to do the job we're doing with Humana, there's more opportunity.

What have you learned from Humana that you think you could actually use as part of your Kaiser project?

Well, I mean, we learned a lot. I'd say the most impactful lesson was around the transition of patients that were with an incumbent provider. It's not easy to change out patient by patient. I mean there's a lot to that. You need to get in touch with the patient's physician. You got to get documentation on record. You've got to schedule time in the patient's home in some cases and exchange equipment. So I mean, we did a lot of that with Humana.

And so we've structured the Kaiser business very differently. I mean we talked about an acquisition -- several acquisitions that we've already made to secure that equipment and prevent the friction of having to change that patient out one at a time. We also spoke in our call of drawing on our revolver subsequent to the end of the quarter in the anticipation of closing the remaining deals that we want to do to secure the patients on day 1 for Kaiser. So I'd say that's the biggest lesson.

Separately, the daily, weekly and monthly measures that we signed up for with Humana, we've signed up for many of those with Kaiser. We've hardwired our technology to produce that data automatically. We've got the Adapt Business System team around those measures and continuously improving those measures. Everything from patient experience when they call into the call center to patient satisfaction when we enter the home for new equipment to various SLAs for getting equipment on patients, sometimes in just 4 hours or less from the point of discharge from the hospital.

That cost to capture those patients, was that all figured into -- with Humana specifically into the capitated amount that you're receiving? Or did you go over -- meaning were margins pretty thin? And how are margins now within those capitated patients?

Yes. So we've said that margin is at or better the enterprise average for both adjusted EBITDA margin as well as free cash flow margin. We've said the same for Kaiser that as this business gets stood up that, that is our expectation, and that's how we've priced these deals. Certainly, we're happy to stand up investment to secure these contracts. I mean, versus the M&A dollars that you deploy to attempt to acquire this amount of business. I mean, the ROIC on these investments is incredible.

Yes. You have another capitated contract in Southern California. Clearly, it's expanding your reach in terms of what you are doing. It's a small contract relative to what you probably have with Kaiser....

The one we announced in the fourth quarter.

Yes. What do you think this contract will allow you to do? Is this more of a competitive replacement over time? How do you view that contract and that opportunity?

Sure. I mean we took that contract also from an incumbent operator in that market. That payer, it is part of a very large national payer that we do believe that there's more opportunity with that payer if we prove to do a good job in Southern California. The timing was great as we're standing up new sites everywhere in California, but particularly Southern Cal as it relates to Kaiser. So we're deepening our presence and our ability to take more share and we think we will.

Shifting over to diabetes. Can you just walk us through -- I mean, obviously, there's been some challenges in the past with shift from DME to pharmacy. Some of Omnipod is even talk -- or Insulet is talking about introducing another faster version of what they have today. How do you think about that space? And I know you're also looking to develop your pharmacy channel. Where do you stand there on that front?

Yes. So pharmacy as a percent of diabetes revenue is now just a touch under 10%. I mean that's up from half that just about 5 to 6 quarters ago. So fueling some of that growth, I mean, we do distribute CGMs. But the real growth is in Omnipod, as you suggested. Tandem recently spoke of the Mobi Tubeless coming much faster than I think the market had originally anticipated. And they're making some progress securing pharmacy contracts for Mobi. Well, that's all eligible for us to distribute through our 50-state mail-order pharmacy. And so that's been a good growth engine for us. I mean pumps are actually up double digit the last couple of quarters.

On the CGM side, now we do offer CGMs through pharmacy, not so much because we want to grow that aggressively because the margins for CGM on pharmacy are quite thin. But what it allows us to do is back to that easy button for the referring provider. We don't want that office to worry about whether we accept a pharmacy order, we don't accept the pharmacy order or we accept this payer and not that payer. We want to accept everything. And that's part of the strategy of growing the pharmacy is to ensure that our sales folks when they're out there fighting for each order that we're not restricting them in any way, which should help growth on the new starts.

Just on the durable equipment side, there's obviously a lot of on this, just given Dr. Oz's comments in terms of what's happening in Florida and California. Obviously, it has a little to do with you guys, but are there repercussions in terms of them looking at this, whether it's isolated to those groups or more holistically, how do you think this affects just the DME side of your business?

Well, I think for the scaled players, particularly public companies with control environments and those kind of things, look, we're pleased to be involved with the CMS as they continue to look at DME. From an operational perspective, though, for us, it's a little bit of a shoulder shrug in terms of impact. Now there is some nuance on the moratorium. This is a 6-month moratorium that the CMS has put in for new licensing.

In terms of acquisition activity, we don't think much will change. I mean targets are -- as long as they haven't changed majority ownership in the last 3 years, you can still buy the DMEs and transfer those license. And we think for newer DME businesses, I mean, frankly, those aren't businesses that we'd likely be entertaining acquiring anyway. So I mean, our stance on this is it's all kind of part of the industry we're in.

And on the DME front, have you quantified what the rulings in '27, '28, how that could actually affect you on the competitive...

For competitive bidding? So we commented a fair amount on this a couple of quarters ago. We'd say that we were pleased to see that the CMS clarified the final rule that was published in late '25. They have excluded kind of our core categories of sleep, respiratory and DME from the competitive bid round that will be pushed out to 2028. The products that will be in include diabetes as well as ostomy and urology, which are very small categories for us.

And in terms of the impact, look, there's almost 2,000 DMEs today that are distributing CGMs to Medicare patients. The CMS has been clear that, that will be 10 or less is what will happen. So there's a lot of market share that will be up for grabs. Adapt is the #2 player in terms of CGM distribution to Medicare. So as we learn more about the process, we're leaning in, and we see the competitive bid as an opportunity to continue to grow our revenue.

And on that 10 or less, obviously, it is a clear opportunity for you guys and maybe taking share, but is that leading to consolidation? And how does that work from just an FTC standpoint?

Yes. I mean competitive bid over the years, frankly, was part of AdaptHealth's origins as DMEs that may not win contracts, there's really 2 options. You either sell your business. And again, you don't have a Medicare contract. So that's going to be a depressed multiple or you close the doors. And so over the years, following competitive bid, I mean, it's been good for acquisition and it's been great for consolidation.

Your largest competitor or one of your competitors had noted that they have a preferred status with Optum. Can you just walk us through as to what that means? And how does that affect Adapt?

Well, to our knowledge, that competitor has not stated the value of that contract or the importance of the contract. For us, it's business as usual. We have seen 0 impact from this situation.

When you say 0 impact, meaning that you're still.....

No change in volumes, no change in referral patterns. We have not seen any impact.

And just from a competitive standpoint, obviously, given that competitor's challenged, how -- what are the opportunities that you're seeing there, the opportunity set? And what are you doing to try to maximize on those opportunities?

Well, I wouldn't say that the competitive landscape is really any different. I mean you have to remember, I mean, health care is local. The folks that are seeing referrals every day, going to see referral offices. I mean they're fighting with the same salesperson at the company down the street as they were last year or as they will next year. And so if things are changing at the top of the house in these big companies, it's really not an impact locally. And it doesn't change anything that we're doing to continue to grow market share.

Just from a regulatory front, and we talked about competitive bidding. But over the last decade, I think -- correct me if I'm wrong, one of the more major ones was public health emergency and then the reversal of that 75-25. What are you seeing today in D.C. outside of, again, of competitive bidding and the stuff with Dr. Oz, are you seeing any other movement on that could either be beneficial, just something that we all, as investors, have to be aware of and track?

Well, sure. I guess, firstly, I'd call out that, as usual, in December, the CMS published the 2026 fee schedule, and there were increases. I mean this is largely an inflation-based fee schedule. And with inflation up, the fee schedule was up just over 2% across the product catalog. So that was good news for the industry. On the regulatory front, and the lobbying front, there's the SOAR Act, S-O-A-R, that is working through. I mean it's really working to increase reimbursement levels for respiratory, which is a large and important category for Adapt. Also working to simplify, reduce restrictions in terms of setting patients up and so kind of increasing that patient access. So we're, of course, part of that, the industry consortium that's lobbying for that act, and we're hopeful, but certainly haven't accounted for any of this in our guidance.

With the capitated contracts you have today, obviously, it's very clear as to what that covers sleep, respiratory and some of the DME stuff. But as you look at the spectrum of opportunities, even with some of these contracts, are there any tuck-ins or areas of opportunities that you might consider looking at just to kind of enhance your product offering today?

Meaning like outside of our core products? No, I can't say that for now, we're spending much time thinking about that. I mean -- and the reason is that the underdiagnosed nature of sleep apnea, COPD and diabetes, frankly, I mean, it's just so significant that the TAM within the segments that we operate in is just so large and continues to grow. And so we're very focused on continuing to win market share within those categories.

And similar to -- I mean, obviously, Kaiser is a big one. Humana is a big one. You have the relationship in Southern California. How many or more of those types of capitated relationships are there? Can you just quantify that opportunity?

So I'll answer that in 2 ways. Firstly, we do have a pipeline of capitated contracts. We have a dedicated payer team that is working to structure price contracts, get competitive. There's been a little more RFP activity from the payers recently, which makes sense based on, I think, the headlines that the payer community is dealing with and finding ways to be more efficient and lower cost....

Sorry, just on that, what are they looking for? Just reducing the prices that they pay? Or is it something?

Well, every one of these RFPs, I mean, some can be different. Some can be pure DME, them can kind of be all-encompassing for home health. I mean they're looking for the same thing, I think that Humana and Kaiser was looking for is a single operator in most states, I mean, there's hundreds of DMEs. So administratively for a payer to handle that versus one scaled player, I mean that's a big deal. The pricing, I mean, we're always happy to offer modest discounts to reimbursement rates in exchange for a whole lot of volume. So Adapt is happy to do that. And then the consistency of the per member per month. I mean the payer knows their membership and those rates per member are locked in. And so it's just a very predictable cost stream for the payer and a revenue stream for Adapt.

We have about 2 minutes left. Does anyone in the audience have any questions that they want to ask?

[indiscernible].

Well, yes, I'd say for adjusted EBITDA margins, which, of course, exclude the CapEx, it excludes the patient equipment. That runs in the high 20% for sleep and respiratory. When you get down to the kind of the gross margins on those sales, we do report segment financials for sleep, that's around a 60% of cost for that resupply. But at the end of the day, it's a high 20-digit 20% adjusted EBITDA margin and both businesses free cash flow and about the 6% to 7% of revenue.

Any other questions? Just on the ability to take market share, is that also -- I mean, it's the service offerings and everything else. But how much of that is also some of these folks just coming to you just being upset or annoyed with what they're currently using today?

From a competitor....

Yes. Competitor standpoint.

Well, sure. I mean we'll take share any way we can get it. Certainly, we're happy to take on patients that are maybe frustrated with their current provider. For us, in terms of retention, I mean, we continue to set records. And so we think we're doing a pretty good job taking care of the patients that we have. And certainly, we're looking to grow that.

Great. Well, we've come to the end of our panel. Thank you so much, Jason.

Thanks for having us. Thank very much.

Thank you. Appreciate it.

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 of 2023 during the post Phillips recall demand snapback. Sleep health patient census grew 4% year-over-year and set another new record. In Respiratory Health, oxygen and 10 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 arrangements 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, will 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 customers.

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 investments 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 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 48 states. 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 in 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's net revenue was $158.5 million, down 7.4% from the prior year quarter. While new CGM starts remain solid, 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 and payment 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 rent. 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, all 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 margins 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 and capitated revenue ramps and the associated infrastructure costs were 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 in 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 in 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 one 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 final 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 forward.

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 size and the patient under these types of arrangements. As I've said before, we can -- services 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 fourth, but these do take time.

If you think about the contract we just won, that was a 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 view 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 national 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 are -- 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. And notwithstanding that we were holding the expectation too flat until that proves out. And then -- a 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, Suzanne referenced, we've got new start activity that we are making key investments in, 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. 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 Mike 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, about or are you in line with your initial outlook?

Megan, 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 capitation 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 course 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 has 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 there on year-over-year -- 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.

Perfect. And then just a follow-up on more on diabetes. I 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 and 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 have -- 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 and 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 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.

[Operator Instructions] And we show no further questions at this time. This will conclude our Q&A session as well as our conference call. Thank you all for your participation, and you may disconnect at any time.

Thank you for joining us for our next presentation. Our next presentation, we have Jason Clemens, Chief Financial Officer with AdaptHealth Corp. Thank you, Jason and Brian for -- somewhere out there. Brian, for joining us at the conference. Really appreciate it.

Thanks for having us.

As you were walking up, Jason and I were just talking, I thought a good place to start with just maybe a brief overview of each of the 4 lines of business, and we can kind of evolve from there off the discussion there.

Sure. So for those may be new to the story, AdaptHealth is the country's largest home medical equipment supplier. We really focused our business around 3 core segments or 3 core patient populations. The first is patients with obstructive sleep apnea. So there's somewhere between 6 million and 7 million patients that today are on a CPAP or a BiPAP for the treatment of OSA, but we believe there's somewhere between 33 million and 34 million Americans that have OSA. Many of them just don't know it yet. So we are benefiting from some tailwinds in like wearables, certain watches and rings and whatnot that are helping to detect that a patient might have OSA and then that propels them to go in for a formal sleep test by physician. And if they need a CPAP, we're happy to provide it. So we're about 25% of the marketplace in the United States, by far, the largest operator in sleep health.

Second part of our business is focused on patients with advanced respiratory diseases, primarily COPD stages 1 through 4 and also other advanced respiratory illnesses. So that TAM is about 20 million patients. We believe there's about 15 million that have been diagnosed formally with COPD, and they're on either nebulizer or oxygen concentrators or ventilation. We offer all those products. We believe we're about 20% of the U.S. marketplace, also the market leader in respiratory equipment supplies to the home.

Thirdly is diabetes. And so we provide insulin pumps, related supplies as well as continuous glucose monitors. So things like Dexcom and Abbott type products. We distribute both. That TAM is about 7 million patients. So those are type 1s and type 2 patients that are injecting insulin. And then certainly, there's somewhere between 30 million and 80 million Americans that have diabetes or prediabetes. So that's a large and growing market as well.

And then finally, we have a fourth segment called wellness at home. It's essentially bent metal, beds, wheelchairs, walkers, things like that for mobility needs in the home as well as supplies to the home for patients with chronic disease states such as urological disorders, incontinence, ostomy and other needs.

Okay. Great. Can you talk specifically dialing down on the diabetes segment? It's been a little bit of a state of flux past years. Can you just a little bit of the background in the transition of CGM and so forth and where you see that market today? It seems like you're coming around and posting stronger numbers.

Well, yes, we think we are in process of turning a corner. We had a great Q3. I mean diabetes organic growth was up over 6%. That's the first time that segment has grown in some time, not quite 2 years, but it's been some time. Now we do have some tough comps in the fourth quarter, so I don't know that that's going to continue forever. But we think that diabetes will -- look, if we're flat, down 1 point, up a point next year, that's generally how we're thinking about our -- the outlook that we provided. And so the key in that business is keeping your resupply steady, which we think we've accomplished that. We're hitting record resupply numbers and retention numbers. And then it's really a matter of filling the top of the funnel with new patients. We've got some improvement there. We are investing as we speak in more field force, more salespeople to be out calling on endocrinologists as well as primary care docs to take more share of the new CGM business.

Okay. I know you've made some changes kind of going from, I think, some structural changes internally in terms of regional management. You've talked about -- can you talk about the backdrop behind that, the thinking behind that and what you're planning to accomplish with going out of -- I think you're going down to 4 regions.

Sure. So as you said, it was much more of a strategic move than maybe a financial move. I mean we'll save a couple of bucks with this. But it was really about shrinking the number of regions. We went from 6 to 4. But then within those regional offices, really standardizing the components of that office. So there's a Vice President of intake in every one of these regions. There's a Vice President of patient services in every one of these regions.

And so what that then allowed us to do is we went through a very large-scale reorganization of operations inside the company. So I mean, there were almost 10,000 people that went through job title changes and new descriptions and new measures on their performance. And so the reason all that's important is that it is unlocking our ability to then start scaling the automation and AI that we've been piloting, somewhat experimenting with over the last 1.5 years. But now that we've got that structure in place and work is getting done in same or similar ways across the country, that's going to give us the opportunity to leverage the tech that we're putting in and hopefully make progress quickly.

Okay. Where do you see AI? I mean, where could it have an impact for you?

Well, where it is having impact already is a couple of areas, really 3. One is within intake of documentation. And so it's staggering even to me every time I say it, but every month, we're ingesting over 5 million pages of fax orders. Some of those are handwritten, believe it or not. So the physician orders for the patient, the diagnosis code, what the physician is ordering for that patient. All that's got to be taken in and turned into structured data. I mean there's about 40 fields or so. I name some of them, patient name data birth, those kind of things that have to come into our sales order system to start creating the patient record in the rep cycle.

And so again, there's just a tremendous amount of manual work today that you've literally got people, a lot of them overseas on 2 screens. They're reading the facts, the image of the facts on the right screen, they're entering it in. And that's a pretty lengthy workflow, up to about 6 or 7 minutes. Well, the AI that we've got running now in our sleep business, I mean, it's got that under a minute in terms of ingesting it because it's essentially screen scraping, right? And it's filling those fields automatically. And then we still have a human in the loop that's checking it. But rather than searching for it and keying it in, they're clicking through and it's just a very rapid process. So that already is starting to unlock some efficiencies and cost savings for us.

We've got some good progress within the rev cycle. So think like cash posting. So the automation associated with matching receipts with EOBs and posting that cash. And then thirdly, we do have some conversational chatbots, AI within our workflow, particularly for things like where's my order? I mean we'll have thousands of patients calling every day asking where their order is. And so we're now automating that experience, and we're removing an Adapt employee from that interaction. So tremendous efficiencies there that we're going to continue to find and scale.

It's really a cost margin opportunity at the end of the day.

I'd say, though, also, I mean, some of it is also patient experience. I mean the NPS score of the chatbot is surprisingly very good. I mean -- and if the patient has got what they need, they're going to leave the call and they're happy. They don't necessarily need to talk to a human. So there's other things in this other than just cost. I mean there's other benefits.

Certainly. One of the data points that has been very topical recently, the Kaiser contract. Can you -- as much as you can share with us why that from a capitation perspective? And then you have the historical reference of Humana, the learnings, the puts and takes of Humana, your takeaways for that. I know first, that was challenging and you got through that. What are your thoughts about -- what you could share with us on that contract? And longer term, your thoughts on capitation and based on your observations, what you've seen out of Humana, you obviously gained some comfort moving forward with Kaiser. So kind of just speak to the dynamics around.

Well, I guess I'd start with some framing. I mean, today, our capitated revenue is about 4% of revenue. With this new contract that is starting in earnest essentially now and really ramping over the course of 2026, we'll be well over 10% of our revenue will be in capitated, pushing 15%. Where does that go over time? I mean, we aspire for it to grow. How fast is unclear. As we stood up Humana, I mean, that was such a significant accomplishment because we were able to prove to Kaiser that switching was possible that there was a DME out there that could take on tens of thousands of patients all at once. And I wouldn't say seamless. I mean there's bumps in the road. But overall, we were quite pleased with our execution on Humana. And so far, we're very pleased with our ability to procure what we've needed in terms of locations, new space, equipment, vehicles as well as recruiting. I mean we need to recruit 1,200 new employees between now and the last contract date.

So we're well into that effort, but it is a big lift. In terms of the benefits, I mean, for a payer, whether you're a hospital system or a managed care operator, I mean, there's so many benefits. The first is essentially one throat to choke of an operator managing your home medical equipment. That's significant because in most states, I mean, if you're a managed care company, I mean, you've got hundreds of DME providers. They're all setting up their equipment in different ways on different formularies with different patient experiences. Managing the complaints that come out of DME is no small task. And so if you're a payer, you're managing escalations and complaints across hundreds of operators as opposed to one. I mean that's really the first and foremost benefit.

The second benefit is then having ability to manage the membership through SLAs and commitments that we've put forth. We've got daily, weekly, monthly metrics and reports that are shared with our capitated partners, regular monthly business reviews and a commitment to continuously improving the patient experience and the metrics that come with these contracts. So that's a pretty big deal because when you're dealing with hundreds of mom-and-pop DMEs, you're not going to have that level of data or visibility to your membership.

And then thirdly, I mean, look, we're happy to offer a discounted reimbursement rate in exchange for a whole lot of membership, a whole lot of volume all at once. We'll continue to price aggressively because we're very confident in managing these type of agreements, and we do intend to do more.

Is it -- was the value proposition for us, you took it away from a competitor, a direct competitor. I mean what was the value proposition other than pricing? Was it just that, that you could manage the patient base more efficiently? Well, more transparency?

Yes. I mean I won't get into maybe the details of why that business came to RFP other than -- Kaiser was looking for a change. I think what we offered in addition to everything I just mentioned, look, I mean, our technology is best-in-class in the industry with our patient apps that we've got as well as our web portals. And frankly, our team, our employees and what they bring to the table. Kaiser is very forward thinking with technology. And so that was a big part of this is how can we leverage our tech to communicate with patients. There's interesting things that you can do above and beyond just DME in terms of communicating with the patient because we've got all these patients on census already, and we're learning a lot about their health through the vitals that are coming to us from these pieces of equipment. And so there's a lot to be learned about patient behavior, keeping folks at home healthy as opposed to showing up in emergency rooms.

I mean kind of -- do you think you'll see more of this going forward? Obviously, I presume you do.

We're pursuing a pipeline. We did in the third quarter announce an additional incremental capitated agreement. Now the strategic significance of that deal is that we're taking diabetes products into that cap for the first time. So we're experimenting with it. I mean we do think diabetes utilization swings much more than like respiratory and sleep and DME, which is very steady utilization curves. So we're going to see how it goes. And if it's successful, I mean, there's more to pursue.

Okay. How long does it take to fully embed a Kaiser contract? What do you think it will -- for you to adapt the infrastructure soup to nuts before you kind of normalizing, if you will?

Well, before the end of '26.

End of '26.

Yes. Yes. I mean we've said that we expect to be run rating the full contract value before the fourth quarter.

In any of that on the call?

Yes. So in Q4 of '26, we expect fully run rating. Now contractually, that can happen sooner. I mean, we expect it to happen sooner. But in setting an outlook for '26, we wanted to put out numbers that we thought were achievable. And so the idea is to go as fast as we can.

Yes. And the capitated business is from a margin perspective, it's largely reflective of the rest of your business model?

So everything that we've -- that we're currently running and cap is running at or better the enterprise margin. We've said that the new Kaiser deal is going to run at the enterprise margin. That's both adjusted EBIT as well as free cash flow.

Okay. So confirm. Okay. I believe you had mentioned on the call, but I know it's been talked about competitive bidding. What are your thoughts on competitive bidding? And I know you also made a reference the last couple of calls, but I believe in terms of talking about competitive bidding that it may translate into further consolidation in the business more broadly. So if you can share your thoughts on that.

Well, since the call, the final rule has been published by the CMS. So we got a little day after Thanksgiving gift. So we've been through that report several times. It is 700 pages. So there's a lot there. But I'd say the headline is there's no surprises really at all to us versus what was proposed and what went final. The competitive bidding process will start next year and contracts will then be awarded in 2027 for implementation in January of 2028. So we've got 2 years here before the next contract cycle is awarded.

The details of the final rule, I mean, it is crystal clear that the CMS intends to consolidate the number of contracts. There's various calculators and scenarios that they walk through in that rule that illustrates very specifically respiratory potentially coming down 26% in the number of contracts awarded, diabetes going to literally under 10 suppliers in the country. And so for scaled operators, I mean, particularly for Adapt, we see a lot of opportunity in the final rule that's been published. Much like my reference in the capitated arrangement, we're happy to offer some reimbursement -- lower reimbursement in exchange for more volumes. And so this is no different. And so again, we're still digesting, but there's no surprises. And at the end of the day, this is the business we're in, operating within the competitive bid environment. It's been around now for 15 years pretty successfully. So we're looking forward to getting moving with it.

All right. '26, you've given some feedback in kind of context, like growth rates of, I think it was 6% to 8% in terms of '26. Can you discuss or walk through kind of your thinking on the kind of the puts and takes, what goes into that thinking and especially across the 4 business lines what did you expect and you've talked about respiratory opportunistically.

Well, we believe that we'll end the year '25, just over 2% organic growth. We think we'll get a little more in '26, so closer to 3% of organic growth. The reason for that is the continued strength in sleep and respiratory. I mean we're very close in Q3 to record new patients, record cards within sleep. So if that momentum continues, we'll be at record territory very soon. And then within respiratory, starts have -- given the quarter have been -- they were a little lighter than we thought in Q3. However, the retention was better. So I mean, we're putting up record census numbers in respiratory.

So again, just the strength of the core of the business in sleep and respiratory. We expect that to continue. So again, just an organic growth rate of about 3% next year. And then you've got the new capitated arrangement that's adding between 3% and 5%. So on the downside of that is essentially, we don't fully run rate until the fourth quarter. Again, we think that we can do much better than that. And so the top of the range is 5%. That just means a faster transition of that capitated range we have.

And diabetes, you're looking at as relatively flat plus or minus 1% in that organic...

Correct. That's right.

Your leverage profile, obviously materially improved. I mean what's your thinking longer term in terms of once you get to the 2.5, which we close there? What's next? What's the thinking beyond that with the cash generation?

Well, I think first, from a free cash flow generation standpoint, I mean, at the mid, I mean, we're expecting $180 million free cash this year. Again, that is burdened with some of these capital commitments to stand up this new capitated arrangement. So for context, we're about $235 million of free cash in '24. We'll be -- we think $180 million at the mid for '25. Again, that's burdened with some of these onetime start-up expenses. As we look to '26, '27 and beyond, I mean, we think that we'll continue to generate between 6% and 7% of our revenue in the free cash flow margin.

There's a lot of capital coming in the first half of the year to stand up the capitated arrangement. However, we also have huge benefit from the big beautiful bill that was signed. We're a very large acquirer of capital equipment, innovation equipment as well as vehicles that we used to lease, and now we're back to buying for those benefits. So we don't expect to be a federal tax cash payer for several years. For perspective, last year, we paid just over $40 million. And so we expect those benefits to carry out for again for several years.

Does M&A -- or I mean, does M&A come into the vision here? What your leverage target a little more so?

Possibly. I mean I think we are discussing this quite a bit internally because we think we'll be under our 2.5x target very soon. I'd say, as we stand here today, it's probably more likely that we set a new target at 2x, and we just -- and we said it, and that's really the long-term target. That's likely. Now we can do that and still conduct some M&A. I mean we've delivered about 1 point of top line M&A growth every year for the last 3 years. We do have a pipeline. I mean these are modest businesses, somewhere between $5 million and $20 million of revenue. The multiples like the environment is very good for us.

We think that will continue. So we're able to acquire quite a bit lower than our trading multiple. And particularly for hospital-owned DME businesses, which we really like because you're essentially -- you're buying a going-forward revenue stream. I mean if you're able to do a good job for that hospital, take that burden of operating the business off of their shoulders and take care of those patients, and we work closely with those referring providers at the facilities, I mean, you're going to have a great business for many years to come.

Right. The $20 million that you've done year-to-date, has that been predominantly hospital trades?

In fact, all of those deals were hospital-based DMEs. That's right. Now that -- not all deals will be hospital-based DME, but we like them quite a bit, and you should expect to see continued modest M&A.

Right. And they're more visible to revenue -- the outlook for a hospital base, I presume?

Not necessarily. Not as much as you think. I mean the revenue outlook for DME businesses in general, again, it's pretty steady. Trends don't move that quickly. And so compared to pricing models, I mean, our deals are performing quite well.

Okay. Have you framed the capital intensity of what you need to deploy into that Kaiser contract in terms of capital? That's on a whole...

We have not. I mean we -- in providing that outlook for '26, we provided 6% to 8% top line and about 0.5 point improvement on adjusted EBITDA margin. We purposely withheld like a free cash flow number. I mean we'll provide that when we formally guide here kind of end of February. But it's a significant amount of capital to put up for that first year. But once you're up and running, it has the same profile as the rest of the business.

Yes. Okay. Any questions in the audience that anyone would like to? No. I was going to -- with that, I mean how -- if you don't mind me stepping back, just kind of saying from a valuation perspective in terms of just broadly speaking, enterprise, how do you move the dial on valuation longer term? Is it just about your model?

Well, I think it's 3 basic things, not easy things. But yes, I mean, number one is continued top line growth. I mean, look, 6% to 8% top line organic. I mean, like -- because again, that Kaiser is -- like we say 3% organic, but Kaiser that was organically generated, right? We'll be growing revenue between 6% and 8% next year. We're continuing to add a point of M&A each year. And so I think longer term, like if we're able to get to that 4%, 5%, maybe 6% in '27, '28 and beyond, I mean, that's factor one. I mean that's a big deal.

I'd say, secondly, just improving our return on invested capital. Some of the AI and automation that we talked about earlier will drive a lot of that. So as the revenue continues to grow, both organically and inorganically, we're getting under our chassis with that tech platform, and we intend to then drive the operating leverage through the business. For perspective, I mean, we spend about $100 million a year on offshore resources. I mean that's 4,500 people, humans overseas that are like dual screen, being data entry, essentially picking things up and putting it down and passing it down to the...

Has that always been the case? Has always been roughly 100 heads offshore?

It has. Now again, we've -- I mean we took out 100 heads in Q3 with the reference to the rev cycle improvements. We've got continued investment to take out more and get more efficient. And so we think that, that second lever of margin improvement and increasing ROIC that we've got a good plan in place. And then thirdly is the -- essentially the risk perception, the WACC of the company. We're very pleased with our progress on paying down debt. We're pleased on the couple of dispositions that have been successful. I mean, have sold for many turns higher multiples than what our enterprise is trading at, subscale businesses that we just -- we didn't see the strategic fit any longer. All that cash went to pay down debt. I mean our interest is now run rating under $100 million, still feels high to me. So we're continuing to improve the risk perception of the company through paying down debt. And that will continue. That will continue.

So you think you just modify your debt target once you hit 2.5?

Yes, that's pretty likely. But again, it's a matter of time, we think. If we're able to deliver on these 3 areas, I mean, valuations move.

Does -- would there be any potentially an opportunity outside of your core competency to drive that value?

Not for now. Not for now. No. I mean the TAM within those 3 segments that I've started with and the underdiagnosed nature of those patient segments, there's so much room to run. I mean there's so much growth to get. The market will consolidate. CMS is part of that in their final rule as well as modest M&A and our ability to cap. I mean when we cap business, that makes it pretty painful for those local operators to continue to stick with it. So it will continue to consolidate. We think there's a huge opportunity.

Yes, inside that contract overall?

Correct.

Any questions from the audience? No. Okay. I'm going to go ahead and wrap it up. Thank you, Jason.

Thanks for having us.

I appreciate you joining us as always.

Likewise.

All right.

Good afternoon, everybody. Welcome again. Welcome back to the UBS Healthcare Conference. I'm Kevin Caliendo, Health Care IT and Distribution analyst. We are very happy and proud to have the management team from AdaptHealth. We have Suzanne Foster, Chief Executive Officer; and Jason Clemens, Chief Financial Officer. I know it's been a tough week travel-wise. So thank you so much for making the trip down to Florida. Thanks for coming.

Thanks for having us.

Yes. Thanks.

Why don't we get right down to it. In this quarter, you discussed the success of the Humana contract and the capitated arrangement. Can you discuss a little bit more how that contract has trended through time and sort of how we should think about it going forward from here. There was a big win when you announced it. It just -- we want to understand how to think it about, bigger picture and longer term?

Yes. Want to -- just in general, I'll talk about how it's doing and then Jason can talk about the trend. We're very happy, I think, mutually, Humana and us, if I can speak on their behalf, a great partnership that our service levels continue to increase above and beyond what's expected, and we're continuing to make sure that we're operating within the parameters of what's required of us. And that has led to expansion and renewal for another 5-year term. So we're happy with that. And at this point, we're in 33 states and looking for other opportunities to partner with them and other like payers.

Yes. And I'd say in terms of the revenue line, I mean, we report capitated revenue that includes the Humana book of business that will include additional cap arrangements like we've announced in the last couple of quarters as that revenue starts flowing. That revenue will move very modestly up or down year-over-year, really based on membership. And so we're down just a tick this year on fewer Humana members within the 33 states that we contracted around. Everything we're seeing and reading, probably what you're reading for printing is showing that there's potentially some growth in that membership next year.

And so that's how to think about it. It's a slow moving revenue stream. It's highly predictable. The utilization that comes with it is, again, slow moving, highly predictable. So we're very pleased with the economics on the contract.

Does that contract include diabetes?

It does not. It does not.

Is there a chance that it could in the future? Or is it like, it is what it is.

Well, I mean I think we'd like to do as much for Humana as they'd like us to do for them. we don't cap a lot of CGM business today, and it's back to that risk profile of the utilization. CGM can move faster than our other core business lines. So we are -- we did announce in the last quarter a smaller cap agreement that Suzanne might get into more of the details of. But for the first time, we're really kind of experimenting. We're taking some risk on CGMs. And it's -- again, it's small enough that it will be a pilot. We're going to see how it goes. But we're interested in potentially doing more, again, based on the performance.

When we think about a contract like this or the other large capitated contract that you won, how do we think about the margin profile and the cash flow -- and maybe more importantly, as you know, we're a big free cash flow fans here. How do we think about the margin and cash flow component -- the cash flow conversion component, and we think about relative to revenues or however you want to look at, how you guys define it?

Yes. So we expect at or better the enterprise margin. And so that's on really however you look at it, operating income, adjusted EBITDA we would expect it to be just about 20%, a touch higher as well as on a free cash flow margin between 6% and 7% of revenue of revenue.

Yes. That's right. And that's consistent with the rest of your business, in essence.

It is. It is. Now there is some uniqueness in start-up CapEx for capitated business. So in the first couple of quarters, we don't expect to be at that profile because we're loading -- we're front-loading vehicles -- patient equipment or their capital expenditures. But as the contract fully ramps, we fully expect 20% EBITDA in between 6% and 7% free cash flow margin.

And the beauty of that, if you think about it for the customer and for us, as we get to focus on service and reduce that administrative burden that's on Adapt just by nature of the per member per month. So these have mutually beneficial arrangements.

When you started and you came on Suzanne, you talked about the business in a way that the company hadn't talked about it before. Your competitors had never talked about servicing the customer, doing certain things. It sounded consultant-ish a little bit, but it was unique. And now that we're here, how -- it's clearly working, right? You're taking share, you're doing well. Take me through how you feel where you are with that process because when you talked about it, it made a ton of sense in an industry that we don't -- we can't touch every day, but it made sense from the outside world that she came in, she saw this. This was the opportunity that you identified immediately, right? It's like this is what we're not doing. We need to do better. Where are you in that in that journey of...

18 months in, I'm happy with our progress because I think we're further along of a business than what I thought we would be when I first arrived because there was a lot of what I used to say beautiful chaos, that we have worked through this standardization, how it's done in Boston, same as California. And when you start standardizing, you can put in the technology, which is the next phase for us.

But we've made rapid progress in the standardization I don't understand why this industry historically hadn't focused on what exactly we are, which is a service provider. And we win and lose against competition and winning the hearts and minds of our referral sources based on how good we are in service. So when I traveled for the first year and got in front of customers and our sales force, our sales force knew it, but somehow it wasn't translating into the rest of the business that when you walk into a referring provider, if the last 5 patients complained about their HME provider, they're going to divert that business away. If they're quiet, that's a win. Wow, I'm not hearing about Adapt, they must be doing a good job.

And when -- the really great happens is when the patient comes in is like, I love my home service provider, and they'll start sending more and more. So it's a flywheel. So we focused on, first, operational improvements. So we weren't wasting our money putting salespeople out there just beating against the door, and they're like, you guys are no good. And so our operational improvements have been remarkable this past year. The one example I'll give you is in sleep where we said, okay, why are we getting beat, well, time to set up, what we call cycle time prescription in the door to a patient on therapy.

And no one had talked about time to therapy. That's very common in health care. I've been in health care my whole life. And so we got very focused on time to therapy. And today, as we sit here, we -- in a few quarters, we bought it from 23 -- on average, 23 days. Today, we sit on average at 10, and we believe there's remarkable improvement that we can even make on 10 because we're not done standardizing. And so this whole shortening of time to therapy has been a focus of ours. So to your point, I really just took the learnings of 30 years in health care and brought it to an industry that maybe didn't -- if you understand the origins of DME, they didn't come up as a traditional health care players.

They came from oxygen and respiratory therapy and all that. And so I'm just taking the learnings from health care and applying it to the service industry called at home care. That's all we're doing.

It sounds simple. I'm guessing it's not because it's a different paradigm for a lot of the people that were -- how are you judging the successes besides winning business? Like is there data that you collect? Like how do you know that it's resonating out there besides...

Customers tell us and you know the inbound increase of people now calling us on 2 fronts, give me hope. One is on the capitated side where they're saying, okay, hold on, this makes sense that we cut out the administrative burden. We share risk, and it -- and we hold you to SLAs. That's good, we're aligning around a patient outcome that we want because the hospitals want better patient outcomes. They want shorter time in hospitals, and we can provide that as a partner, as a handoff. The other thing that's encouraging is inbound from hospital systems saying, why are we running our own DME. This is hard business logistically, why are we doing it?

And so we say, well, we're ready to take on that business. That's what proves to me that we have a clinical value out there of making sure that the platform or the ecosystem of health care is seamless from doctor's office or hospital to home. And we're playing that part.

Got it. The capitated contracts have 2 meaningful -- large ones, I'm sure there's -- but the 2 meaningful. Is this a shift in strategy? Or is this a result of the effects of what you've done that's resonating with them? Meaning like are you going after this business because it's out there? Or is this business becoming more attractive because of what you've accomplished operationally, and it makes more sense now to go after that.

Yes, probably both. But I mean Jason was around when Adapt acquired a small company out in the California region that was already doing some capitated. There is quite a bit of capitated business already in California before Humana and before Kaiser. And then Humana came and we started that business, and we had some lessons early on, but we now have shown that, that model works. And then now we're in a large IDN and doing that partnership well where we can prove it out even more. And I trust we are going to prove it out. And now with those 2 reference points, the 2 big ones, and we have some other smaller ones, the pipeline becomes easier because we have proof points.

And so that business has come to us, but we're also pushing the story, but it's a longer sales cycle because there's some integration and changes on the way the referrals come in and the 2 companies communicate that it takes time to close that business. But we have a strong pipeline for the next 2 years.

Thinking about that, I know picking on risk is something that's new. Do you want to let that simmer into how that goes first before pushing more or...

I think Jason will tell you, it's not really new.

Yes. Yes. I mean on the CGM side potentially. It's really utilization can move more rapidly. But in our core, I mean, really sleep and respiratory as well as DME, I mean, the bed metal, beds, wheelchairs, other items that we bring into the home. Those utilization curves move very, very slowly. Particularly, if you think of COPD and just the kind of the life cycle of that disease state, I mean, there's no cure it only advances. And so as patients are identified as having COPD they might get on a nebulizer and at some point, oxygen and later into the disease they might need a ventilator and they might need a bed in the home and other DME to help that patient get around the home or outside the home.

But if you think through your kind of friends and family and how many in your network are at home right now on an oxygen concentrator, it's probably very few -- hopefully very few maybe 0. A year ago, it was likely very similar. And a year from now, it's likely very similar. So to bring it home, those utilization curves move very, very slowly. Plus when we price them, I mean, we get 2 full years of data from the payer or the IDN that we're pricing for. We also have our data. I mean, we just have reams of data with over 4 million patients service. So we're able to monitor them.

We also -- we construct the contract and the framework to give us some flexibility there to make sure that pricing holds to what we expected. And if it doesn't, for some reason, we're able to come back and have that discussion.

Understood. The pipeline, how do we think when you say the pipeline is rich, what is -- it's hard to be rich and you have -- I mean, is it relative to the fact that you have these 2 big capitated contracts? Are they like similar in size? Or are numerous in number is the way to think...

I think numerous in number would be...

Not too many of those, out there.

Right. You know we announced this new one with 170,000 lives. It's a region one, but with a national player. So you get the region right and there's opportunity to expand. And so that's how we're approaching them. It's just little by little, you're getting a couple of hundred thousand lives at a time. And yes, there's not a equivalent to the one we just closed at this point.

Sure. You said you have investment vehicles and other stuff. How much leverage is there from the existing -- from Humana existing? Like can you move stuff over? Or is it all incremental investing? I just don't know how logistically it works. So maybe just walk me through how it works.

Well, for this new IDN, there's just huge contract that we announced, we expect at least $1 billion over the next 5 years. it's predominantly in geographies that we don't operate in today. And so there's some -- the operational side of that is, well, I mean you've got to stand up a lot of infrastructure. I mean we're looking for 1,200 new employees we've already procured 300 new vehicles. And we're not yet up on 36 new site to service, but we're moving through that. I mean we're signing leases kind of as we sit here and speak.

And so that's the operational challenge of standing up pre-revenue. So you've got -- you're taking on that expense prior to having revenue and you're taking on that infrastructure. But as the revenue turns on, right, I mean those margins come up to our pricing model literally in overnight. So the upside to all this is all that fixed cost, 1,200 people, they're in vehicles, 36 sites. That's all paid for through the pricing of this contract. And so there's opportunity -- I mean there's opportunity on the patients that show up in these facilities. They might not have this IDN payer insurance plan, they may have United or Aetna or something else. That's opportunity for us.

The bigger opportunity even is as this infrastructure stood up, as soon as those customers glowing and happy, we will drop in sales folks, and we will go head to head against the competitors in these local geographies. And so all that fixed cost is already paid for. So the margins on leverage could be very attractive.

Yes. I won't have to add in any more infrastructure.

So a brand-new market where you basically have -- it's a free calling card to go and try to win business, and there's a lot of business in those regions that I would imagine. No doubt about it.

It does get to a question that we asked on the earnings call. I just want to clarify and make sure I understand. Is it going to affect the cadence for '26 earnings in terms of you onboarding this, the other contracts maturing a little bit versus a normal cadence and how to think about this contract -- I know you gave us some details around this particular contract and it ramps and the margins ramp. But how should we think about it? I know we're not -- I know it's not time to give '26 guidance. But just thinking about cadence, how it might be different. Anything you can help us with that?

Sure. So we provided an outlook of between 6% and 8% top line growth next year. For discussion purposes, Q1, 2%, 4% in Q2, 6% in Q3, 8% in Q4, something like that. I mean, it will ramp over the course of the year. start a little slower and ramp through the end. So that's how we...

That's the revenue growth.

That's how the revenue growth should right should flow through in 2026. Now EBITDA margin, we think we'll be right about the same level of Q1 and 2 of '25 in terms of adjusted EBITDA margin. And then we do think that we'll expand -- I mean we've we said in our outlook, expect 0.5 point of margin expansion for the full year. A lot of that will be back-half weighted. And again, it's because we're forward investing in all this infrastructure. And as the revenue turns on, that's really where we'll get the pull-through. So the first 2 quarters of the year, the EBITDA margin is flattish. Second half is where you're going to pick up margin. That -- for the full year, you get to -- I don't want to be a stickler, but if I'm doing the math, 2, 4, 6, 8 doesn't get you to 6% to 8% for the full year, right? 3, 6, 9, 12.

So something for that it's some ramp up. I didn't want -- hundreds and thousands of people. I understand that was purely...

Illustrative.

Illustrative. Thank you. Okay. Let's move to diabetes. First quarter -- last quarter was the first quarter of growth, I think, since 1Q '24 something like that. I know on the call, you didn't say this is an inflection point, and we don't want to say we're fixed it. But what happened in the quarter and what -- how to think about it going forward? Because it's important and it does drive -- I mean, from a stock perspective, it drives sentiment a little bit. And it's something that we can all track a little bit and understand maybe more than sleep in some of the other areas. So what happened in the quarter and what can...

Let me -- before we get to the numbers, so in September of '24, when we got our arms around this and said, this is yes, it's an interesting dynamic in the marketplace, but a lot of this is self-inflicted. We made some changes and told everybody, give us 3 or 4 quarters to stabilize. The first thing we have to do is fix it. So there was 2 parts to it. They would fix it before we invest in it. And the fix it came from taking our the resupply business, which is, what, 85%, 90% of the revenue and putting that in our Nashville Center of Excellence. I don't know why we were running it separate, but we did that, and we saw -- that was the quickest to turn around because we have the infrastructure and the know-how.

So our resupply, we increased attrition, got customer service better. All of that was good. Then in the meantime, we took a new sales leader and said, okay, we've got to increase our starts that feedback. And that took a little time to get the right sales force in place, get them incented correctly and get them out on the street. So that was part 2. And then coming into this quarter, both of those CGM starts were low down, pumps held their own, but resupply engine was really humming and that's what allowed us to have a good year on a comp basis versus a quarter where we had meltdown.

We didn't declare victory because we know there's a second phase that we have to execute to. And that is that we held somewhat flat. We added a few sales headcount, but again, it was fixed before invest. And now we're saying, okay, that the infrastructure is fixed, if you will, or stable, we can now start investing. So looking forward, we're saying we'll put in some strategic headcount in areas that we don't have headcount meaning in sales, I'm sorry, strategically look at geographies where we're not getting business and put and invest in some headcount there.

And the other thing is the hypothesis around do you have to take pharmacy and med benefit is seeming to prove out. The providers don't want to have to think. So we -- even though we took it, we weren't doing it efficiently. The example I'll give you is we would take a pharmacy referral, but it would take us 36 minutes in our time study to process that order. That's way too long and inefficient. So we have invested this quarter in the pharmacy SaaS technology that we need to bring that from 36 to 5 minutes. And so now we'll be in different...

36 to 5 minutes.

Yes. Well, when it's implemented this quarter. So those are the 2 Phase II investments that we're thinking about when it comes to diabetes in an otherwise dynamic market, right? Like some will speculate the pharmacy medical benefit channels have stabilized, we'll see. But either way, we got to be prepared that whatever happens there that we can take the referral and the prescription from either channel and how to be profitable for us in both, and that's what we're working on now.

So 36 to 5 minutes, so a person would come in with a prescription that needed -- and would they have to sit there for 36 minutes before they would get it or...

No, no because they're not sitting in front of us, right? That's a drop ship. So meaning our pharmacists and team would get the prescription in order to do all of the appropriate regulations. It would take us 36 minutes to take that one prescription, pull it, document it, do whatever we had to do and get it out the door. That's why it wasn't -- it's not as efficient for a provider like ours without the right technology. And so now our tech team has engaged because that's where we've put a lot of our tech resources because it is our lowest margin business to make sure that we're efficiently running it. And this last -- this quarter, we said, okay, let's put that SaaS technology in place.

Now remember, in the big scheme of things, with the new capitated contract coming in, I mean today, that diabetes revenue is 17%, 18% of the total revenue. That's going to -- regardless of growth, it's going to be a very small piece of our business. So we were trying to justify our investment dollars. So we're doing what we need to, to make sure that the service at the end of the day is good, and it's profitable. But we really are focused on the much bigger upside we have in our sleep and respiratory and capitated and hospital arrangements.

Understood. Understood. That's actually super helpful. So this is all about Adapt. It's not your relationship with manufacturers. It's not the pharmacy chain. It's not -- any of that stuff is just kind of noise in the background. This is Adapt. You're solving this issue.

That's the theme of our business that right here.

No. I get it, but it's clear now and to hear it from you, it makes it much more understandable. Does it help with -- when you make this 36 to 5-minute change, does that help with revenue cycle? Does it help with cash flow? Does it help financially? Or is it purely operational, thus efficient, thus you can do it more successfully.

You could argue it helps with top line because when you're trying to cherry pick, you're the doctor and I'm going like just send me this type that's a harder position to be in and say, okay, doctor like send it, we can manage it on the back end. So we're trying not to make it your problem, trying to make it our problem to solve. So it can have -- we can potentially have some upside on revenue, help certainly with our cost, right, because we can bring through volume without -- because we did the analysis, say, well, do you just throw headcount at it? Or do you put in the technology and our study showed that putting technology in based on what we're projecting to come out of that would be the better solution.

There's a lot of analysis going on in Adapt over the last year, so it sounds like.

Yes. there is. We're letting data drive the decisions.

What -- is there more tech investments -- like is there -- let's -- there's a lot more I want to talk about, but all that you've done, what's the next level of efficiency that you want to drive in your business?

Yes. I'd like Jason giving you an example. But before I do, I think of it this way, the first phase is -- out of the gate, I thought we would have more opportunity to deploy tech quicker. What I learned over the last year was that we'll hold on a second. When we tried, it was kind of going more slow than I -- than we thought. And what -- I mean it was obvious. The standard processes were not in place. So whenever you try to automate or put tech right on a spaghetti chart or beautiful cash as I used to call it, it doesn't go well. So we kind of pulled back a bit in the areas where particularly operations and said, okay, let's put our standard processes in place and really our workflows and get all of that. And then we've had some recent examples where we've been able to come on top and even just deploying it in a standard operating model rather than months and days.

And so that's kind of Phase II where we're going is we believe in the operations, there's about to be a lot of benefit both from digital automation and AI. So digital is our app, where we now have almost 300,000 users. And every month, they're deploying more and more use cases from where is my order to pay my bill online to self-scheduling CPAP. So we're getting a lot of uptick there. And then in the automation intake, we have -- we used to have a title of people that literally were called fax wranglers. They -- people with fax would come in, they figure out where it goes and put it in the right channel. That will all be automated. So automation and AI is something that I see a future for here with so much administrative work that we do. But Jason running RCM, I think on the -- while we said this on the earnings call where he was ahead of the standard operating model was able to make some meaningful improvement. So I know you don't want to spend too much time on it, but I think it's worth commenting on the progress we've made on...

You don't care about revenue cycle. Yes. And I think to help frame the opportunity set, I mean, as we exited Q2, we had about 4,600 FTEs offshore, predominantly India and Philippines, performing revenue cycle type duties as well as other back office type functions within the operations. As we exited Q3, we were down to 4,500. And so 100 heads came out as part of his myAPP ramp that we're getting more patients to self-pay and to where is my order. And so the call volumes have started to come off, and so we've peeled out some headcount.

As we're going into Q4, there's some new RPA or robotics processing automation going into the cash posting. And so today, we got hundreds of people overseas that are getting the ERA or you're in from the payer, matching it to the payment, posting it to the patient accounting just to kind of run that machine. Well, we're installing a fair amount of tech to automate this and replace those people. More of that is coming as we look into '26 and beyond. And so I think in the upcoming earnings calls, you'll continue to hear a storyline about our progress in automation and AI, but again, to frame it, you're talking about a little under $100 million of cost that's attached to those 4,500 heads. So there's a lot of opportunity.

We refer to our R&D -- I mean, our tech team as our R&D team because bring up these new technologies, put this infrastructure in place because we do think it can transform the way we do the business.

Interesting. And that's certainly not priced into the stock. I hate to bring up competitive bidding, but I have to because people ask about it and those of us old enough to remember the last time we went through this with this industry wasn't pretty. Obviously, it was a lot different than what we're talking about now. But it's a worrisome term for investors, right? What about competitive bidding. It's always worse than how do we think about it? Just remind us all a little bit about what's actually on the docket for competitive bidding? How it might affect you guys? What you really know about it currently? And how we should think about it?

Yes. Why don't you take it from the investor side, and then I'll talk about it from a...

Sure. Yes, I'd say that -- I mean, context and history is important for you and those of us old enough to remember all these things. If you look at the products, the whole demi post-fee schedule, back in the last effective round, which was 2017, right? I mean those rates for sleep, oxygen, DME, I mean they came off about 60% overnight. So by definition, there's a lot of meat on that bone, right, of reimbursement pressure back then. But since then, the reimbursement increase, the fee schedules are only up about 2%, 2.5%. CPIU of course, is closer to 3% 3.5%. And so effectively, since then, there's been further compression. And so the result of that has been massive consolidation in the industry. Back in 2016, '17, there are about 10,000 DMEs and today, there's about 5,500.

Well, the details of the new rules in the proposed rule are very important. I mean there's 2 key factors that are clearly messaging very overtly consolidation is coming. The first is per MSA throughout the country, there's calculators built into that proposed rule that are suggesting 1/3 of the contracts that exist today, 1/3 will be cut. So the 5,500 is likely to go to closer to about 3,000 or so in terms of operators. On the other end, the minimum number of contracts in an MSA is changing from 5, down to 2. And so that's important because if you have a pretty considerable market share in a specific MSA, it might just be you and a single competitor left, whereas today, you probably have many competitors in that MSA.

So the rules as they're written in the proposal are suggesting a pretty significant consolidation coming. The last thing I'd say on kind of the financials and the impact of this is there is a math equation that shows if you're 10% of the sleep market in a particular MSA, you would be willing to drop your rates by X in exchange for Y of more market share because the lifetime value of that -- of those patients, right, it's going to make sense for you to work towards positioning yourself in your best light.

I think when you take competitive bid, the ability like us to capitate large chunks of business and our ability to invest in tech, are three things converging that are setting companies like Adapt up with size and scale for a unique opportunity over the next couple of years because they're all driving consolidation in the marketplace. And so if you go from 5,000 HME, DME providers today, which had been halved over the last 5 years, right, it was more than 10, down to 5. We think it will be 3,000 that volume has to go somewhere on a national basis, which we're one of the very few companies that can take that on.

So I love that you bring it up because I think competitive bid could be a real strategic advantage for us, just like I think our ability to continue to cap business. And as we continue to take cost out through technology, it puts us in a really interesting position.

Does that -- when you consolidate down and have this volume available to you, does that mean that, hey, you know what, we don't really need to do any M&A because we're going to see -- we see this opportunity coming in, in the next couple of years. We don't need to buy share. It's going to come to us, and that's a much higher return, presumably on invested capital...

We do not need to do M&A. Now will we do it in -- where it's in our core of sleep and respiratory, and it's in a geography that would be easier for us to buy as opposed to build, West Coast, for example, or something like that in a white space for sure. But we're in a good place where we don't have to because we think the organic growth that's coming our way over the next few years is going to happen regardless. So we'll be very strategic on where we want to build our footprint.

When will the thesis around competitive bidding the advantage to adapt? How can we in the room outside of your headquarters understand that you're actually taking the share? Like how will we know, will show up in organic growth? Will you tell us, hey, we're starting to see this consolidation, we're starting to win. Like how do we know when -- that this thesis is playing out the way you hope it will.

It's on those new starts of patients within each of the segments. And so as an example, in sleep, I mean, in the last quarter, I mean we're at almost record territory of new starts. I mean we were up almost 7% over the prior year in new starts. I mean if you're seeing mid-single-digit start growth, sleep, respiratory, CGMs, that's how you know that it's working.

And when do you think we'll start to -- like when do you start think you'll start to feel it or you'll start to see it.

Well, we're showing you 6% to 8% next year.

No, that's why -- so it's a little bit -- I don't want to say it's baked in, but it's there, part of the 6% to 8% is also something in the new business you've already want.

There's real momentum in particularly sleep and respiratory.

Fair enough. Pricing a little bit. What are your sort of built-in expectations around reimbursement in that 26% number that revenue number? Based on whether it's DME, the different segments. Where are you anticipating?

Very steady. I mean, when we're talking 6% to 8%, you can really translate that to volume on the rate side, I mean, we're very likely the calculators that come out with the demi post-fee schedule increases for next year. They're based on CPIU through June of this year. And so somewhere 2%, 2.25% potentially could be fee schedule increase. However, Medicare Advantage penetration into Medicare, right? That has a tendency to wash some of that out. And so we would expect that to remain the same next year and for net rate to be basically flat.

Got it. On the sleep side, there's been some talk that Philips may come back to the market. You guys have done a really good job of finding alternative sources. How does that -- do you expect them to come back to the market? Does that in any way affect you positively or negatively if you have another player? And how should we -- if that news comes to be, do we as investors care? Is it a positive? Is it negative? Is it any way -- like how do we address that or think about it?

They've begun reaching out not just to us, but to their partners to say, to signal that they expect to get this behind them within the year. We don't know what that means. They can't give us a date, but their intention to come back. And so I think going from a 2 player to a 3-player market is good, of course. And that's all we know at this point.

Is there going to be -- I'm guessing when a company goes through problems, then I come back to -- purely be speculating, but they have to incentivize people to get back in. What do you -- how did you do the math or the analysis around, hey, do I want to go back -- get back in bed, no pun intended, with the company that's caused problems and dislocated the market for a while versus wow, this price is really attractive. Like how do you -- it's a big decision.

Remember, a lot of our scripts come -- they'll be out there. So I'm sure they'll be out selling doctors on their back and their products. So a majority of our scripts will come in branded. And then on the other side, I'm sure our team will be looking at the product and how it compares. But for the most part, we will follow the prescribers.

What's the percentage that are branded versus not? Because I know this was a debate period of time ago for sleep, it's over 50%.

It's over 50%, that's right.

Okay. For diabetes, it's well in the 90s. That I understood, I thought sleep was lower. Okay. Our time is up. Is there anything else that we haven't touched on? Do you think that we should make sure everybody learns and knows.

Just that we are really optimistic about the next couple of years with some of the industry trends. And we think that given our size and kind of the operational improvements we've made will not only help us grow, but this focus on the patient has really proven to put us in alignment with a lot of our customers. So we're pretty optimistic about the couple of years ahead. So we appreciate the opportunity to talk to you about it, any time you want to hang around and come back.

Thank you. Thanks, everybody, and thanks for coming. Thank you.

Thank You.

Good day, everyone, and welcome to today's AdaptHealth Third 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'd like to remind everyone that statements included in this conference call and in this 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 this 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, and good morning, everyone, and welcome to the call. I'm pleased to report that Q3 was a milestone for AdaptHealth. If you recall, last year at this time, we realigned our business into 4 reporting segments, each under general managers and dedicated sales leaders. This was intended to focus our efforts on improving patient service and operational efficiency. By doing so, it allowed us to better manage our resources, and that decision was a key contributor to the mid-single-digit organic growth each segment produced this quarter.

The theme for today's call is that over the past year, the team has worked tirelessly to transform our business, and we are now seeing our progress taking hold and flowing through to our financial results.

In the third quarter, we completed substantial operational improvements across the organization and delivered financial results that exceeded our expectations. We are continuing to demonstrate progress across all 3 value drivers: growth, profitability and risk profile.

Starting with growth. Our third quarter revenue was $820.3 million, up 1.8% from prior year quarter. Organic revenue growth, which does not include changes in revenue from divestitures or acquisitions, was 5.1% versus the prior year quarter with strength across each of our 4 reportable segments. Sleep new starts were up nearly 7% from the prior year quarter, making it our highest quarter in 2 years. We also set new patient census records in both Sleep and Respiratory Health. We experienced robust year-over-year growth in our Wellness at Home segment, driven by orthotics and hospice. And in Diabetes Health, we delivered the first quarter of revenue growth since Q1 2024.

Moving to profitability. Our third quarter adjusted EBITDA was $170.1 million, up 3.5% from the prior year quarter and above the high end of our guidance range. Adjusted EBITDA margin was 20.7%, up 30 basis points from the prior year quarter as we exhibited discipline on expenses even as we made forward investments in talent, technology and infrastructure to support our new large capitated partnership we announced in August.

Turning to our risk profile. We reduced debt by another $50 million during the third quarter, bringing our year-to-date total debt reduction to $225 million. We are delevering quickly and rapidly approaching our 2.50x target net leverage ratio, with our net leverage ratio standing at 2.68x at quarter end. Debt reduction remains among our highest capital allocation priorities as we believe a strong balance sheet is essential to unlocking and sustaining value for shareholders.

During the quarter, we continued to make significant strides towards improving patient service and field operations. As planned, we completed the implementation of our standard field operating model and organizational structure, starting with consolidating from 6 to 4 regions. This was a huge step forward. It required empowering our best operators to lead these 4 regions and realigning nearly 8,000 employees to our new field operating structure and standard workflows.

As a reminder, we enter nearly 40,000 homes per day. We operate 640 locations across 47 states and without a standard operating model and org structure, rolling out standard workflows and technology can be slow and inefficient. Now with the standard operating model across the country, we can more efficiently deploy operational improvements and technology solutions in a timely manner and at scale.

Another initiative that's taken place over the last many months is the consolidation of our previously fragmented call centers into a new national contact center and utilizing a single patient services technology platform. This is a significant enhancement that allows us to dramatically improve how we route our incoming call volume and standardize patient interaction. which creates a higher quality, more consistent experience for the patients we serve. Looking forward, as we deploy technology that allows more patients to self-serve, this new call center will supplement the local branches with increased capacity to manage the most critical patient concerns.

We continue to believe that there is significant potential to deploy AI and automation across our business. Therefore, we continue to selectively but aggressively pursue and pilot the use of these tools to drive service excellence and operational efficiencies, and we are already beginning to see the early benefits. For example, in the third quarter, automation enabled the revenue cycle management team to reduce its reliance on offshore labor by approximately 5%.

Let me connect these results to where we are headed strategically. We are moving quickly to establish the infrastructure required to service our recently announced exclusive capitated agreement with a large integrated delivery network. This is a significant undertaking that will require approximately 1,200 employees, 30 locations and 300 vehicles. Our partnership with this customer is off to a strong start because we share a philosophy about how best to unite our efforts to provide superior care for patients.

This starts with a mutual recognition that the combination of an integrated delivery network at an at-scale home medical equipment and service provider working through a per member, per month or capitated fee model produces the strongest alignment of incentives. This means we share a common commitment to a seamless handoff of care as patients are discharged from the hospital when they are at their most vulnerable and the risk of readmission is the highest. It means being rewarded for clinical appropriateness and efficiency by providing exactly what the patients need, nothing more, nothing less. It also means being motivated to drive patient adherence by investing in setup, training, education and ongoing support to ensure patients use equipment correctly. In short, we are strategic partners working to keep patients healthy at the lowest sustainable cost.

We arrived at this moment because of our success with our Humana capitated arrangement, which demonstrated for the first time that an at-scale HME provider could lift and shift significant volumes of activity while maintaining high service standards. Our immediate objective is to replicate that success by delivering on our promises to our new IDN partner as well as to another new capitation partner, a major payer for whom we will be the exclusive provider to an additional 170,000 lives as announced this morning.

But as we look out on the horizon, we intend to lead the evolution of our industry by using our results to prove to every IDN and large hospital system in the U.S. that partnering with us produces better outcomes for patients. That means faster time to therapy, higher adherence, greater patient satisfaction and ultimately finding ways to lower readmission rates and deliver genuine clinical value in the home.

AdaptHealth is uniquely positioned with our technology infrastructure and operational capacity to offer this value proposition at scale. And our relentless focus on operational discipline and service excellence demonstrated in our Q3 progress is all about enhancing the value proposition. Our national contact center, centralized order intake and adoption of AI and automation are just a few examples of how we are alleviating patient, physician and hospital pain points. This focus extends beyond capitation to our entire business.

To be clear about what is at stake, service excellence is where HME providers win or lose loyalty. Hospitals and physicians remember which HME companies respond timely, who handles logistics seamlessly and who prevents patient readmissions. Service excellence creates referral stickiness. For us, operational discipline as the foundation for service excellence is not just about margin improvement. It's the key to competitive differentiation. And because of this, ingraining this discipline into our DNA is becoming one of our highest strategic imperatives.

As we look toward the upcoming round of CMS' competitive bidding program, our operating efficiency is a unique and critical strategic asset. While the final rule has yet to be released and the ongoing government shutdown holds the potential to delay it, CMS has not missed words about what it hopes to achieve with the redesign of the program. As outlined in the proposed rule, CMS sees the successful process as one that will cause HME participants, small and large, to submit competitive bids, and it seems to view limiting the number of contracts awarded as the key mechanism for achieving that aim. Some look at the bidding program and focus only on the reimbursement risk. However, rate compression is not a foregone conclusion, and moreover, it is only half the equation. The other half is that if CMS retains its proposal to limit contract awards, this would, by definition, consolidate traditional Medicare market share with knock-on effects that would likely force industry consolidation more broadly. As a result, competitive bidding has more potential to transform HME industry structure than perhaps any other dynamic.

AdaptHealth has been preparing for this moment for years. Our cost structure enables us to participate in the bidding program from an advantaged position. Furthermore, as government policy continues to evolve, our improving financial strength affords us the flexibility to take strategic action to consolidate market share. Where others may see risk, we see opportunity.

Before I close, I'd like to express how grateful I am to my AdaptHealth colleagues. The progress we've made over the last year and especially in the third quarter, demonstrated our grit, determination and focus is paying off. We have a lot of momentum coming into 2026 and expect to see continuous improvements across our business as our teams execute on these growth opportunities ahead of us.

With that, I'd like to pass the call over to Jason to review our financials.

Thank you, Suzanne, and thanks to everyone for joining our call today. After covering our third quarter 2025 results, I'll provide a review of the balance sheet and our plans for capital allocation. Then I'll finish with guidance for the remainder of 2025 and some perspective on our early expectations for 2026.

For third quarter 2025, net revenue of $820.3 million increased 1.8% from the prior year quarter. Organic revenue growth was 5.1% in the quarter. This does not include $34.4 million of prior year revenues related to the divestiture of certain assets from the Wellness at Home segment and $7.7 million of revenue from acquired businesses. As Suzanne noted, our third quarter revenues were characterized by strength across all 4 reportable segments, with each producing year-over-year organic growth.

Third quarter Sleep Health segment net revenue increased 5.7% versus the prior year quarter to $354.8 million. Sleep Health starts were approximately 130,000, up 6.8% versus the prior year quarter, resulting in our highest quarter in 2 years. Our Sleep Health census reached a new record of 1.72 million patients, up from 1.70 million in the prior quarter.

Third quarter Respiratory Health segment net revenue increased 7.8% from the prior year quarter to $177.0 million. Despite lower-than-anticipated oxygen new starts, retention remained strong, resulting in an oxygen census of 330,000 patients, which was a new third quarter record.

Third quarter Diabetes Health segment net revenue increased 6.4% versus the prior year quarter to $150.1 million, our first quarter of year-over-year growth since the first quarter of 2024. Although CGM starts were softer than we expected, CGM census grew over the prior year quarter for the third consecutive quarter, driven by continued improvement in retention rates. Pump and pump supplies revenue continued to grow over the prior year quarter.

For the Wellness at Home segment, third quarter net revenue declined 16.0% from the prior year quarter to $138.4 million, including the previously mentioned impact of the dispositions of certain noncore assets.

Turning to profitability. Third quarter 2025 adjusted EBITDA was $170.1 million, up 3.5% from the prior year quarter. Adjusted EBITDA margin was 20.7%, slightly above the midpoint of our Q3 guidance range and up 30 basis points from 20.4% in Q3 2024. The year-over-year margin trend reflected modest improvement in operating expenses as well as the disposable of less profitable noncore product lines. Our labor expenses were well contained even as we invested in advance of revenue for our new capitated agreement.

Moving to cash flow, balance sheet and capital allocation. Q3 2025 cash flow from operations was $161.1 million. CapEx of $94.2 million was 11.5% of revenue, up slightly from the prior quarter as we continue to invest in new patient growth. Free cash flow was $66.8 million, in line with our expectations and unrestricted cash stood at $80.4 million at the end of the quarter.

At quarter end, net debt stood at $1.73 billion, down from $1.80 billion at the end of the second quarter. We reduced our TLA balance by $50 million in Q3 2025, bringing the year-to-date total to $225 million. Our focus on debt reduction has decreased year-to-date interest expense by over $15 million as compared with the same period for 2024. Our net leverage ratio stood at 2.68x, down from 2.81x at the end of the second quarter and rapidly approaching our target of 2.5x.

Turning to capital allocation. Our highest priorities continue to be investing to accelerate organic growth and debt reduction to strengthen our financial position, followed by strategic acquisitions of home medical equipment providers to round out our geographic footprint and increase patient access. So far in 2025, we have allocated $19 million of capital to tuck-in deals, and we are continuing to advance modest tuck-in deals through our pipeline.

Turning to guidance. We are maintaining our full year 2025 revenue guidance range and expect to come in very modestly above the midpoint of that range. We are also maintaining our full year 2025 adjusted EBITDA guidance, but we expect to come in at the bottom end of that range as we prudently accelerate investments in infrastructure, technology and labor to stand up our new capitated arrangement. We are maintaining our free cash flow guidance at a range of $170 million to $190 million. While the government shutdown has the potential to push some cash collections into Q1 2026, given the free cash flow generated year-to-date, we remain confident that we will still achieve our prior guidance range.

Given the number of moving parts affecting our expectations for 2026, let me provide a preview of how we are thinking about next year. We anticipate the top line will grow 6% to 8% over full year 2025, which assumes accelerated growth in our core products, revenue from our new capitated contract and the impact of certain assets disposed in 2025. We expect revenue growth will start slower in the first half, but will accelerate in the back half due to the timing of the ramp of the capitated contract and the dispositions.

We anticipate full year 2026 adjusted EBITDA margin to be approximately 50 basis points better than 2025, even as we invest in new capitated infrastructure in early 2026 ahead of the revenue ramp. As a reminder, we expect this capitated contract once fully ramped to produce at least $200 million of annual revenue with adjusted EBITDA margin and free cash flow margin in line with the rest of our business.

As has been our practice, we intend to provide formal full year 2026 guidance when we report fourth quarter earnings this coming February.

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

[Operator Instructions] Our first question comes from Eric Coldwell with Baird.

Nice job in the quarter. I wanted to hit on the large capitated deal. Your comments on '26, Jason, were very helpful. You mentioned slower growth in the first half, more in the second half. Conversely, the incumbent on that arrangement has been signaling that it actually expects the transition to begin this quarter and to be completely ramped or completed by the end of the second quarter of next year. So the incumbent sounding like the transition is going to happen a little faster. If I'm reading you correctly, it still sounds like you're expecting a little slower. I'm hoping you can just help us triangulate those 2 data points.

Well, sure, Eric. I mean, I guess I'd say, firstly, that we don't have a lot of perspective on what competitors might be saying out there. What we do know is that the contracted dates that we've signed up to deliver, that's very clear. We're in advance of the bulk of that ramp. And so we think we're being appropriately conservative with our expectations of the ramp over the course of 2026.

And as markets come online, we'll certainly gain confidence on having all the infrastructure that we need in place before the first patient shows up. I mean that, in our mind, is the priority is making sure that we've got the labor and the people and the vehicles and the infrastructure in place for those patients prior showing up. And if we do that, we take good care of those patients, that ramp could get better than what we're suggesting.

Just one quick follow-up or additional question. You've obviously been pretty successful here recently with these new wins, particularly on the large capitated side. At the same time, again, a competitor has recently announced a -- at least in the near term, an exclusive with a large network, OptumHealth. And I'm curious, based on your 2026 preview, it doesn't sound like that's a big impact, but I'm hoping you can give us some color on perhaps how much exposure you might have had there or if that competitor announcement is at all impactful? I mean, certainly, a larger OptumHealth larger network somewhat visible to the Street. I'm just curious if you have any thoughts on that change?

I'll take that one, Eric. So taking a step back, I think that these capitated agreements or preferred provider agreements as some call other types of agreements are evidence that the market, payers and providers are interested in partnering with a single scaled partner to help their membership or patients.

But there's a distinction in my understanding between an exclusive capitated agreement and what we call a preferred provider agreement. And so the distinction here is that with -- when we say capitated agreement, we are exclusive, we -- they have to refer to us, and we have to service that patient pool. A preferred provider agreement means, hey, give us the business, we'll service it, but it still means that people can compete for that business. It's still an open network.

And so if I understand correctly, the contract that you're referring to, I have not heard that it is exclusive. I have heard that at the end of the day, they have to earn the business just like anyone else would. And like I said, in this business, you earn that business by providing the best service. And so we believe with all of the infrastructure and continuous improvement that we made that we are going to continue to earn business on the basis of our service excellence. And so it does not preclude us from calling on that customer.

No, Eric, I might add, since the announcement that you're referring to, there has been zero change in our trend lines and our expectations related to that contract. So we'll see what, I guess, tomorrow brings. But for now, we've got full access and coverage, and we feel just fine about it.

We'll now move on to Brian Tanquilut with Jefferies.

Congrats on the quarter. Maybe, Suzanne, I'll just hit on that last comment you made. So as we think about the fact that you've already won Humana, the Kaiser contract and then another one today, I mean, different dynamics there. Humana was not capitated prior. What are you seeing in the market? Or what are the conversations like in terms of getting more payers to convert their approaches to DME to capitation? And how far are we from -- or is it reasonable to think that eventually, this will be mostly capitated at least for the national providers?

Thanks, Brian. I mean I believe that this type of model is what's best for the industry. I was recently on the road meeting with some big hospital systems and their CEOs. And what they're talking about is reducing their length of stay, seamless handoffs putting our people alongside their people for discharge planning. So they're incented to move patients through the hospital or if it's a physician practice to have a seamless handoff.

And so having a strong partnership where we can hold each other accountable, they can hold us accountable for service level initiatives, that's a big deal for them because if they're managing many, many different players without strong SLAs in place, that makes it difficult. So us showing up saying we're a large public company that takes compliance and integrity seriously, that we cover 47 states that we can do this at scale, that we agree to SLAs in the capitated agreement, they like that model. And so the idea that we can show up and have that seamless handoff for them and quarterly report out how that performance is going between us, that's something that's really getting a lot of interest. And that's where we're putting a lot of resources to go see how many more hospital systems, IDNs and payers that we can convince that by aligning our incentives that this is best for patient care.

That makes sense. And then maybe, Jason, just back to the point of the guidance. I mean, obviously, a good quarter here, and you're maintaining the guidance. First, what exactly are these investments that you mentioned? And then how should we be thinking about the investments related to the new contract? And where are you tracking versus what you thought you'd be spending for Kaiser?

Right. So I guess, firstly, like kind of when we say infrastructure, we're talking about an estimated 1,200 people that have to be recruited, onboarded, trained and ready for day 1 of patients flowing across multiple states. It's procurement of vehicles to our standards. They've got to be outfitted. They got to be painted, all this detail that needs to happen in order to have trucks running on day 1. So that's all well underway.

And finally, it's the procurement of about 3 dozen locations in geographies that we don't compete in yet. And so as we get those locations identified and secured, they got to get outfitted, you got to get them ready, you got to stock them with inventory and capital equipment and again, be ready for that patient on day 1.

So we're moving along according to our plans. In fact, in some markets, we've actually advanced due to some local dynamics in those markets, which is why we're seeing expenses running hotter, particularly in the labor lines. And then I'd say related, I mean, we went from 6 regions to 4. I mean we took out 2 kind of operating regions. Now as part of that operating model change, look, there's a lot of talent in the organization, a lot of experience, long time in DME. We think it was prudent to hold on to the folks that want to continue to be part of our business that potentially want to relocate. We're doing a fair amount of that to these markets to stand up new AdaptHealth operations and to grow from there. So that's a little bit about kind of what we're investing in.

In terms of what to expect, we do expect to carry additional expense into the first quarter, potentially mid-second quarter. And as this revenue comes online, the nice thing about it is, I mean, you immediately move up to 20% EBITDA margin, which is our expectation for the contract because the infrastructure is paid for, the capital equipment is in, trucks are running. And then at day 1, you start getting paid per member per month. And so there'll be a little bit of forward investment in the fourth quarter and in the first quarter, and then that will start swinging out over the course of '26, and we expect high revenue growth as well as a big improvement in EBITDA margin in the second half of '26.

We'll now move on to Richard Close with Canaccord Genuity.

Yes. Just hitting on the capitated agreements a little bit more. In terms of the announcement or the new contract announced today, are there any more details that you can provide? Just curious if there's any geographic overlap with your other agreements that portend maybe some additional operating leverage there or less infrastructure investments on that? And then is there an opportunity to expand the number of lives with that agreement?

Yes, Richard, I'd say that we announced this agreement more so for the strategic implications to the company and where we're heading in terms of taking control of our own destiny and reimbursement, capping business exclusively where we can contain an entire population and take care of all of those patients.

In terms of like financial impact, I mean, 170,000 members, the math doesn't work exactly, but compared to over 10 million lives in this other contract that we've spoken about, you'll see us maybe a couple of percentage points. So it's nowhere near size and scale.

There is benefit to the geography of this contract and potential growth. This is a major payer. If we do our jobs and we think we will, it does set up nicely for us to continue to work that payer's pipeline. So more to come.

[Operator Instructions] We'll now move on to Pito Chickering with Deutsche Bank.

This is Kieran Ryan on for Pito this morning. Just wanted to check in and see if you could provide any other color on Diabetes. I appreciate the detail on CGMs versus pumps. I'm not sure if you can talk about anything you saw on the pharmacy side or with payer mix in the quarter that maybe contributed to the uptick.

I appreciate the question, Jason. I will tag team this. I'll start with just what we're seeing in Diabetes. So listen, we've talked about this now for the past year that this has been a focus of ours to improve our execution that a lot of this was certainly an interesting market dynamic, but that was no excuse for our past year's performance, and we have finally gotten our arms around the business and we're seeing the best attrition rates from our resupply team. We've really stopped that bleeding and servicing patients really well there.

Pumps have been strong, and our sales force has been trained, put in place. We've made the changes we needed to. We have a strong leader there. So we're getting out in front of the right customers and leveraging the HME side of our business. The Diabetes team and our HME sales forces are working collectively to identify opportunities. So it's kind of been an all hands on deck that finally has proven to show some success.

And then in terms of the numbers, I'll hand that off to Jason to give you a little bit more for that purpose.

Yes. To get maybe into the weeds a little bit, this was the first quarter or last quarter, I'd say, of a comparable against a different management team, a different resupply organization and processes because those changes were made late September of 2024. And so what you're seeing is just strength in retention, as Suzanne said.

Now when we get to Q4, now we're comping that same team that we've got running in Nashville is now comping against themselves. And so we're setting record retention rates, but to grow above that, it does get more challenging. So although we were thrilled to see over 6% growth in Diabetes in Q3, given the softer starts, we still have a ways to go until we're demonstrating consistency and stability and ultimately, some growth in this business. And so that's a little bit about Q3 versus Q4. As we get to '26, again, we expect stable retention, modest improvement in sales. We're taking actions to make sure we secure that. And with a little luck, we'll have a consistent stable business to report in 2026.

And to your point around pharmacy versus med benefit, during the past year, we didn't -- we've made the decision to pursue the pharmacy channel. We were slower last year committing to that to wait to see what we would -- this business and how it would perform. But now that we're seeing that providers do really want the optionality to send both, we are making investments to make sure that we can efficiently process those types of orders as well.

And then I guess just briefly on the Sleep side, obviously, strong new start and census numbers. I just wanted to still understand if you still expect that mix headwind to be fully comped out as we exit '25. So that's kind of not a factor as we move into '26.

Yes, exactly. I mean there'll be de minimis impact in Q4. But as we get into '26, that we'll be past all that. So it will be a bit of an easier comp, if you will, as we look towards next year.

We'll now move on to Whit Mayo with Leerink Partners.

Jason, the 6% to 8% revenue growth that you're guiding to for 2026, any way to unpack that by segment, how you're thinking about it?

Sure. We can probably offer some high-level views and then add a lot more to that when we guide in February. But if you look at the base business today, I mean, we've gone through a lot of disposition activity over the course of kind of late '24 through current. We're starting modest M&A that's been going on around that same time frame. And so you're going to likely have a bit of a canceling effect as we look to '26.

Outside of that, our organic growth, which excludes dispositions acquisitions, year-to-date, we're running 1.8%. So as we look to '26, I mean, we think that we can get a little bit of growth there. Some of that will come through the accounting changes that Kieran mentioned in the last question. I mean that alone is $30 million or about 1 point of revenue.

So if you look at Sleep, I mean, that alone will -- we expect to produce a better growth rate in Sleep, not just that single factor, but we're starting to near records of new start activity. And so we aim to continue that through '26.

Respiratory in '25 so far has just had a blowout year. I don't know that we'll be producing at these upper single-digit levels for Respiratory. We think it will normalize back to kind of a lower single digit, which is what we've seen historically as it relates to Respiratory.

And then as it relates to Diabetes and Wellness, we think we'll produce steady and stable revenue, potentially a little bit of growth in one or both of those segments.

But all that together, we think organic growth, again, today, a little under 2% could move to a little under 3% next year. And then you've got the benefit, which is also organic of this compensated arrangement that gets you up to that 6% to 8%.

Okay. That's helpful. And I was wondering, is there anything new on RAC audits for PAPs, ventilators, rentals, et cetera, that's on your radar that's concerning or not concerning to you? I think CMS did award a new contract recently. So just wanted to get an update there.

That's right, Whit. But the number of audits and the kind of frequency of audits, it's been very, very steady. There's been no change or impact.

Thank you. This now brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.