Q1 2024 AdaptHealth Corp Earnings Call

Unknown Executive: Good morning, everyone, and welcome to today's Adapthealth first quarter 2024 earnings release. At this time, all participants are in a listen-only mode, and later you will have the opportunity to ask questions during the question-and-answer session. To register for a question, simply press star and one on your telephone keypad at any time during today's meeting.

Good day, everyone and welcome to today's adapt health first quarter 2024 earnings release at this time all participants are in a listen only mode. And later you will have the opportunity to ask questions. During the question and answer session to register for a question simply press Star and one on your telephone keypad at any time during today's meeting.

Unknown Executive: Today's speakers will be Richard Barasch, Chairman and Interim CEO of Adapthealth, and Jason Clemens, Chief Financial Officer of Adapthealth. Josh Parnes, President of Adapthealth, will join Richard and Jason for the question-and-answer portion of today's call. 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 2024 and beyond.

Speaker Change: Today's speakers will be Richard Barasch, Chairman and interim CEO of adapt health and Jason Clemens Chief Financial Officer of adapt out Josh Parnes President of adapt health will join Richard and Jason for the question and answer portion of today's call before we begin I'd like to remind everyone that statements included in this conference call in the press release.

Unknown Executive: 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. should not have any 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, and free cash flow, all of which are non-GAAP financial measures.

Speaker Change: 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 2024 and beyond actual results could differ materially from those projected in forward looking statements because of a number of risk factors and uncertainties.

Speaker Change: Which are discussed at length in the company's annual and Cordy S quarterly SEC filings adapt health Corp should have no obligation to update the information provided on this call to reflect such subsequent events.

Speaker Change: Actually on this morning's call the company will reference certain financial measures such as EBITDA, adjusted EBITDA and free cash flow all of which are non-GAAP financial measures. This mornings call is being recorded and a replay of the call will be available later today I'm now pleased to turn the floor to chairman and interim CEO of adapt health Mr. Richard Barasch.

Unknown Executive: This morning's call is being recorded, and a replay of the call will be available later today. I am now pleased to turn the floor to Chairman and Interim CEO of Adapthealth, Mr. Richard Barasch. Please go ahead, sir.

Richard Barasch: Please go ahead Sir.

Richard Barasch: Thank you. Good morning, and thank you all for joining Adapthealth's first quarter 2024 earnings call. Simply stated, we had a terrific first quarter, highlighted by 6.2% non-acquired revenue growth and an 18% increase in adjusted EBITDA over last year's first quarter. Our sleep and respiratory product lines continue to deliver strong results that are a good place to see our diabetes business start to improve as well. We continue to de-lever and are on target to hit our cash flow targets for the year. Jason will go through the numbers and details.

Richard Barasch: Thank you good morning, and thank you all for joining adapt health's first quarter 2024 earnings call.

Richard Barasch: Simply stated we had a terrific first quarter highlighted by 6.2% non acquired revenue growth and an 18% increase in adjusted EBITDA over last year's first quarter, our sleep and respiratory product lines continued to deliver strong results.

Richard Barasch: We used to see our diabetes business start to improve as well we continued to delever and we're on target to hit our cash flow targets for the year Jason.

Speaker Change: Jason will go through the numbers in details so I'd like to discuss some of the underlying improvements that gave us confidence that our performance is sustainable.

Richard Barasch: So I'd like to discuss some of the underlying improvements that give us confidence that our performance is sustainable. During the past year, Adapthealth faced several internal and external challenges, and the company addressed each one in a constructive way. This isn't a victory lap, and our new CEO will have plenty to do with the opportunity to put her own mark on the strategic future of the company.

Speaker Change: During the past year at that <unk> faced several internal and external challenges and the company has addressed each one in a constructive way this isn't a victory lap and a new CEO with a planning to do and the opportunity to put her own mark on the strategic future of the company.

Richard Barasch: However, I'd like to highlight some of the more impactful improvements that have occurred, which should serve the company well going forward. Adapthealth originally built its business on M&A, which was facilitated by attractively priced capital. Opportunistically, we took on mostly long-term debt at very attractive rates, but our overall leverage was more than desired, especially in the newer, higher interest rate environment. As a result, the entire company successfully galvanized around the generation of cash flow, which has allowed us to reduce our leverage ratios and our absolute level of debt.

Speaker Change: However, I'd like to highlight some of the more impact impactful improvements that have occurred which had served the company well going forward.

Speaker Change: That health originally built its business on M&A, which was facilitated by attractively priced capital.

Speaker Change: Opportunistically, we took on mostly long term debt at very attractive rates, but our overall leverage was more than desired, especially in the newer higher interest rate environment.

Speaker Change: As a result, the entire company successfully galvanize around generation of cash flow, which has allowed us to reduce our leverage ratios and our absolute level of debt.

Richard Barasch: Even with the difficulty of the changed healthcare issues, we yet again paid down debt in excess of required payments and expect to have meaningful additional cash to deploy through the year for further de-levering. I'm quite confident that we'll meet our 2024 goal of less than three times leverage in short order.

Speaker Change: Even with the difficulties of change healthcare issues, we yet again pay down debt in excess of required payments and expect to have meaningful additional cash to deploy through the year for further delevering I'm quite confident that we'll meet our 2024 goal of less than three times leverage in short.

Speaker Change: Order.

Richard Barasch: Over the past year, we've discussed the challenges with our diabetes. We still have a way to go, but the improvements have been tangible. We have strong new leadership and are building an efficient operating platform that will support our growth ambitions. We have more than doubled our sales force and can finally state that we are activating the pharmacy channel to supplement our growth.

Speaker Change: Over the past year, we've discussed the challenges in our diabetes business, we sell all the way to go but the improvements have been tangible we have strong new leadership and are building an efficient operating platform that will support our growth ambitions, we have more than doubled our sales force. He can finally state that we're activating them.

Speaker Change: The pharmacy channel to supplement our growth.

Richard Barasch: Our sleep business continues to perform well, but we're mindful of the challenges that may arise from GLP-1. We are now actively surveying our more than 1.5 million sleep patients for evidence of change in behavior. So far, we have not seen any material changes, but we'll be vigilant to address any issues should they occur.

Speaker Change: Our sleep business continues to perform well.

Speaker Change: Mindful of the challenges that may arise from G. O P. Once we are in.

Speaker Change: Now actively surveying our more than $1 5 million sleep patients for evidence of change in behavior. So far we have not seen any material changes, but we will be vigilant to address any issues should they occur.

Richard Barasch: We note the real-world study described by ResMed that shows a positive correlation between GLP-1 usage and CPAP compliance. I was also delighted to see the recent Lillian announcement that described the enormous size of the addressable OSA market, more than double the already large estimates of undiagnosed OSA patients provided by the American Academy of Sleep. Our underlying thesis is that increased awareness of OSA is going to more than offset any potential impact on our sleep business. After a slow start, the Humanic Contract is performing both operationally and financially as we had originally projected.

Speaker Change: We know the real World study described by Rez Med that shows a positive correlation between G. L. P. One usage and CPAP compliant.

Speaker Change: I was also delighted to see the recent will aid announcement that describe the enormous size of the addressable OSA market more than double the already large estimates of one diagnosed OSA patients provided by the American Academy of sleep Medicine.

Speaker Change: Our underlying thesis is that increased awareness of OSA is going to more than offset any potential impact to our sleep business.

Speaker Change: After a slow start the humana contract is performing both operationally and financially as we had originally projected we are pleased to report that the patient transition is essentially complete.

Richard Barasch: We are pleased to report that the patient transition is essentially complete. This experience gives us confidence to actively market to potential payers as an important component of our growth. I would expect to see additional contract wins in the near term.

Speaker Change: This experience gives us confidence to actively market to potential payers is an important component of our growth plans I would expect to see additional contract wins in the near term.

Richard Barasch: Payers and providers want to see that the therapies we provide are having a positive impact on their members and patients. We have nearly 1,000 professionals who work with our patients every day to improve their experience with the equipment and devices we provide. We are highly focused on adherence to therapy as the essential first step to better outcomes, and we believe that our adherence statistics for sleep are the best in our industry.

Speaker Change: Payers and providers want to see that the therapies. We provide are having a positive impact on their members and patients. We have nearly a 1000 professionals who work with our patients every day to improve their experience with the equipment and devices we provide.

Speaker Change: We are highly focused on adherence to therapy as the essential first step to better outcomes and we believe that our adherence statistics for sleep by the best in our industry.

Richard Barasch: We are especially proud of the work that our advanced respiratory therapists do to reduce avoidable hospitalization, and we are developing the tools and data to show that we are positively affecting outcomes. Finally, we are put to bed for lingering concerns about permanent leadership.

Speaker Change: We are especially proud of the work that our advanced respiratory therapists due to reduce avoidable hospitalizations and we are developing the tools and data to show that we are positively affecting <unk>.

Speaker Change: Finally, we have put to get put to bed the lingering concerns about permanent leadership.

Richard Barasch: The long and diligent search for a new CEO was well worth it since we found the ideal candidate. Suzanne Foster comes to us from Danaher Corporation, where she served as president of Beckman Culture Life Sciences. She has over 25 years of healthcare experience, including experience in the HME business, and has a strong track record of leading growth businesses in the healthcare market. Our board made a very wise choice, and the management team is looking forward to welcoming Suzanne to Adapthealth. I will be around to help Suzanne have a smooth transition to her new role, but now I'm going to turn it over to Jason. Thanks, Richard.

Speaker Change: Long intelligent search for a new CEO was well worth it since we've found the ideal candidate.

Speaker Change: Suzanne Foster joins Us from Danaher Corporation, where she served as president of Beckman Coulter Life Sciences.

Suzanne Foster: She has over 25 years of healthcare experience, including experience in the <unk> business and has a strong track record of leading growth businesses in the health care market.

Suzanne Foster: Our board made a very wise choice and the management team is looking forward to welcoming Suzanne to adapt health.

Suzanne Foster: Ill be around to help Suzanne have a smooth transition to her new role.

Suzanne Foster: I'm going to turn it over to Jason.

Jason A. Clemens: Thanks, Richard, and thanks to all for joining our call. In the first quarter of 2024, we built on momentum from last year across a few key areas that we'll review today. First, we'll cover some details regarding the changed health care situation that Richard touched on. Starting at the end of February, we began holding claims for certain payers where one of our third-party software providers utilized Change Healthcare to process claims. Health claims peaked at approximately $150 million a few weeks later, and as a result, cash flows decreased. We drew $75 million on our revolver and carried that balance as we ended the first quarter.

Jason A. Clemens: Thanks, Richard and thanks to all for joining our call in the first quarter of 2024, we built on momentum from last year across a few key areas that we'll review today.

Jason A. Clemens: First we will cover some details regarding the change health care situation that Richard touched on.

Jason A. Clemens: Starting at the end of February we began holding claims for certain payers, where one of our third party software providers utilized change healthcare to process claims.

Jason A. Clemens: Health claims peaked at approximately $150 million a few weeks later.

Jason A. Clemens: As it related cash flows decreased we drew $75 million on our revolver and carried that balance as we ended the first quarter.

Jason A. Clemens: Our revenue cycle team has acted swiftly and decisively to mitigate that impact. Since the end of the quarter, our Herald claims for this matter have compressed to approximately $30 million. As a result, cash inflows have started to normalize, and we paid off the balance on the revolver near the end of April. With delayed payments largely caught up, we are reiterating our free cash flow guidance for the first half of 2024 and for the full year. Now, turning to our results.

Jason A. Clemens: Our revenue cycle team has acted swiftly and decisively to mitigate that impact.

Jason A. Clemens: Since the end of the quarter, our health claims for this matter has compressed to approximately $30 million.

Jason A. Clemens: As a result cash inflows have started to normalize and we paid off the balance on the revolver near the end of April.

Jason A. Clemens: With delayed payments largely caught up we are reiterating our free cash flow guidance for the first half of 2024 and for the full year.

Jason A. Clemens: Net revenue of $792.5 million increased 6.4% compared to the first quarter of 2023. Fleet revenue of $306.2 million grew 4.0% compared to a year ago. Sleep sales revenue was up 5.6%, driven by our resupply census, which reached a new record of 1.58 million patients. Sleep rental revenue was flat over the prior year, and we were pleased with that result following the record setups from late 2022 through mid-2023. Diabetes revenue of $149.3 million was up 2.0% against the first quarter of 2023, outperforming our expectations and resulting in our first year-over-year increase since the second quarter of 2023. PGM performed significantly better than expected, driven by increased patient sensitivity. We are making steady progress. Ramping up our new Salesforce team members and new technology deployed in our resupply operations is resulting in more touchless reorders.

Jason A. Clemens: Now turning to our results.

Jason A. Clemens: Net revenue of $792 5 million increased six 4% compared to the first quarter of 2023.

Jason A. Clemens: Felipe revenue of $306 2 million grew 4.0% compared to a year ago.

Jason A. Clemens: Sleep sales revenue was up five 6% driven by our resupply census, which reached a new record of $1 five to 8 million patients.

Jason A. Clemens: Sleep rental revenue was flat over the prior year and we were pleased with that result, following the record setups from late 2022 through mid 2023.

Jason A. Clemens: Diabetes revenue of $149 3 million was up 2.0% against the first quarter of 2023, outperforming our expectations and resulting in our first year over year increase since the second quarter of 2023.

Jason A. Clemens: CGM performed significantly better than expected driven by increased patient census, we are making steady progress ramping up our new salesforce team members and new technology deployed in a resupply operations is resulting in more touchless reorders.

Jason A. Clemens: As expected, we absorbed $4.3 million of revenue pressure in our pump and pump supply categories as the market shifts towards tubeless pumps. However, encouragingly, we again delivered more revenue from tubeless pump starts than from tube-based pump starts. Oxygen and non-invasive ventilation new starts continue to be very strong, building on the momentum from the end of 2023. As Richard mentioned, the transition of humana patients is substantially complete.

Jason A. Clemens: As expected, we absorbed $4 3 million of revenue pressure in our pump and pump supply categories as the market shifts towards <unk> pumps.

Jason A. Clemens: Encouragingly, we again delivered more revenue from tubular pump starts then from two based pump starts.

Jason A. Clemens: Oxygen in noninvasive ventilation, new starts continue to be very strong building on the momentum from the end of 2023.

Jason A. Clemens: As Richard mentioned the transition of Humana patients is substantially complete.

Jason A. Clemens: Starting this quarter, we are now reporting revenue from capitated arrangements in a separate revenue category. This includes Humana as well as several other existing capitated arrangements. Turning to profitability, first quarter adjusted EBITDA of $158.5 million reflects an adjusted EBITDA margin of 20.0%, a 200 basis point improvement over Q1 of 2023. This improvement was driven by three things.

Jason A. Clemens: Starting this quarter, we are now reporting revenue from capitation arrangements in a separate revenue category.

Jason A. Clemens: This includes humana as well as several other existing capitation arrangements.

Jason A. Clemens: Turning to profitability first quarter adjusted EBITDA of $158 5 million reflects an adjusted EBITDA margin of 20.0%, a 200 basis point improvement over Q1 of 2023.

Jason A. Clemens: This improvement was driven by three things number one improved cost of products and supplies as a percentage of revenue, resulting from continued efforts to drive efficiencies in our supply chain.

Jason A. Clemens: Number one, improved cost of products and supplies as a percentage of revenue resulting from continued efforts to drive efficiencies in our supply chain. Number two, improved salary, labor, and benefits as a percentage of revenue, reflecting the flow through of our 2023 cost management program. And number three, expected increases to other operating expenses related to continuing infrastructure investments in fleet and warehouse operations. Cash flow from operations of $49.0 million was impacted by the change healthcare matter covered earlier.

Jason A. Clemens: Number two improved salary labor and benefits as a percentage of revenue, reflecting the flow through of our 2023 cost management program and number three expected increases to other operating expenses related to continuing infrastructure investments in fleet and warehouse operations.

Jason A. Clemens: Cash flow from operations of 49.0 million was impacted by the change healthcare matter covered earlier.

Jason A. Clemens: CapEx of $87.9 million, representing 11.1% of revenue, was almost a full point better than the first quarter of 2023. Although free cash flow for the first quarter was negative $38.9 million, we are reiterating our full year free cash flow guidance of $150 to $180 million, and we are reiterating our expectation to deliver at least $55 million of that in the first half of 2024. We continue making progress towards our plan to get leverage below three times below three times before the end of 2024.

Jason A. Clemens: Opex of $87 9 million, representing 11, 1% of revenue was almost a full point better than the first quarter of 2023.

Jason A. Clemens: Although free cash flow for the first quarter was negative $38 9 million, we are reiterating our full year free cash flow guidance of $150 million to $180 million and we are reiterating our expectation to deliver at least $55 million of that in the first half of 2024.

Jason A. Clemens: We continued making progress towards our plan to get leverage below three times before the end of 2024 in fact, even with the change healthcare impacts we compressed net leverage from 316 times at the end of 2023 to three two times at the end of Q1 2024.

Jason A. Clemens: In fact, even with the changed health care impacts, we compress net leverage from 3.16 times at the end of 2023 to 3.12 times at the end of Q1. During the quarter, we paid $25 million towards our TLA balance, exiting Q1 at $695 million. After the end of the quarter, we paid an additional $15 million toward the TLA balance, and we expect to make our $10 million required payment before the end of next quarter.

Jason A. Clemens: During the quarter, we paid $25 million towards our T. L. A balanced exiting Q1 at $695 million.

Jason A. Clemens: After the end of the quarter, we paid an additional $15 million towards the TLA balance and we expect to make our $10 million required payment before the end of next quarter.

Jason A. Clemens: We expect the TLA balance to be $670 million at the end of Q2, down $80 million from the balance at the end of Q2 2023. For Q2 2024, we expect revenue growth of about 1% over the prior year, surpassing very tough 2023 comparables. Additionally, we're keeping a close eye on extended shipping lead times for certain sleep resupply products, which could impact growth for the quarter. So we're accounting for that risk in these numbers.

Jason A. Clemens: We expect the TLA balance to be $670 million at the end of Q2 down $80 million from the balance at the end of Q2 2023.

Jason A. Clemens: For Q2, 2024, we expect revenue growth of about 1% over the prior year, surpassing very tough 2023 comparable <unk>.

Jason A. Clemens: Additionally, we're keeping a close eye on extended shipping lead times for certain sleep resupply products, which could impact growth for the quarter. So we're accounting for that risk in these numbers.

Jason A. Clemens: Adjusted EBITDA margin of approximately 20.5%, up from Q1 2024 margin, but pressured by added expenses associated with recovering from the changed healthcare situation discussed earlier. These expenses should dissipate in the coming months, but we do expect an impact in Q2. Pre-cash flow to be at least $94 million, which meets our expectations for the first half. For the full year, we are maintaining our original guidance and expecting revenue to be in the range of $3.25 to $3.35 billion, adjusted EBITDA to be in the range of $650 to $710 million, and free cash flow to be in the range of $150 to $180 million. With that, I'll turn it back to Richard for his closing remarks.

Jason A. Clemens: Adjusted EBITDA margin of approximately 25% up from Q1 2020 for margin, but pressured by added expense associated with recovering from the change healthcare situation discussed earlier.

Jason A. Clemens: These expenses should dissipate in the coming months, but we do expect an impact in Q2.

Jason A. Clemens: Free cash flow to be at least $94 million, which meets our expectations for the first half.

Jason A. Clemens: For the full year, we are maintaining our original guidance and expect revenue to be in the range of three to five to 335 billion adjusted EBITDA to be in the range of $650 million to $710 million in free cash flow to be in the range of $150 million to $180 million with that I'll turn it.

Jason A. Clemens: Back to Richard for closing remarks.

Richard Barasch: Thanks, Jason.

Richard Barasch: When I took the job as interim CEO approximately a year ago, it was intended as a short-term role while we installed a new CEO. However, as things have developed, it has turned into one of the most impactful and rewarding years I've experienced in my career. I've been able to observe firsthand the professionalism and dedication of our nearly 11,000 team members as they deliver high-quality care to the 4 million people we serve. As we compliantly generate more actionable data from our patients, I'm even more convinced that Adapthealth will have an increasingly important role in the health outcomes of our patients.

Richard Barasch: When I took the job as interim CEO approximately a year ago. It was intended as a short term role while we installed a new CEO.

Richard Barasch: As things have developed this turned into one of the most impactful and rewarding years I've experienced in my career I.

Richard Barasch: <unk> been able to observe firsthand the professionalism and dedication of our nearly 11000 team members as they deliver high quality care to the 4 million people we serve.

Richard Barasch: As we comply only generated more actionable data from our patients I mean, even more convinced that adapt health will have an increasingly important role in the health outcomes of our patients.

Richard Barasch: After another clean quarter of continued growth, I'll be leaving the CEO job with a great deal of optimism for the company. The future is bright for Adapthealth, and I look forward to watching and helping Suzanne and our talented team deliver on the opportunities ahead. Operator?

Speaker Change: After another clean quarter of continued growth will be leaving the CEO job with a great deal of optimism for the company. The future is bright for adapt health and look forward to watching and helping Suzanne and our talented team to deliver on the opportunities ahead.

Speaker Change: I will now open the call to questions operator.

Unknown Executive: Gentlemen, at this time, if you would like to ask a question, please press the star and 1 on your touch-tone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is the star and 1 to ask a question, and I misspoke. Let me correct myself. That is, star and 2 to simply remove yourself from the queue if you find someone has already asked your question. Once again, ladies and gentlemen, that is Star and 1. We'll take our first question today from Brian Tanquilut at Jeffries.

Speaker Change: Gentlemen, thank you at this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key once again that is star and wanted to ask a question and I Miss spoke let me correct myself that is star and two just simply remove yourself from the queue. If you find someone has.

Speaker Change: Already asked your question once again, ladies and gentlemen that is star and one we will take our first question today from Brian <unk> at Jefferies.

Unknown Executive: Good morning, guys. Thanks for taking the question. It's Jack Seven on for Brian.

Speaker Change: Good morning, guys. Thanks for taking my question its Jackson on for Brian Congrats on the strong results maybe kick it off I wanted to touch on the margin piece because of a particularly impressive are.

Unknown Executive: Congratulations on the strong results. Maybe to kick it off, I wanted to touch on the margin piece because it was particularly impressive. Are you able to give any color on what sort of driving that improvement and in the cost of products by category? I'm wondering here if it's sort of, you know, diabetes margins leveling out with payer mix. Any color there would be great.

Jackson: Are you able to give any color on what sort of driving that improvement in cost of products by category. I'm wondering here, if it's sort of diabetes margins leveling out with with payer mix any color there would be great.

Jason A. Clemens: Sure, this is Jason. I'd be glad to add some color.

Speaker Change: Sure. This is Jason I'd be glad to add some color. So as you pointed out we referenced cost of products and supplies as.

Jason A. Clemens: Frankly significantly better than the first quarter of last year as well as salary labor and benefits, which was part of our 2023 management cost management program that we that we were able to deliver one I mean within cost of products and supplies.

Jason A. Clemens: So, as you pointed out, we referenced cost of products and supplies, which was, you know, frankly, significantly better than the first quarter of last year, as well as salary, labor, and benefits, which was part of our 2023 management and cost management program that we were able to deliver. I mean, within cost of products and supplies, there are a couple of things going on there of note within our supply chain operations. So that includes certainly specific supplier negotiations that we won't offer a lot of detail on and product mix that you alluded to, either from diabetes or other areas growing faster or slower. Overall, we're very pleased with the 2024 contracting cycle. The contracting cycle is largely complete, so we do expect to continue to deliver improved costs of products and supplies throughout the course of the year.

Jason A. Clemens: A couple of things going on there of note within our supply chain operations. So that includes certainly specific supplier negotiations that we won't offer a lot of detailed one.

Jason A. Clemens: And product mix that you alluded to either from diabetes or other areas.

Speaker Change: Areas growing faster versus slower.

Speaker Change: We're all we're very pleased with the 2020 for contracting cycle.

Speaker Change: The contracting cycle is largely complete so we do expect to continue to deliver improved cost of products and supplies throughout the course of the year.

Jason A. Clemens: Got it. That's helpful. And then, you know, maybe on the capitated piece, commentary around Humana being ramped now is really helpful. Can you give a sense of what that move in capitated revenue was quarter over quarter, or, I guess, versus the benchmark of the back half of the year that looked particularly strong in the quarter?

Speaker Change: Got it that's helpful. And then maybe on the catheter adp's commentary around Humana being ramped now.

Speaker Change: That's really helpful can.

Speaker Change: Can you give a sense of what that move and catheter revenue was quarter over quarter or I guess like versus the benchmark in the back half of the year that looked particularly strong on the quarter.

Jason A. Clemens: Sure. But it's not perfect math, what I'm about to say, because capitated revenue was, in fact, reported in various categories in the first half of 2023, so that includes sleep, respiratory, HME, and others. Starting in the second half, we did report our Humana per member per month revenue in the other category, so if you take note of the sequential step-up from Q2 to Q3 last year and then Q3 to Q4, pretty significant step-ups, and that is showing you the ramp-up period of the Humana contract and the transition of Humana patients.

Speaker Change: Sure well it's.

Speaker Change: It's not perfect math, because what I'm about to say because.

Speaker Change: <unk> revenue was in fact reported in <unk>.

Speaker Change: Various categories in the first half of 2023, so that includes sleep respiratory.

Speaker Change: <unk> and others starting in the second half we did report our Humana per member per month revenue in the other category. So if you take note of the sequential step up from Q2 to Q3 last year and in Q3 to Q4 pretty significant step ups and that is showing you the ramp up period.

Speaker Change: The humana contract and the transition of Humana patients. So in the first quarter. We are reporting the entire Humana <unk> revenue in <unk>. So we reported $32 million in Q1. Additionally, we have several other captivated arrangements that we've been operating and frankly growing that portfolio.

Jason A. Clemens: So, in the first quarter, we're reporting the entire Humana PMPM revenue in capitated form, so we reported $32 million in Q1, and additionally, we have several other capitated arrangements that we've been operating and, frankly, growing that portfolio for a number of years now. So that's where you see the revenue reporting now. In terms of comparing against Q1 of last year, it's just going to be tough until we get enough quarters behind us so we're able to see that trend in capita. Hope that helps.

Speaker Change: Leo for for a number of years now so thats, where you see the revenue reporting now in terms of comparable against Q1 of last year.

Speaker Change: It's just going to be tough until we get enough quarters behind us too. So we're able to see that trend and capitate. It hope that helps.

Jason A. Clemens: Yep, very helpful. And last one for me, maybe looking forward, there's a lot of moving pieces and appreciate all the commentary around change on the cash flow side of things, but as you think about the full year guide, does this feel like the right level of sort of free cash conversion or sort of a normalized, you know, stabilized version of what we should expect from the business in terms of, you know, how much cash generation you can get relative to how, you know, the P&L is growing.

Speaker Change: Yes, very helpful. And then last one for me maybe looking forward, there's a lot of moving pieces and I. Appreciate all the commentary around change on the cash flow side of things, but as you think about the full year guide does this feel like the right level of sort of free cash conversion.

Speaker Change: Or sort of a normalized.

Speaker Change: Stabilized version of what we should expect from the business in terms of how much cash generation you can get.

Speaker Change: Relative to how the P&L is growing.

Jason A. Clemens: Without question, we are confident in that free cash flow guidance for the year. Now, to the second part of your question on how much we could get or what the kind of cash generation power of the business is, we continue to believe that it's quite a bit more than what we expect to deliver in 2024. I mean, after all, interest is running almost 4% of revenue. And as we continue to de-lever, as we continue to drive down interest expense, which we're very focused on, that will add an added benefit.

Speaker Change: Without question. It is we are confident in that free cash flow guidance for the year now.

Speaker Change: The second part of your question on how much we could get her or what's the kind of cash generation power of the business. We continue to believe that it's quite a bit more than what we expect to deliver in 2024 I mean after all.

Speaker Change: Interest is running.

Speaker Change: Almost 4% of revenue and as we continue to Delever as we continue to drive down interest expense, which we're very focused on that will add an added benefit.

Jason A. Clemens: It's important to note that our CapEx as a percent of revenue was down 90 bps over the first quarter of last year. We committed to about a half point of improvement year over year. As the Oracle Perpetual Inventory deployment continues to roll out aggressively across the country, that should give us just added confidence in hitting that CapEx number. And again, we feel very, very confident about our free cash flow expectations for the full year.

Speaker Change: It is important to note that our capex as a percent of revenue was down 90 bps over the first quarter of last year, we committed to about a half a point of improvement year over year as the Oracle perpetual inventory deployment continues to rollout aggressively across the country that.

Speaker Change: Should give us just added confidence in hitting that capex number and.

Speaker Change: We feel very very confident about the free cash flow expectations for the full year.

Unknown Executive: Got it. Appreciate all the color and congrats again.

Speaker Change: Got it I appreciate all the color and congrats again.

Unknown Executive: Our next question comes from Pito Chickering at Deutsche Bank.

Speaker Change: Our next question comes from <unk> Chickering with Deutsche Bank.

Unknown Executive: Hey, good morning, guys. Thanks for taking the questions.

Chickering: Hey, good morning, guys. Thanks for taking the questions and nice job on the quarter.

Unknown Executive: A nice job on the quarter. Diabetes, we've been modeling diabetes for down year over year for the first half of the year and then up and back half the year to get basically flat growth year over year. 1Q was definitely way above our expectations. Should we be thinking about the cadence differently for the year? What change versus your original thoughts around diabetes? And is this just a split between pharmacy growing faster than DME? Thanks.

Chickering: Diabetes, we've been modeling diabetes were down.

Chickering: Year over year first half of the year and then up in the back half of the year to get basically a flat growth year over year <unk> was definitely way above our expectations should we be thinking about the cadence differently for the year for what changed versus your original thoughts are on diabetes and is this just the split between pharmacy growing faster.

Speaker Change: <unk>. Thanks.

Jason A. Clemens: Good question. I'd start with just a review of the comparable periods in the prior year. It's important to note that Q1 of 2023 and the sequential step up into Q2 2023, you see that huge step up in diabetes revenue year over year, going from 146 to 169. We do not expect such a pronounced step up in the second quarter. So although we're very pleased with the diabetes beat in Q1, pump and pump supplies came right down the middle of the fairway compared to what we expected.

Speaker Change: Yes, good question.

Speaker Change: Start with.

Speaker Change: Just a review of the comparable periods in the prior year. It's important to note that Q1 of 2023 and the sequential step up into Q2 2023, I mean, you see that huge step up in diabetes revenue year over year going from $1 46 up to $1 69, we do not.

Speaker Change: Not expect such a pronounced step up in the second quarter. So although we're very pleased with the diabetes beat in Q1 pump and pump supplies came right down the middle of the fairway of what we expected and CGM did outperform our expectations I mean, we had diabetes down for Q1, but we're making some progress on <unk>.

Jason A. Clemens: And CGM did outperform our expectations. I mean, we had diabetes down for Q1, but we're making some progress in sales. We're starting to take more orders in pharmacies, so things are going according to plan. But it's really that tough to compare it with the prior year. There were some system conversion activities and other items that affected just such a large sequential step up that we don't expect to repeat. So that's really the only change to think about for the full year quarterly numbers.

Speaker Change: Sales were starting to take more orders in pharmacy, so things are going according to plan.

Speaker Change: But it's really that tough comparable in the prior year. There were some system conversion activities and other items that affected just such a large sequential step up that we don't expect to repeat so that that's really the only change to think about the full year quarterly numbers.

Unknown Executive: Okay, great. And then for 2Q, you talked about some margin pressures from change and from investment. Can you give us any color on how 2Q consensus looks versus your expectations? And a quick one on organic growth. How does capitated get calculated as it converts from fee-for-service into capitated for organic growth?

Speaker Change: Okay, Great and then for <unk>, you talked about some margin pressures from change in from investments can you give us any color on how acute you could touch it looks versus your expectations and a quick one on organic growth how does cabot hated that calculated as convert from fee for service into capital for organic growth.

Jason A. Clemens: Sure, Peto. In terms of organic growth, the capitated arrangements are 100% organic or non-acquired because we did acquire some of these capitated arrangements, but we've anniversaries the years of those acquisitions. So it's 100% organic.

Speaker Change: Sure Pete.

Speaker Change: In terms of organic growth the the <unk> arrangements are 100% organic or non acquired because we had we.

Speaker Change: We did acquire some of these capitation arrangements, but we've anniversaried the years of those acquisitions. So it's it's 100% organic in terms of how the street is thinking about the full year.

Jason A. Clemens: In terms of how the street is thinking about the full year, I guess I'd just summarize it by saying, look, we did better in Q1. We're pleased with it. We think that Q2 is going to be a little softer than what we expected two months ago when we guided. But zooming out, Q3, Q4, we feel very good about. The full-year guide, we feel very good about. And so I think it's really a bit of a swap between Q1 and Q2, which would be my observation of where the street's at, as well as what we were thinking a couple months ago.

Speaker Change: I guess I'd, just summarize it by saying.

Speaker Change: Look we did better in Q1, we're pleased with it.

Speaker Change: We think that Q2 is going to be a little softer than what we expected.

Speaker Change: Two months ago, when we guided but zooming out Q3, four we feel very good about the full year guide we feel very good about and so I think it's really a bit of a swap between Q1 and two would be my observation of where the street's at as well as what we were thinking.

Speaker Change: A couple of months ago.

Unknown Executive: Should we take the beat from 1Q and subtract that from the 2Q consensus just from ballpark?

Speaker Change: Let me just take the beat from <unk> and subtract that from the <unk> consensus just from a ballpark.

Unknown Executive: I mean, you know, generally, it's a fair way to think about it. But practically, obviously, it doesn't work exactly like Yeah, great. Thanks.

Speaker Change: I mean.

Speaker Change: Generally it's a fair way to think about it.

Speaker Change: Practically how obviously it doesn't work exactly like that.

Unknown Executive: Yeah, great. Thanks so much, guys. Nice job on the quarter.

Speaker Change: Okay, great. Thanks, so much guys nice job on the quarter.

Unknown Executive: Our next question today comes from Eric Coldwell at Baird.

Speaker Change: Our next question today comes from Eric Coldwell at Baird.

Unknown Executive: Thanks very much. I want to start off by making sure we understand the growth comps in the product categories here in first quarter 24 versus first quarter 23, because I think you've suggested that some of the Humana work was in those categories in the first quarter of last year, but now it's in the capitated line. So is there any additional detail you could give to quantify as we look at the segment growth rates exacerbating compared to what was reported last year? Is there any way you could quantify that impact?

Eric White Coldwell: Thanks, very much I.

Eric White Coldwell: I wanted to start off with making sure we understand the growth comps in the product categories here in first quarter 'twenty four versus the first quarter 'twenty three because I think you've suggested that some of the some of the Humana work was in those categories in the first quarter of last year, but now it.

Eric White Coldwell: And the cat potatoes lines. So is there any additional detail you could give to quantify as we look at the segment growth rates ex <unk>.

Eric White Coldwell: Compared to what was reported last year is there any way you could quantify that impact.

Jason A. Clemens: Great question, Eric. You know, it's going to be tough to quantify it since we're not breaking it out specifically in our filings or our reporting. However, the way that we're thinking about it and attempting to message things is, you know, thinking about sleep as a revenue category, diabetes as a revenue category, and then everything else, which includes capitated and includes HME and respiratory and the other revenue categories. It's not perfectly precise to think of it that way, but it does help simplify.

Speaker Change: Great question Eric.

Speaker Change: It's going to be tough.

Speaker Change: To quantify it since we're not breaking it out specifically in our in our filings are reporting.

Speaker Change: However, the way that we're thinking about it and attempting to message things is thinking.

Speaker Change: Thinking about sleep as a revenue category.

Speaker Change: Diabetes is a revenue category and then everything else, which includes capitate. It includes HMA in respiratory in the other revenue categories.

Speaker Change: It's not perfectly precise to think of it that way, but it does help simplify and so what we've said is we expected sleep.

Jason A. Clemens: And so what we've said is, you know, we expected sleep to grow about mid-single digits over the prior year. And we saw that in Q1 at 4%. We also said that we expected rental to have a tough comparable year, and if we ended flat, we'd be thrilled for the full year. Might be down a touch, might be up a touch, but we'd be pleased with flat. We've said in diabetes, as someone mentioned earlier, that we had expected to be down to potentially flat in the first half of this year and then adding maybe a point and hopefully another two or three points of growth in the third and fourth quarters of this year. And then for the rest of the revenue categories, you know, the average growth makes up the full-year guide number at a little over 3%. So, I hope that that helps, Eric.

Speaker Change: To grow about mid single digits over the prior year, we saw that in.

Speaker Change: In Q1.

Speaker Change: At 4%. We also said that we expected rental to have a tough comparable year end. If we ended flat we'd be thrilled for the full year might be down a touch might be up a touch but we'd be we'd be pleased with flat.

Speaker Change: We've said in diabetes as.

Speaker Change: Someone mentioned earlier that we had expected to be down.

Speaker Change: Potentially flat in the first half of this year, and then adding maybe a point and hopefully another two or three points of growth in the third and fourth quarter of this year and then for the rest of the revenue categories.

Speaker Change: The average growth makes up the full year guide number at a little over 3%. So hope that helps there.

Jason A. Clemens: Okay, and then on to Q, I know during the, I think during some of this Humana transition, I know you won't quantify, can't do that perhaps, but is there still a comp issue on a year-over-year basis in Q2 in the product categories, or is that fully worked through as it was in Q1, as Q2-23 began?

Speaker Change: Okay.

Speaker Change: Then on <unk> I know during the I think during some of this humana transition I know you won't quantify it can't do that perhaps but is there still a comp issue on a year over year basis in Q2, and the product categories or is that fully worked through as Q1.

Speaker Change: Q2, 'twenty three began.

Speaker Change: Yes.

Jason A. Clemens: Yeah, it won't be a material difference in Q2, Eric. I mean, we did, you know, we committed to substantially transitioning all patients by the end of the first. We executed on that. I mean, as we stand here today, I think we're down to about 130 or so patients left.

Speaker Change: Yes, it won't be a material difference in Q2, Eric I mean, we did we.

Speaker Change: We committed to.

Speaker Change: Substantially transitioning ball patients by the end of the first quarter.

Speaker Change: We executed on that.

Speaker Change: As we stand here today, I think we're down to about 130 or so patients left so we're we're down to the nitty gritty.

Jason A. Clemens: So we're down to the nitty gritty. We did transition within the quarter faster than we had anticipated. And so what that means is you've got nearly a full plain quarter for Q1. So we don't expect that capitated number to really move too much as we're looking to Q2 as it relates to transition.

Speaker Change: Okay. We did we did transition within the quarter faster than.

Speaker Change: Than we had anticipated and so what that means is you've got nearly a full a full clean quarter for Q1. So we don't expect that catheter number to really move too much as we're as we're looking to Q2 as it relates to transition.

Jason A. Clemens: And then in terms of the capitated payments across Humana and your other existing accounts, is there any kind of an outlook you could give us for, and maybe you didn't, I missed it, but is there a revenue target for 2Q or the year? Is there seasonality in these payments?

Speaker Change: And then in terms of the capital payments across Humana and your other existing accounts is there any kind of an outlook you could give us for and maybe you did and I missed it but is there a revenue target for <unk>. The year is there seasonality in these payments.

Jason A. Clemens: I'm just, it's a new line we're trying to figure out how to mark.

Speaker Change: Two new line, we're trying to figure out how to model.

Jason A. Clemens: Yeah, good question, Eric. I mean, I think the right way to think about it is generally flat revenue. The reason for that is that the PMPM is set at the beginning of the calendar year, and membership is generally set at the beginning of the calendar year. And so utilization will shift. So utilization, we expect, would pick up seasonally, just like the rest of our business. So that could be a bottom line impact, but top line, that's how we'd expect to think about it.

Speaker Change: Yes, good question Eric.

Speaker Change: I mean, I think the right way to think about it is generally flat.

Speaker Change: Revenue the reason for that.

Speaker Change: Is that the <unk> is set at the beginning of the calendar year and the membership is.

Speaker Change: Generally set at the beginning of the calendar year, and so utilization will shift so utilization, we expect would pick up seasonally just like the rest of our business. So.

Speaker Change: So that could be a bottom line impact but topline.

Rich: That's how we would expect to think about it now rich.

Jason A. Clemens: Now, Richard mentioned an expectation for more growth in capitated wins. We have not accounted for any of that in guidance. We don't expect at any time to include any potential wins in the guidance, but we are deploying resources against pursuing those arrangements.

Speaker Change: Richard mentioned, an expectation for more growth in capital wins, we have not accounted for any of that in guidance. We don't expect at any time to include.

Speaker Change: Any potential wins in the guidance, but we are deploying resources against pursuing those arrangements.

Jason A. Clemens: Okay, and then on the revenue outlook, so obviously Q1 was very strong, better than expected, and 2Q margin looks good, overall commentary for the year sounds good, 2Q doesn't sound so good, what's going on this quarter?

Speaker Change: Okay, and then on the revenue outlook for <unk>. So obviously Q1 was very strong better than expected and.

Speaker Change: <unk> margin looks good overall commentary for the year sounds good <unk> doesn't sound. So good what's what's going on this quarter.

Jason A. Clemens: Yeah, it's really, you know, comparably, I mean, that's really what's driving Q2. You know, so on the revenue side, I mean, look, the comps are just significantly tougher in Q2 versus Q1. Specifically, around the diabetes step up, as well as sleep.

Speaker Change: Yes, it's really a.

Speaker Change: Comparatively I mean, that's really what's driving Q2.

Speaker Change: So comparatively on the revenue side I mean look the comps are just significantly tougher in Q2 versus Q1.

Speaker Change: Specifically around the diabetes step up.

Jason A. Clemens: I mean, if you look at the prior year, that sleep rental number was up, you know, $7 million against the first quarter of 23. I mean, we expect sequentially from Q1 to be generally flat. I mean, we would be pleased with flat performance in Q2 out of sleep rental. It would mean that we're starting more patients than we are trading from the 13-month rental cycle from a year ago, where we had record setups.

Speaker Change: As well as sleep I mean, if you look prior year that sleep rental number was up $7 million against the first quarter of 'twenty. Three I mean, we expect sequentially from Q1 to be generally flat I mean, we would be pleased with flat performance in Q2 at a sleep Brent.

Speaker Change: That would mean that we're starting.

Speaker Change: More patients than we are trading from the 13 month rental cycle from a year ago, where we had record set up so so that's that's one key callout on revenue.

Jason A. Clemens: So that's one key call out on revenue. You know, second, we are keeping an eye on some supply chain slowdowns in sleep resupply. I can't say anyone's getting too worked up about it impacting a full-year number, but within the quarter, more from a timing perspective, it's just something we're keeping an eye on, and we thought it made sense to account for it in the Q2 number. Finally, you know, as thrilled as we are with the performance of our revenue cycle team on this change healthcare matter, you know, it is very costly.

Speaker Change: Second we are keeping an eye on.

Speaker Change: Some supply chain slowdowns in sleep resupply.

Speaker Change: I can't see anyone getting too worked up about it impacting our full year number but within the quarter more from a timing perspective, it's just something we're keeping an eye on and we thought it made sense to to account for it in.

Speaker Change: The Q2 number finally.

Speaker Change: As thrilled as we are with the performance of our revenue cycle team on this change healthcare.

Speaker Change: <unk> it.

Speaker Change: It is very costly.

Jason A. Clemens: You know, on the back end, I mean, now that payments are, you know, inflows are normalizing, the challenge is now you have to apply that payment in your systems, right? You got an ERN, which is now manual as opposed to electronic. You got an EOB.

Speaker Change: On the backend.

Speaker Change: Now that payments or inflows are normalizing.

Speaker Change: The challenge is now you have to now you have to apply that payment and your systems you got you've got an ear and which is now manual as opposed to.

Jason A. Clemens: You have to produce patient accountability, right? I mean, you have to go through all those procedures, and in many cases, we've got, you know, labor approaching these one by one, like logging into portals, pulling things down manually. I mean, it's very costly and obviously wasn't planned, you know, as we started the year. That said, with an outperforming Q1 and our, you know, just firm views on the rest of the year, we think we'll overcome it for the rest of the year. So, you know, some of this is largely timing as opposed to something structural that's changing.

Speaker Change: Electronic <unk> and <unk>.

Speaker Change: You got to produce the patient accountability.

Speaker Change: You have to go through all those procedures and in many cases, we've got.

Speaker Change: Labor.

Speaker Change: Approaching these one by one like Walgreens into portals, pointing things down manually.

Speaker Change: It's very costly.

Speaker Change: And obviously it wasn't planned.

Speaker Change: As we started the year.

Speaker Change: That said with an outperforming Q1 and are just firm views on the rest of the year, we think longer comment for the rest of the year. So.

Speaker Change: Some of this is largely timing as opposed to something structural thats changing inside of the business.

Unknown Executive: All right, last one for me. I know it's a lot.

Speaker Change: Alright last one for me I know, it's a lot.

Speaker Change: Just again coming back to <unk>.

Unknown Executive: Just again, coming back to 2Q. I don't want to put words in your mouth, but it doesn't sound like you have, or at least you're not calling out, a change in market demand or customer losses. Salesforce issues. I'm just wanting to hear you say that or say no, in fact, you know, there's some other stuff on the 1% revenue growth outlook. I mean, I think we can all look at the year-over-year comps and understand that, but I, very understandable, but I just want to make sure there's nothing structural, secular, you know, more fundamental here that you would call out as something worrisome.

Speaker Change: I don't want to put words in your mouth, but it doesn't sound like you have or at least you're not calling out.

Speaker Change: Change in market demand.

Speaker Change: Customer losses Salesforce issues.

Speaker Change: Just wanting to hear you say that or say no. In fact, there is some other stuff on the the 1% revenue growth outlook I mean, I think we can all look at the year over year comps and understand that but I.

Speaker Change: Very understandable, but I just want to make sure theres nothing structural secular more fundamental here that you would call out as something worrisome.

Unknown Executive: There's nothing structural or fundamental that we would call out. These are just a couple of short-term issues that we're going to overcome in the second quarter.

Speaker Change: There's nothing structural or fundamental that we would call out. These are just a couple of short term issues that we're going to overcome in the second quarter and I think were being appropriately conservative about how we are looking at it.

Unknown Executive: I think we're being appropriately conservative about how we're looking at it, and I just want to be clear that there's no change in customer demand. So, for example, any potential slowdown in sleep resupply has nothing to do with demand; it has to do with supply. So we're just being mindful of things that are possible and trying to be, I hate to use the word conservative, but smart about how we think about it. Very good

Speaker Change: And I just wanted to be clear that there is no change in customer demand. So for an example, any potential slowdown in sleep resupply has nothing to do with demand that has to do with supply. So we're we're we're just being mindful of.

Speaker Change: Things that are possible and trying to and trying to be.

Speaker Change: I hate to use the word conservative but.

Speaker Change: But smart about how we think about the second quarter.

Unknown Executive: Very good. Thank you very much.

Speaker Change: Very good thank you very much.

Unknown Executive: Richard Close, with Canaccord Genuity, your line is open for our next question.

Speaker Change: Richard close with Canaccord Genuity. Your line is open for our next question.

Unknown Executive: Yes, congratulations on the quarter. Just maybe on the sleep resupply, you know, supply chain issues, or, you know, what you're seeing there, can you go into any more details, specifically on what's occurring and the confidence that, you know, maybe it's short term in nature versus longer term?

Richard Barasch: Yes, congratulations on the quarter, just maybe on the sleep resupply.

Richard Barasch:

Richard Barasch: No supply chain issues are.

Richard Barasch: What youre seeing there can you go into any more details specifically on what's occurring and the confidence that maybe it's short term in nature versus longer term.

Jason A. Clemens: Sure, Richard. This is Jason.

Richard Barasch: Sure sure Richard This is Jason so.

Jason A. Clemens: Without getting into specific commercial arrangements or naming.

Richard Barasch: Names.

Richard Barasch: This is firstly not related to raw materials.

Jason A. Clemens: So, you know, without getting into specific commercial arrangements or naming names, this is firstly not related to raw materials supply. It's not related to the manufacturing capacity of the suppliers that we purchase products from. This is related to a slowdown in distribution. You know, some of these suppliers have called out publicly, particularly Red Sea Impact, for just dragging out some distribution. Now, there are things we can do with those suppliers to get around some of that by air freighting and the such, which obviously increases cost.

Richard Barasch: Supply, it's not related to our manufacturing capacity of the suppliers that we purchase product from.

Richard Barasch: This is related to a slowdown in distribution.

Richard Barasch: Some of the suppliers have called out publicly.

Richard Barasch: Particularly like Red C impact and just dragging out some distribution now theres things we can do.

Richard Barasch: With our suppliers to <unk>.

Richard Barasch: Around some of that by air Freighting, and such which obviously increases cost.

Jason A. Clemens: You know, so it's a kind of supply versus cost question, but at the end of the day, we're doing everything we can to get the product that our patients are asking for and to get that out to patients.

Richard Barasch: So it's a kind of a supply versus cost question, but by the end of day, we're doing everything we can to get the product that our patients.

Richard Barasch: Are asking for and to get that out on patients.

Jason A. Clemens: Okay, that's helpful. And then, with respect to diabetes, maybe just an update there. You talked a little bit about the pumps, maybe you could refresh our memory on exactly how you're thinking about the impact in terms of revenues and pumps as you progress through the year, and then commentary on doubling the sales force in diabetes. Just the, you know, I mean, a current update in terms of where that stands and productivity expectations.

Speaker Change: Okay. That's helpful and then with respect to diabetes, maybe just an update there.

Speaker Change: You talked a little bit about the palms, maybe if you refresh our memory on exactly how youre thinking about the impact in terms of revenues pumps as you progress through the year and then commentary on doubling the sales force in diabetes.

Speaker Change: Just the.

Speaker Change: Current update in terms of where that stands and productivity expectations.

Jason A. Clemens: Sure, Richard, I'll speak a little bit on the pump dynamic and then pass it to Richard for some comments on CGM and Salesforce. You know, pump and pump supplies. I mean, we had expected that to be down $15 to $20 million for the full year as part of our guidance at the beginning of the year. You know, we also messaged an expectation for that to ramp sequentially down from Q1 until the end of the year as we're working to set up and start more tubeless pumps versus tube-based pumps.

Speaker Change: Sure Richard I'll speak a little bit on the pump dynamic in the past.

Speaker Change: Richard for some comments on CGM and Salesforce.

Speaker Change: Pumping pump supplies, we had expected that to be down 15% to $20 million for the full year as part of our guide.

Speaker Change: At the beginning of the year.

Speaker Change: We also message an expectation for that to ramp sequentially down.

Speaker Change: Down from Q1 until the end of the year as we're working to.

Speaker Change: Set up and start more to bliss pumps versus tube based pumps.

Jason A. Clemens: We did a little better than we thought for Q1 than we would do. So, look, it's just one quarter. We're not getting too excited about it, but we do intend to continue that trend. So, this is the second quarter in a row that we put out more tubeless pumps and earned more revenue from tubeless pumps than we did from tube-based pumps. So, it'll take time for that to continue to cycle through the overall patient portfolio, but we're very focused on it. Richard? Yeah, we had just a comment on the increase in our distribution.

Speaker Change: We did a little better than we thought.

Speaker Change: Q1, then we would do so look it's one quarter, we're not getting too.

Speaker Change: Excited about it but we do intend to continue that trend. So it's the second quarter in a row that we put out more.

Speaker Change: To bless pumps enter and more revenue from to bless pumps than we did from too faced pumps. So it will take time for that to continue to cycle through the overall patient portfolio, but we're very focused on it.

Richard Barasch: Yeah, we had just a comment on the increase in our distribution. We've done two things. We've added 40-ish new reps. They've all been trained. They're out in the field, and we're actually seeing results that we're quite, quite pleased with from the majority of the new hires. They're not going to get 100%, and we're doing very well. They're being very well trained. But, very importantly, we're also deploying them in places that are target rich.

Speaker Change: Yes, we had just to comment on the increase in our distribution we've done two things we've added.

Speaker Change: 40 ish, new reps, they've all been trained around in the field and we're actually seeing results that we are quite quite pleased with from the majority of the new hires can you get a 100% and we're doing very well they are being very well trained but very importantly, we're also deploying them in places that are target rich for example.

Richard Barasch: For example, we deployed new sales reps in New York City, where there's a huge prevalence of diabetes compared to some other large cities. So, it's not just the increase in the sales force. It's also the targeting of markets that we think are going to be particularly fruitful.

Speaker Change: We deployed new sales reps in New York City, where theres, a huge prevalence of diabetes and some other large cities. So.

Speaker Change: Not just the increase in the in the sales group. It's also the targeting of markets that we think are going to be particularly fruitful.

Speaker Change: Alright, thank you.

Unknown Executive: Kevin Caliendo, over at UBS, please go ahead; your line is open.

Speaker Change: Kevin Caliendo ever at UBS. Please go ahead your line is open.

Unknown Executive: Hey, guys, thanks for taking my question. I find it interesting that one of your public peers is investing in their sleep sales force; you guys have as well. I'm just wondering, given sort of the comments today, is there any underlying business that's intensifying? Or are you seeing an opportunity in the marketplace for growth that's new, that's out there, that you're trying to capitalize upon? Or are you just trying to get out ahead of them?

Kevin Caliendo: Hey, guys. Thanks for taking my question.

Kevin Caliendo: I find it interesting that one of your public peers is investing in their sleep sales force you guys have as well.

Kevin Caliendo: I was just wondering given sort of what the comments today.

Speaker Change: Are there any underlying business, that's intensifying or are you seeing an opportunity in the marketplace for growth. That's new that's out there that you are trying to capitalize upon or are you just trying to get out ahead of.

Unknown Executive: of the sleep data and the GLP-1s, just trying to, it just seemed interesting to me, especially given the sort of comments around SQ and everything. You could talk, maybe, about the competitive dynamics and the strategy in sleep.

Speaker Change: Of this debt.

Speaker Change: The sleep data on the <unk> just trying to it just seems interesting to me, especially given the sort of comments around Q and everything.

Speaker Change: So you could talk maybe about the competitive dynamics in the strategy and sleep.

Richard Barasch: Oh, look, we're in a competitive business. Let's start with that.

Speaker Change: Yes.

Speaker Change: In a competitive business that start with that but we're the number one and sweep by good margin.

Speaker Change: Our market share is increasing each year each quarter. So we're starting from very very good place.

Richard Barasch: But we're number one in sweep, by a good margin, and our market share is increasing each year, each quarter. So, you know, we're starting from a very, very good place. We're adding sleep reps, again, in target-rich places where we think we have an opportunity to grow. So we believe that we can continue to grow very, very nicely. No one disputes the fact that there are a huge number of undiagnosed OSA folks out there. As I said, when Lillian made their announcement a couple weeks ago, they talked about a number that was even startling to us in its size of the number of potential OSA patients. So we think that there are still nice tailwinds for the sleep business. And given our market leadership and our strength in the market, we're going to make the best use we can of it.

Speaker Change: We are adding sleep reps again target Rich places, where we think we have an opportunity to grow. So we're we believe that we can grow continue to grow very very nicely.

Speaker Change: No one disputes the fact that there's that there.

Speaker Change: There is.

Speaker Change: A huge number of men diagnosed OSA folks out there.

Speaker Change: As I said.

Speaker Change: When we made the announcement a couple of weeks ago. They talked about a number that is even startling to us and its size of the number of potential OSA.

Speaker Change: Patient so we think that there is.

Speaker Change: It's a very very there is still a nice tailwind to the sleep business and given our given our market leadership and our strength in the market.

Speaker Change: We're going to we're going to make the best use we can.

Unknown Executive: That's helpful. I appreciate that.

Speaker Change: That's helpful. That's helpful. I appreciate that and just the.

Speaker Change: One quick question on diabetes.

Speaker Change: Discuss the pharmacy channel shift in that marketplace. So was there any contribution there at all like how should we think about that.

Speaker Change: Did contribute in the quarter in any way shape or form.

Unknown Executive: And just one quick question on diabetes. You discussed the pharmacy channel shift in that marketplace. Was there any contribution there at all? Like, how should we think about that? Did it contribute in the quarter in any way, shape, or form?

Speaker Change: It did not.

Speaker Change: Incrementally contribute in Q1, Kevin we do expect a very modest contribution in Q2 as we have opened up for key markets.

Jason A. Clemens: It did not incrementally contribute in Q1, Kevin. We do expect a very modest contribution in Q2 as we have opened up four key markets on pharmacy that we, you know, that team we're very proud of, and they delivered on that near the end of Q1. So, look, it won't be material, but the team's focused on it. We intend to open up more markets as we go throughout the year.

Speaker Change: On pharmacy that we.

Speaker Change: That team, we're very proud of and they delivered on that near the end of Q1, so look it won't be material, but the team is focused on it we intend to open up more markets.

Speaker Change: As we go throughout the year.

Unknown Executive: Thanks. Listen, I appreciate all the color this morning.

Speaker Change: Thanks listen I appreciate all the color this morning.

Unknown Executive: And our next question will come from, I do apologize if I mispronounce your name, it's from Joanna Gajuk at Bank of America.

Speaker Change: And our next question will come from I do apologize if I mispronounced. Your name it's from John a good joke at Bank of America.

Unknown Executive: Hi, thank you. That was pretty good. Joanna Gajuk, but thanks.

John: Alright, Thank you that was pretty good Joanna thanks.

John: So yes, thanks for taking the question here a couple of follow ups.

John: The impact in Q2, so just wanted to clarify so you said, it's pretty much just the cost and I understand that just processing, thanks, Mani only versus Adam.

John: Automated systems that you normally use that cocky, but I just wanted to clarify make sure.

John: Are there any impact to admission process in terms of just having more patients then I guess.

Unknown Executive: So yes, thanks for taking the question here. A couple of follow-ups on change and the impact in Q2. I just want to clarify. You said it was pretty much just the cost, and I understand that just processing things manually versus, you know, automated systems that you normally use that cost you. But I just want to clarify and make sure, you know, are there any impact on the admission process in terms of just having, you know, more patients and, I guess, process the existing patients on resupply because of, you know, a change outage?

John: Processing the existing patients on the rest of the supply because of.

Speaker Change: Got it.

Jason A. Clemens: No, we and our third-party suppliers do not rely on change for either of those areas of patient accounting.

Speaker Change: No we.

Speaker Change: Or and our third party suppliers do.

Speaker Change: Do not rely on change for either of those areas of patient accounting.

Unknown Executive: Okay, good. When it comes to diabetes, you just mentioned the pharmacy rollout, and also in the last quarter, you talked about looking for a partner to ramp up your participation in this channel. It sounds like things are happening there. So any update there in terms of finding a partner, or are you doing it yourself?

Speaker Change: Okay.

Speaker Change: And.

Speaker Change: When it comes to diabetes.

Speaker Change: You just mentioned the pharmacy rollout and also on the last quarter you talk about that.

Speaker Change: Looking for a partner to ramp up that youll participation in this channel it sounds like things that are happening there. So any update there in terms of finding a partner or are you doing it yourself.

Jason A. Clemens: Well, we're continuing to do it ourselves. We are exploring partnership as an outsourcing opportunity to compress costs on the back end. So we haven't yet made a determination on that, but we are still evaluating. But the four markets I mentioned that have been opened up, that's entirely organic and done with our own internal capability.

Speaker Change: Well, we are continuing to do it ourselves we are exploring partnership.

Speaker Change: As an outsourcing opportunity to compress costs on the back end.

Speaker Change: So we haven't yet made a determination on that but we are still evaluating but the four markets. I mentioned that have been opened up that's entirely organic and done with our own internal capabilities.

Unknown Executive: Okay, great. And as for the Life Through Diabetes and Deformity Channel...

Speaker Change: Okay, Great and then as it relates to that he said the pharmacy channel.

Speaker Change:

Jason A. Clemens: So let me maybe give you an update on any additional payers. You know, is there still anybody left that could still shift? You know, I'm talking about managed Medicaid or Medicare Advantage that maybe are, you know, using the medical benefit. I could shift to the pharmacy benefit if they're still out there. Are you pretty much done with us?

Speaker Change: So let me maybe.

Speaker Change: A bit on any additional payers.

Speaker Change: Is there still anybody left that could still shift I'm talking about managed Medicaid or Medicare advantage it may be using.

Speaker Change: Using the medical benefit at the shift of pharmacy benefit if they are still out there or are you pretty much done with us.

Jason A. Clemens: Sure. I mean, it is still potential.

Speaker Change: Sure.

Speaker Change: Is still potential.

Speaker Change: I would say that our percent of government business is up to 81% within diabetes for the quarter and so we continue to.

Jason A. Clemens: You know, I would say that our percent of government business is up to 81% within diabetes for the quarter, and so we continue to drive more and more new start activity towards that channel, if you will, which we believe is better insulated from pharmacy shift risk. We'd say during the quarter, we detected three payer changes moving from commercial and more medical benefits to a pharmacy benefit. One of them was an upper Midwest regional mid-share company.

Speaker Change: Drive more and more new start activity towards that that channel if you will.

Speaker Change: Which we believe is better insulated from pharmacy shift risk.

Speaker Change: Say within the quarter.

Speaker Change: We detected three payer changes moving from commercial.

Speaker Change: More medical benefit to a.

Speaker Change: Pharmacy benefit one of them was in upper Midwest regional.

Speaker Change: Mature company. The other two were state Medicaid offices, the four markets I mentioned, where we've opened pharmacy operations is in one of those state Medicaid.

Jason A. Clemens: The other two were state Medicaid offices. The four markets I mentioned where we've opened pharmacy operations are in one of those state Medicaid offices. So we're working to continue to get after that business. So we didn't see a material impact of a pharmacy shift on our business in the first quarter of 24.

Speaker Change:

Speaker Change: Offices, so we're working to.

Speaker Change: Continue to get after that business so.

Speaker Change: We didn't see a material impact of pharmacy shift to our business in the first quarter of 'twenty four.

Unknown Executive: So, would you say you are, you know, in the aggregate, I guess, in your business when it comes to pharmacy versus DME benefit?

Speaker Change: So what would you say you are.

Speaker Change: In the aggregate I guess in your business when it comes to pharmacy versus the <unk> <unk> benefit.

Speaker Change: Yeah.

Jason A. Clemens: You're asking what percent of our business is pharmacy versus medical benefit. It's very small. It's still in the 5% or so range for pharmacy and then the vast majority is medical benefit distribution.

Speaker Change: You are asking with what percent of our business this pharmacy versus benefit.

Unknown Executive: Okay. And if I may, just two more.

Speaker Change: It's very small it's still in the 5% or so range for pharmacy, and then the vast majority in a medical benefit distributions.

Unknown Executive: So, a lot on COPEX. So, you read from your earthquake outflow guidance, understandably, some impact from change. But COPEX, right, so it's 11% of revenue down from a year ago, but I guess above the four-year guidance of more like 10%, right? So, is it just timing, and COPEX is sort of still expected to be in the same range as you discussed previously? Yes, you've got it. Okay, and last one.

Speaker Change: Okay.

Speaker Change: If I may just.

Speaker Change: Two more.

Speaker Change: So that on the Capex so.

Speaker Change: <unk>.

Speaker Change: Lee from your free cash flow guidance.

Speaker Change: Understand at least some impact from Tianjin <unk>.

Speaker Change: Opex right.

Speaker Change: Revenue down from year ago, but but I guess about the full year guidance of more like a 10% rate. So is it just timing and capex.

Speaker Change: I expect it to be in the same my chest.

Speaker Change: You discussed previously.

Speaker Change: Yes, you got it.

Jason A. Clemens: So you keep paying down debt. So that's great and reducing your interest expense. So that's great. That helps the cash flow. And I guess you have any targeting to, you know, even reduce it further. And I guess that terminal matures on January 26. So any initial indication of how you plan to go about it? It sounds like you would have to address it later this year.

Speaker Change: Okay and last one.

Speaker Change: So you keep paying down debt, so that's great and reducing our interest expense so thats great.

Speaker Change: Our free cash flow and I guess you have.

Speaker Change: And you're targeting to even further.

Jason A. Clemens: Yeah, good questions. You know, so for Q1, we exited at 3.12 times levered. We've said that we expect to be below three times, which is our stated leverage target before the end of 2024. And we do think we'll deliver on that sooner versus later. You're correct. The TLA is, it'll come current on Jan of 25. It comes due on Jan of 26.

Speaker Change: Yes, good questions.

Speaker Change: So for Q1.

Speaker Change: We exited at 312 times.

Speaker Change: Levered.

Speaker Change: We've said that we expect to be.

Speaker Change: Hello, three times, which is our stated leverage target before the end of 2024, and we do think we will deliver on that sooner versus later.

Jason A. Clemens: As you'd expect, our bank group has been activated, and we're working closely to start considering options. So we'll do something this year. But, you know, we're continuing to pay it down in the meantime. And as we message for Q2, we're going to continue to do that.

Speaker Change: Youre correct the TLA.

Speaker Change: Is it.

Speaker Change: It'll come current in June of 'twenty five that comes due June of 2006 as you would expect our bank group has been activated we're working closely to start considering options. So we'll we'll do something this year, but we're.

Speaker Change: We're continuing to pay it down in the meantime, and as we message for Q2, we're going to we're going to continue to do that.

Unknown Executive: Great, it makes sense. Thank you so much for taking the questions.

Speaker Change: Okay that makes sense. Thank you so much for taking the questions.

Unknown Executive: And at this time, we have no further questions from our audience. I'll turn it back to our management team for any additional or closing remarks.

Speaker Change: And at this time, we have no further questions from our audience I will turn it back to our management team for any additional or closing remarks.

Richard Barasch: Thank you everyone for joining our first quarter conference call. Jason and the team will be available, as will myself, to answer any questions. Thank you.

Speaker Change: Thanks, everyone for joining.

Speaker Change: Our first quarter conference call, Jason and the team will be available as my son myself as well to answer any questions that you have got thank you.

Unknown Executive: This does conclude today's teleconference, and we thank you all for your participation. You may now disconnect your lines.

Unknown Executive: [inaudible]

Speaker Change: This does conclude today's teleconference, and we do thank you all for your participation you may now disconnect your lines.

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Hello.

Speaker Change: Oh.

Speaker Change: [music].

Speaker Change: Yeah.