AdaptHealth Corp. (NASDAQ:AHCO) showcased a steady performance in the second quarter of 2024, with a focus on growth and strategic divestitures. CEO Suzanne Foster and CFO Jason Clemens led the earnings call, highlighting key financial figures and strategic initiatives aimed at bolstering the company's position in the healthcare market.
Foster's vision for the company includes investments in talent and technology, particularly automation and AI, to drive long-term sustainable growth. Clemens reported a 1.6% increase in net revenue year-over-year and detailed the company's financial health, including the sale of certain custom rehab technology assets to National Seating and Mobility.
Key Takeaways
- AdaptHealth reported a 1.6% increase in net revenue year-over-year for Q2 2024.
- Adjusted EBITDA for the quarter stood at $165.3 million, with margins slightly improved from Q1.
- The company signed an agreement to sell custom rehab technology assets to NSM, which represented about 1% of enterprise revenue.
- Full-year guidance was updated, with net revenue projected to be between $3.255 and $3.315 billion, and adjusted EBITDA between $660 and $700 million.
- Supply constraints in the sleep business have been resolved, and significant growth was noted in July.
- The Humana (NYSE:HUM) contract is a primary source of capitated revenue, covering over 1 million patients across 33 states.
Company Outlook
- AdaptHealth is focusing on organic growth in the sleep, respiratory, and diabetes markets.
- The company is simplifying its business structure and strengthening its balance sheet.
- Investments in technology, particularly automation and AI, are expected to improve operations.
Bearish Highlights
- The company experienced a delay in sales of the Omnipod 5 due to integration with CGM.
Bullish Highlights
- The company saw a resolution to supply constraints and significant growth in the sleep business.
- Growth in the respiratory business was driven by market share gains and the Humana contract.
- AdaptHealth is pursuing additional capitated contracts to grow their share of capitated revenue.
Misses
- Despite the overall positive outlook, the sale of the custom rehab technology assets indicates a strategic shift away from certain product lines.
Q&A Highlights
- AdaptHealth is actively selling and distributing through the pharmacy channel.
- The company has infrastructure in place, including brick and mortar pharmacies, to support Medicaid and other customers.
- Sales staff are focused on capitated deals, with a pipeline of incremental cap deals in progress.
In summary, AdaptHealth is making strategic moves to enhance its market position and financial stability. With a clear focus on growth areas and the optimization of its business operations through technology, the company is poised to capitalize on opportunities in the healthcare sector. The leadership team's commitment to long-term strategy and sustainable growth, coupled with a solid financial footing, positions AdaptHealth for continued success in the coming quarters.
InvestingPro Insights
AdaptHealth Corp. (AHCO) has been navigating the competitive healthcare landscape with strategic precision, as evidenced by the company's recent performance. In the second quarter of 2024, the company reported a modest increase in net revenue and updated its full-year guidance, reflecting a confident outlook for the year ahead.
InvestingPro Data provides a deeper look at the company's financial health and market position. As of Q1 2024, AdaptHealth boasts a market capitalization of $1.12 billion, showcasing its substantial size in the healthcare equipment and services industry. Its revenue growth over the last twelve months has been positive, at 7.94%, suggesting an upward trajectory in its operations. Moreover, the company's gross profit margin stands at 18.14%, indicating a solid ability to convert sales into profit.
An InvestingPro Tip highlights that management has been aggressively buying back shares, a sign of confidence in the company's value and future prospects. Additionally, analysts anticipate AdaptHealth will turn profitable this year, a significant milestone that investors are keenly watching.
For those seeking more comprehensive analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/AHCO, which delve into the nuances of AdaptHealth's financials and market expectations. These tips include insights into earnings revisions by analysts and the company's performance over various time frames, such as the strong return over the last month and the large price uptick over the last six months.
Investors looking to understand the potential of AdaptHealth Corp. can find a wealth of knowledge through these insights, equipping them with the information needed to make informed decisions.
Full transcript - Adapthealth Corp (AHCO) Q2 2024:
Operator: Good day everyone, and welcome to today's AdaptHealth Second Quarter of 2024 Earnings Release. At this time all participants are in a listen-only mode. Later you have an opportunity to ask questions, during question-and-answer session. [Operator Instructions] 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 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. 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 have 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 and free cash flow, which are non-GAAP financial measures. 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.
Suzanne Foster: Thank you and good morning for joining our second quarter earnings call. I'm pleased to report another consistent quarter with second quarter results in line with expectations for revenue, adjusted EBITDA and free cash flow. With this being my first quarter, I'd like to start by briefly sharing why I'm excited to be at AdaptHealth? I joined the team because I believe in our purpose and the vital role we play in improving healthcare. For too long, I have witnessed the increasing desire to extend high quality and prospective care to the comfort of one's home, and I want to be part of solving this problem and accelerating this movement. I'm grateful for the learnings that have come from a 30 year career in healthcare that began on the front lines as a clinical social worker in a hospital setting. The learnings from obtaining a degree in public health policy focused on ways to bend the healthcare cost curve, followed by experiences and leading companies, focused on medical devices, life sciences and distribution of healthcare supplies. Most recently, I led a business within a large corporation known for operational excellence in high performance through emphasizing standard work, standard metrics and a mind-set of continuous improvement. I'm bringing these learnings and skill sets to the team at AdaptHealth, which I'm confident will result in improved performance and growth across our business. Over the last two months, I've spent most of my time traveling to meet our employees and see our operations. Here are a few of my journey impressions. Overall, the business is performing well. Our patients adherence programs are best-in-class, digital orders are increasing, thereby reducing the number of faxes, resupply demand is strong and our technology infrastructure projects are underway. I am especially impressed with the depth of commitment and knowledge of this team. The team at AdaptHealth formed through many acquisitions, brought together strong and entrepreneurial leaders in the industry with decades of experience. Our team knows the business and in many cases have grown up in the business. There are, however, some key areas where I see I can -- where we can improve to realize our full potential and growth. We're making several investments now in the areas of talent, strengthening our processes focused on organic growth, simplifying the business, developing a long-term strategy for sustainable growth and technology adoption. Let me take these five areas of focus one at a time. First, we are investing in clinical, commercial and operational talent to a few key areas of the organization and we are working to better align our teams, provide role clarity and remove duplication. We are investing in training that is focused on process improvement for critical workflows. We are having our first Kaizen event this month with several more schedules this year. We have implemented standard work and metrics across the leadership team and are working to drive this through the rest of the organization. The alignment of roles and responsibilities and the standardization of how we do the work has become an important initiative for us and one we are excited about. In some, we are coming together as one Adapt. The team is eager to create and adopt standard work and understand that this work is -- work we must do ourselves. We have the knowledge and desire to do so. This work will help us drive leverage and position us for growth in the large end markets we serve. Our goal is to continuously improve on how we deliver cost effective, accurate and timely care to the home. Second, we are working to strengthen the business to deliver organic growth in the three markets we serve, sleep, respiratory and diabetes. We are working to align our sales forces. We are expanding our national accounts and payer relations teams. On the operations side, we are taking steps to improve our throughput and conversion rates so that our sales teams have the confidence to deliver on the promise of reliable and accurate service. Third, we are simplifying our processes and our org structure, while continuing to strengthen our balance sheet. We are evaluating non-core assets, rationalizing our footprint, and we are paying down debt. All these efforts are focused on increasing our free cash flow yield. Fourth, we are building a strategy for long-term sustainable growth, one that positions ourselves for increased clinical and payer relevance. To that end, we created a new leadership role and welcomed Dr. Philip Parks as our Executive Vice President of Strategy and Healthcare Innovation. As an experienced military and civilian physician, strategist and leader, he is intimately familiar with the clinical, technological and logistical challenges of decentralized care on the battlefield and in the home. We are embracing our role as we are uniquely positioned to enable decentralized healthcare more broadly, reliably and with higher levels of clinical quality and improved patient experiences. Dr. Parks understands the important roles we play as a provider and facilitator of care and supports the people living with acute and chronic diseases. I believe the unique lens, his background and experiences afford him will be invaluable as we shape our strategy in future of what this company can become. Finally, I have familiarized myself with our IT systems and infrastructure, and I'm happy to report that the team made solid progress in this area over those past couple of years. I do, however, see significant potential for automation, AI and other advanced technologies to improve our operations, increase our capabilities and drive efficiencies. We are currently conducting a few low cost experiments with AI that are progressing well around customer and clinical documentation. The technology is producing highly accurate structured data with predictable results. It is early days, but this is encouraging because we know that our critical functions can run more efficiently and effectively if we remove the work that otherwise slows us down. What is more compelling is that accurately and reliably transforming facts and digitally transmitted documents into structured data at scale can unlock potential to improve patient experiences, and allow us to personalize our patient and provider interactions. We are just at the beginning of this journey, but we are confident that we will soon uncover more areas for operational improvement in efficiencies using AI, which will create a better experience for our employees, patients and providers that we support. We have already invested in key hires, initiated projects focused on increasing organic growth and are simplifying the business. We believe these short-term investments will lead to longer term, improved profitability and performance, ultimately fulfilling our mission to shift more care to the home and reduce overall healthcare costs. I would like to take this opportunity to express my sincere appreciation to the team at AdaptHealth. Our partners and shareholders who have helped educate me on the state of the business and the markets we serve. I am optimistic about the road ahead and look forward to working as one Adapt, a unified team to simplify and standardize our operations, deliver growth, realize clinical and payer value and most importantly support our patients in their homes. With that, I will turn it over to Jason.
Jason Clemens: Thanks Suzanne and thanks to all for joining our call today. For the second quarter of 2024, we delivered against our expectations for revenue, adjusted EBITDA and free cash flow. Incremental expense associated with recovering from the changed health care situation came in line with what we projected and shipping lead times for sleep resupply products improved in June over what we experienced in April and May. Net revenue of $806 million increased 1.6% compared to the second quarter of 2023. Sleep revenue of $322.4 million, increased 6.5% over the prior year. New starts were strong, up over 5% sequentially from Q1. Notably, our sleep resupply census reached a new milestone in the quarter and now stands in over 1.6 million patients. Over 30% of new patients responded to our GLP one survey in the quarter, which showed that approximately 12% of those patients were prescribed GLP-1 therapy, up a touch from the first quarter. While we continue to closely monitor adherence and resupply ordering patterns in our GLP-1 patient cohort versus patients not currently utilizing GLP-1 therapy, we have not detected any notable difference to date. Diabetes revenue of $151.2 million was down $17.7 million over the prior year, but as previously discussed, we faced a tough prior year CGM comparable this quarter due to timing of system conversions in 2023, so we expected year-over-year compression. For the first half of 2024, diabetes revenue of $302 million was down $13.2 million over the first half of 2023. We expected pump and supplies revenue to decline by about $10 million for the first half, but results were slightly worse as some patients held off on new tubeless pumps, pending CGM compatibility that just recently launched, so we believe that starts should pick up in the second half. Also, we started supplying ANDA [Moby] during the second quarter and we expect that product to ramp up over the rest of the year. As expected, CGM revenue growth was flat for the first half, as our new sales reps made up for three payers that shifted to 100% pharmacy reimbursement earlier in the year. As of today, our pharmacy is now distributing products in each of those markets and we are working to grow. Since the end of the quarter, we have seen a modest shift in payer reimbursement channels but encouragingly we have seen shifts in both directions. We remain focused on building the capabilities to provide our diabetes products, regardless of reimbursement channel, and our sales force is focused on growing our share in a continuously increasing achievable market. Revenue from all other categories was $332.4 million, growing 3.3% over the prior year, led by respiratory, much of our respiratory growth was driven by the onboarding the rest of our Humana patients, and we were pleased with those results. Utilization is right in line with our expectations. For the HME and supplies to the home revenue categories, we continue to revaluate products that do not fit our strategic roadmap and do not drive ancillary volumes into our core areas of sleep, respiratory and diabetes. To that end, we recently signed a definitive agreement to sell certain custom rehab technology assets to national seating and mobility, a well-respected national mobility solutions provider with over 30 years of experience in the CRT category. For AdaptHealth, these products represented a small amount of revenue from individual acquisitions over the years but in aggregate represent about a point of enterprise revenue. Later we will discuss our adjustment to full year guidance and we are looking forward to working closely with NSM to ensure a smooth transition. Turning to profitability, second quarter adjusted EBITDA of $165.3 million, reflects an adjusted EBITDA margin of 20.5%, a slight improvement over the first quarter. Our sequential margin expansion was driven by cost of products and supplies, primarily driven by outsized growth in higher margin products and compression in diabetes products that are amongst the lowest product margins in our portfolio. Labor and other operating expenses performed as expected. Cash flow from operations was $198 million, driven by cash inflows that were delayed from Q1 due to the changed health care situation. Pay sales outstanding for Q2 was $48.9, but the month of June was $44.3 and we expect to be back to normal by the end of the third quarter. CapEx of $81.3 million, representing 10.1% of revenue was down against 10.4% of revenue to second quarter of 2023. Free cash flow of $116.7 million, outperformed our target of $94 million. We remain confident in delivering our full year guidance for cash flow. At the end of the second quarter, our TLA balance was $650 million, a result of paying off $45 million since the end of the quarter, including voluntary payments of $35 million. Our net leverage ratio is now just under 3x. Ahead of our goal to be under 3x before the end of 2024. We expect to further deliver over the remainder of the year. For the third quarter, we expect revenue to be flat sequentially from Q2 accounting for the disposition discussed earlier and in line with the seasonal effect we experienced last year. Adjusted EBITDA margin percent of 20.0% down slightly from Q2, as we recently made key investments in people and technology that Suzanne discussed earlier. Free cash flow of at least $30 million. For the full year, we are adjusting our revenue midpoint to account for the disposition discussed earlier. However, we are maintaining our midpoint for adjusted EBITDA, and we are increasing our midpoint for free cash flow. Our updated full year guidance is net revenue to be in the range of $3.255 billion to $3.315 billion, adjusted EBITDA to be in the range of $660 million to $700 million and free cash flow to be in the range of $160 million to $180 million. With that, we'll open the call up for questions. Operator?
Operator: [Operator Instructions] We will take our first question from Brian Tanquilut from Jefferies.
Jack Slevin: It's Jack Slevin on for Brian. Great work on the quarter to the team and welcome to Suzanne on the first earnings call here. I guess maybe starting with that. Suzanne the one comment I just wanted to make sure I got clarity on your point on taking a look at non-core assets. Could you just give a sense for kind of what you mean in terms of size and scope or boundaries that you might put around that? I just want to make sure I understood that correctly.
Suzanne Foster: I'm going to let Jason handle the size and scope, but let me clarify what I mean by non-core assets. So as I looked at our portfolio, one of the benefits, of course, is we have a really nice broad portfolio that helps us serve patients with sleep disorders, respiratory and diabetes? But then we have a bunch of other or a few other things that are around that came in through the acquisitions that really strategically don't support us moving towards focus on those three areas. So as I looked across the portfolio, we challenged ourselves to say which of these is in furtherance of supporting patients with those chronic and acute conditions, and if not and there is no other strategic imperative there, then should AdaptHealth.
Jason Clemens: Yes, and I’d round that out Jack by saying that as we qualify certain products. This is a very targeted analysis and study that we've been working on for some time. Products that are no growth to low growth with no margin to low margin, taking free cash out of the company. Certainly, we are looking very hard at those products. Additionally, if the product does not provide ancillary revenue, an example is some of our businesses that we support our hospital systems. Those are not good candidates for disposition because that individual product on its own may not have a high growth profile or high margin. However, it feeds respiratory, it feeds the HME categories that we're focused on. It feeds sleep and diabetes. And so that's a little bit of how we're approaching this program. In terms of size or scope or what else to come, I mean, we won't have much to say about that today. In the next quarter, I suspect that we will have something to discuss at that time, but at the end of the day, we're focused on simplifying this business and continuing to delever our balance sheet.
Jack Slevin: And then, Jason maybe just as a follow-up on some of the diabetes commentary. I just want to make sure I'm understanding sort of what the expectation is on the trajectory, both on the pump side of things and on the CGM side of things as we look into the second half. So it sort of got that things were ahead of expectation on pumps coming out of 1Q, now 2Q lagging a little behind what's faked in the guidance. I guess when we think about jumping to the second half there, what's the -- how do we get confident that's turning the corner or any color there would be helpful and then just how you're thinking about CGM with the salesforce and other moving pieces into the second half.
Jason Clemens: I think pump and supplies, I might remind you that at the beginning of the year, when we set full year guidance, we had expected somewhere between a $15 million and $20 million top line compression, much of that driven by the continued shift from tube based pumps to tube less pumps, which are primarily distributed through pharmacy operations. And we've been playing a little bit of cash up, which we've been making progress on as reported last quarter. For this quarter, look, pumps fell a little behind. We believe it's timing related to the CGM compatibility. Some of this was just launched in June for Dexcom (NASDAQ:DXCM) G7 as well as eBay (NASDAQ:EBAY) three. And so, we think we'll call some of that back in the third quarter. So that 15 to 20 still holds, if I had to say today, probably closer to 20, but we're still within range for that. For CGMs, as discussed, we came in line with our full year guidance expectation of flat as we knew we had to overcome some payer policy shift earlier in the year. Based on what we're seeing today, we're feeling pretty good with the back half on CGM. We have noted a small handful of shifts in the last month or two, but encouragingly as mentioned in our prepared remarks, some of this actually went the other way. There was a state Medicaid plan that had switched to a 100% pharmacy reimbursement a couple of years ago. And effective July 1st of this year, they've reopened the DME benefit. So it is essentially a dual channel reimbursement, which we believe is an indication of the value that DME drives versus the pharmacy. It's that constant touch. It's the adherence, it's the relationship with the patient, it's the access to the data that's getting generated from the CGMs. And where we have patient consent, we're monitoring. I mean, after all a measurement for A1C every six months by a blood test is a triple weighted stars measure. And look, these things matter to payers. And so, we're continuing to do work to help educate the market, advise on that dynamic and of course be agnostic in our diabetes products regarding how we get reimbursed. We want to take care of as many patients as possible because we think we do a great job of it.
Operator: Our next question will come from Richard Close with Canaccord Genuity.
Richard Close: Jason, maybe just diving deeper on the diabetes side, obviously Dexcom had some mixed results there. I guess, if you could put it in context, how you're thinking in terms of how the second quarter performed and the second half was there anything surprising in their commentary on the market versus what you have baked in to your assumption?
Jason Clemens: I wouldn't say that there's anything surprising to us from Dexcom's comments. I would say that if anything was surprising, it was a reference to relationships with DME operators. Like for us, I mean, we've maintained a longstanding and I think very solid open relationship with Dexcom. So, that to us just it doesn't apply. Regarding their down guide and revenue changes, I mean, again, for us, like operating within this DME reimbursement channel, having very deep visibility now in the pharmacy channel and shifts as they occur. Can't say we had that a year ago or about a year and a half ago but we did invest in a fair amount of detection, kind of forward-looking detection capabilities. And so, at this stage it's to us, it feels like a slow moving but dynamic channel environment. And so, based on the information we have today, we're feeling good with our full year guide.
Richard Close: And then maybe Suzanne, if you could talk a little bit about the sales teams, you made some comments there I think in your delivering better organic growth, can you just provide a little bit more details on any changes to the sales teams and adding to national accounts?
Suzanne Foster: Sales team is one of my favorite topics. So today, we have several different sales teams and we go to our customers in several different channels. And again, it's only been a little over 60 days. So I want to preface this with I haven't completely dug in, but I do have a hypothesis that if we further align our commercial organization so that we're looking at it more holistically, and what I mean by that is all of our referral sources, so all the different providers that refer to us, the big national accounts, and the payers, if we look at that in a holistic way around what are we trying to accomplish. And we align the teams under that strategy then maybe there's more to be had. So, for example, we know that a lot of patients have multiple comorbidities. And the hypothesis on the table is, do we look at a different way of going to market where we're capturing the referral both for a diabetic patient and who also may have a sleep disorder. And so that's work to be done in this next quarter. But the going in hypothesis is that we can do more with our current sales organization.
Operator: Our next question will come from Mathew Blackman with Stifel.
Unidentified Analyst: This is Colin on for Matt. We saw a couple dynamics play out this quarter from both the pump and CGM companies that have already reported. We're still trying to fully wrap our head around it, but it sounds like things are okay on the CGM side. I'm curious on the pump side, things are now tracking more in line with your original expectations. Last quarter, you saw the pharmacy mix for Omnipod 5 actually exceed your DME pump mix -- your durable pump mixed for the first time. Did that continue this quarter? And with the potential backup of patients looking to adopt the new integrations, do you expect that to continue in the second half?
Jason Clemens: We did not see the strength in OP 5 setups in the second quarter that we saw in first and fourth quarter of last year. We're very confident that that is related to just a delay, patient delaying, providers delaying on account of the CGM integrations. Our July numbers are up quite significantly for OP 5, and so hard to say if that'll be a trend or make a trend, but we are confident that it's a timing issue.
Unidentified Analyst: And then really quickly on the sleep business, you mentioned last quarter, the potential for some supply constraints. It really didn't seem to play out in this quarter's results, but just wanted to confirm that that's not a worry going forward for the rest of the year.
Jason Clemens: We're feeling good on supply across all products as we stand here today, through April and early May so we reported on about the second week in May, we were absolutely experiencing slowdown from some specific sleep resupply products. That did get better over the course of the quarter and we ended up coming in right in line with what we expected. That's not a spillover in any way for the rest of the year. And as we stand here today, we've got the products that we need to take care of our patient demand.
Operator: Our next question will come from Eric Coldwell with Baird.
Eric Coldwell: I have a few, hopefully not too long. On the fleet, Jason, that you just responded to. I think the options that were laid out, if those previous constraints continued were that you could just wait and then hopefully the manufacturer of the shipping would clear up. You could shift to alternative suppliers or you could perhaps shift your strategy on getting supply into the market. Maybe, I think at one point even mentioned, renting a plane and flying stuff over. So I'm just curious, what was the final tally? Was it just the manufacturer in question got the problem resolved or the shipping lanes cleared? What actually changed in the second half of the quarter?
Jason Clemens: We did not have to pull any levers operationally to deliver on the quarter as it related to that item, the manufacturer supply chain did come through for us.
Eric Coldwell: On sleep, I think you said patient sleep starts were up over 5%, and hopefully that's the right number that I got. If so, that's pretty good.
Jason Clemens: Eric, that's sequential versus prior year sequential.
Eric Coldwell: So Q-over-Q?
Jason Clemens: Yes.
Eric Coldwell: No change in your overall view on equipment rental, run rate this year given working through the prior period supply constraints and then the patient pack log that came back in a year plus ago, you have a tough comp on equipment rental that what you saw this quarter doesn't change your view on equipment rental for the full year then?
Jason Clemens: If anything changed, it's a modest improvement in outlook. Our census for rental bottomed in February, and of course as a reminder that was related to healthy starts in the first quarter. But record starts a year ago, and as those patients, as we stopped getting paid for that rental device 13 minutes later, right. It was really that phenomenon. But we bonded in February and we have continued to increase that sense of sense. We're feeling very solid on the rental line for sleep. If anything, we're feeling a little bit better than we did a quarter ago.
Eric Coldwell: One or two more quick ones, if you will. First off, you maintained EBITDA guidance at the midpoint but you also mentioned heightened investments. I was hoping you could walk through some of the mechanics there. Selling the business, some other obvious progression in some of your other lines. Now you have some heightened investments. You've called out. How does this all, what are the pluses and minuses in that analysis? And maybe just how much is the incremental investment that was highlighted?
Jason Clemens: I might start on the disposition. The guidance change implies $15 million of revenue for the rest of the year and zero dollar EBITDA impact for the rest of the year. For us, again, these were kind of collections of businesses acquired over years. We didn't maintain like a product leader and a distinct focus on growing it or driving efficiencies in that business. We think that National Seating & Mobility is going to be a terrific owner for that business. We think they're going to take very care of that patients. We think that they will find under their management and their focus improvement in growth, improvement in operating margin. I mean, that business will be in good hands, we believe. So that's the first piece. So on the even line, no impact for the full year. Now in terms of the third quarter and Suzanne's remarks, I mean, we have made several key investments some just a week or two after Suzanne arrived. And so I frame that as a couple million in people within the third quarter, a couple million in technology within the third quarter. In the fourth quarter, we have to counteract some of this and to make sure we deliver on our full year guide. We've got various cost-out streams that activated two weeks ago. And so, we'll get a little bit of that back in Q3. But the predominance we expect to get back in Q4. So think of the Q3 as well as Q4 as recurring expense. So it is left pocket, right pocket. I mean, we feel very good about delivering on the full year numbers.
Eric Coldwell: And if I could get one last one, how much diabetes revenue is going through pharmacy now?
Jason Clemens: We have maintained it at just a touch over 5%. It has grown very slightly against the first quarter. But of course, we are continuing to ramp new markets with new salespeople to sell and distribute in the pharmacy. And so we do expect that number grow up.
Eric Coldwell: Thanks for all the questions and congrats on a smooth, steady quarter here.
Operator: Our next question will come from Pito Chickering with Deutsche Bank (ETR:DBKGn).
Kieran Ryan: You've got Kieran Ryan on from Pito. We're thinking about 4Q revenue. Usually diabetes is strong due to deductibles being hit and pulled forward from the first quarter with diabetes, pretty much flat year to date. Do you still assume that seasonality in 4Q? And is there anything that you'd call out that might make that change?
Jason Clemens: We absolutely expect a big pop sequentially from Q3 to Q4 from a percentage basis, pretty similar to what we saw last year.
Kieran Ryan: And then just quick follow-up. I was just wondering how we should think on the seasonality of the capitated revenues. I was just a little curious why 2Q is down, just a touch first 1Q.
Jason Clemens: We're going to see cap revenue right in that kind of $30 million ballpark touch higher. Essentially, the cap payment works as the number -- the membership number that's set at the beginning of the year, through the payers that we're capped with. And then over the course of the year, certainly as there's changes to plan design there could be life events, people change employers, things like that. It will bounce around a little bit, but we expect it to be in a very tight band. So up a million, down a million from one quarter to the next is what you should expect going forward.
Operator: And our last question will come from Joanna Gajuk with Bank of America (NYSE:BAC).
Joanna Gajuk: So, I guess respiratory revenue there. I guess it sounds like you've restated some of your numbers here, especially for Q1. So I guess when I look at that number, Q-over-Q revenues up 1%. So what's driving this, I guess, change in the revenue versus how you reported in Q1? And also, how are you thinking about the growth for the year for this service line?
Jason Clemens: Joanna, first, I would provide a perspective on, I think you said the word restatement. So just to clarify, nothing was restated. We did add disclosure detail in the second quarter to break out the capitated revenue by product line. We thought that made good sense versus some feedback from the street that would be helpful data. And so we obliged with that. And so you can see now if you look at the data both ways. You can look at it on a pure cap versus rental and sales. You can also look across the product category regardless of the nature of that revenue, if it's rental or sales were capitated. And so it's just providing that extra disclosure in the second quarter. Now in terms of growth, I mean, we're thrilled with respiratory. I mean, respiratory continues to outperform. Now some of that is Humana. And we've just taken on more patients in respiratory as a result of that contract. But most of it is really because of new sales. I mean, our market share data this quarter for the first time shows that we've overcome everybody in market share for respiratory. And so we're very confident where we share across those product categories that includes oxygen as well as non-offensive ventilation.
Joanna Gajuk: Now this is my follow-up. So the market share gains and Humana contract is helping you. So I guess on that end, since you mentioned the Humana contract because I know last quarter, there was a discussion maybe additional Cavotec contracts. I didn't hear this being, I guess, part of the strategy. So I don't know if this is just kind of there? Or should we expect more or less commentary on additional capitated contracts?
Jason Clemens: Should we expect additional commentary on capitated? Well, I think that we've offered that Humana certainly is the predominance of that capitated revenue. It's 33 states. It's a lot of patients, so it's well over 1 million patients. For a number of years, we've maintained capitated business with other payers. A lot of that's kind of West Coast focused, as you expect. We do maintain a pipeline of incremental cap deals that we're working, but now that's included in guidance not really much to discuss until we're unless we secure additional cap deals. Does that answer your question?
Joanna Gajuk: Yes. And I was just thinking about like any additional future contracts, whether this is part of the strategy, too, trying to get additional ones. I mean it sounds, okay, you've had some but they were much smaller. So I was wondering whether this is part of the strategy to pursue additional larger capitated contracts.
Jason Clemens: Yes. To reiterate our strategy, we do have dedicated sales folks that are focused on cap deals exclusively. They're specialists in designing on pricing because we were obviously a big pricing machine cap yields. And so that will continue. We do intend to grow our share of cap yields. And if or when we put deals, we'll be sure to talk about.
Joanna Gajuk: If I may squeeze a very last one on the other business, diabetes and the commentary is around the channel shifts and I guess the salesforce, but specifically around your ability to participate in the pharmacy channel or that business going through the pharmacy channel, as in do you need more pharmacies? Are you kind of using third qualities? How you kind of handling that? I guess, revenue stream going through the pharmacy channel.
Jason Clemens: I'd offer maybe an example to help bring the point home. Louisiana Medicaid was a state office that switched to a 100% pharmacy reimbursement earlier in 2024. We have worked to that -- that's a brick and mortar state, so you're required to have brick and mortar pharmacy to distribute. And so we've stood that up. We've got licensing in place, we're active. We are actively selling and distributing to Louisiana State Medicaid as well as the [NCS]. And so that's one example of the infrastructure that we're continuing to stand up and refine.
Joanna Gajuk: So you're saying that there's actually more that you need. Or are you saying that you have the, I guess, infrastructure in place to service across the country that product through the pharmacy channel?
Jason Clemens: We expect to continue to grow our pharmacy business.
Operator: No further questions, I'd like to turn the call back to our presenters for any additional or closing remarks.
Suzanne Foster: Thank you. I just want -- again, want to reiterate our appreciation for the support of AdaptHealth. Hopefully, you can see from today's call that we're moving quickly, but methodically through improving the business and our performance and we're excited about the future. Thank you all again for joining today
Operator: And this will conclude today's conference. Thank you for your participation and you may now disconnect.
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