Accendra Health, Inc. (ACH) Earnings Call Transcript & Summary

Good morning, everyone. I'm Ed Pesicka, the President and CEO of Owens & Minor, and I'm really excited to be here today to talk about some of the advancements that we've made in 2019. In addition to that, I'd like to thank everyone for joining us today. Let me first start with safe harbor. The safe harbor statement is in this presentation. Our presentation will be posted on our website. In addition to that, at the back of the presentation is a GAAP, non-GAAP reconciliation, and that will also be part of this presentation posted on our company's website. So let me start at a high level. At Owens & Minor, we are a health care solutions company. We're really focused on leveraging our 3 pillars: our distribution business; our products business or manufacturing business; and lastly, our service businesses. The really focus in those pillars are to focus on driving value to our customers. In addition to that value, continuing to drive risk mitigation for our customers and, ultimately, providing an enhanced experience for the clinician and ultimately the patient. We do that by leveraging our 17,000 teammates. And then in addition to that, I talked earlier about -- or briefly about our manufacturing products business. In addition to our own products, we have a portfolio of over 1,400 branded manufacturers. So what that enables us to do is provide the broadest portfolio of products to provide the right choice for the customer and, ultimately, for the clinician and the patient. We do that with our facilities throughout the world, about 125 facilities throughout the world. So let me go from there and talk about how we think about the business and these pillars. So you have the external disclosures. The reporting segments are Global Solutions as well as Global Products. And then the way we think about that business is really 3 pillars. We have our distribution businesses. Those are the distribution businesses in the U.S. That's your historical med/surg distribution business in the acute care space. And then on the other end of the spectrum, we have our Byram business, which is a home health care distribution business. The next pillar in that Global Solutions is our services. Those services include the various services we offer like QSight, SurgiTrack, PANDAC and myOM, really focused around driving operating efficiencies for our customers, whether that's in the OR or in the entire facility. And then lastly, our manufacturing businesses, our Global Products business: our Owens & Minor products, with multiple brands, leading brands, including Halyard, Medichoice, Avid Medical and Medical Action and others. So that's the way we think about that business and those 3 pillars. So let me talk about how we go to market. So when I reflect back on my first 9 to 10 months with the company, when we came out here and we looked at it, we said, first, we need to develop a strategy that's really focused around the customer. To do that, we had to have an intense focus around the customer, and we had to really change the culture to make sure the culture is focused around the customer as well as intensity. Next, we had to drive operational excellence. We have to drive service improvements and, ultimately, we had to drive financial improvements. Based on setting that foundation, then this can enable us to leverage the data we have, put together additional systems and services and technology that can drive benefit to our customer base as well as benefit to us as a company. So I'll first start with the culture. What we did in 2019 was established a great culture focused around the customer. We did that with assembling a world-class management team, which I'm going to go through in the next couple of slides. Next, we restored service levels. And then finally, we improved the financial profile. So early in the year, we said we're going to do 3 things: change the culture, focus on the customer; drive significant service improvements; and improve the financial performance of the business. Really, this ended up -- as a result of it, we really do now have a results-oriented culture. We regained customer and supplier confidence. We continue to pay down our debt. And lastly, we believe we have a very strong platform for share gains. So let me talk about the leadership team. So the first thing we did looking at the Board, we added a couple of members to our Board, where we had areas where we could use support. One, manufacturing. We added manufacturing support on our Board with Mark Beck. Mark Beck came from Danaher, Corning and then JELD-WEN. So really understands strong operationally. Next, we added 2 health care professionals. We added Bob Henkel, who was the President and CEO of Ascension Health; and then we also added Mike Riordan, who ran Prisma Health or helped create Prisma Health, which was Greenville and Palmetto coming together. In addition to that, Mike has academic medical experience. So we've continued to migrate our Board to other areas where we had opportunity to add additional strength. Let me talk about the leadership team. So I've been lucky enough in the past to work for some great leaders. If I look through my career, I know what a great leader looks like. I also know what a great leadership team looks like. And I've been blessed to work with colleagues that are smart, strategic, operational execution focused and strong leaders. And I believe the team we've put together here is one of the leading teams in the industry. So what do I mean by that? I mean, we've been able to take people that have been running businesses at Owens & Minor as well as outsiders to strengthen it. So if I think about our operational aspects of the business, we have 2 people that have been historically with the company and have done a great job. That being Perry, who runs our Byram Home Healthcare business; and next, Chris Lowery, who runs our Global Products business or the Halyard product brands. Then I brought in several outsiders that came in. I brought in Mark Zacur, who is our Chief Commercial Officer. Mark ran the Fisher Healthcare business for years. Mark also sits on the Board of a hospital, a small independent hospital not-for-profit in the Pittsburgh area. Here's why that's important. Because Mark, while he is the commercial leader, he also has a view and the lens from the provider side being on the Board of a hospital. In addition, we added Jeff Jochims as our Chief Operating Officer, with significant distribution and manufacturing experience as well as sitting on several Boards. And lastly, to round it out, just recently, we added Dave Myers, who was the former President of Concordance, one of the top 4 players in the med/surg distribution space. On the functional side, I had the ability to leverage people that were internal to the organization. Shana who runs our HR with experience not just at Owens & Minor but at Becton Dickinson. In addition to that, Nick, who runs our Legal Counsel, who's our General Counsel; and lastly, Andy, who is our CFO. So I say that, and I think this is important because you can set a culture, but if you don't have the leaders to drive, that culture becomes much more complicated. This is a group of leaders that are seasoned and tenured, that have a long runway yet left in front of them and have seen ups and downs and can manage through various aspects of the business cycle. So extremely excited to have this group. So let me talk about that culture and the focus. Really, what we need to do is we needed to align the focus. We needed to align our customers -- our company's focus around the customer with a high level of intensity every day, coming to work, focused on serving the customer. We did that through our values, which you can see highlighted here, always do it with integrity, continue to drive development, look for excellence, come to work every day with an intensity, we're here to serve the customer, we're here to drive improvements to them and to us at Owens & Minor. Be accountable. And this is the value that's missed, listening. Spend time to listen to the customer, spend time to listen to your suppliers, spend time to listen to your coworkers to figure out what we need to do to continue to advance the company. Next, I talked about service. We needed to drastically improve our service. So got the culture down, have the leadership team, now service. Here's what we've done in service. These are just a few indicators of how we measure service. We have continued to focus on this to get back to where we were pre-service issues. So you go pre-2017, we're back to or above those levels. So just you take a couple of these. Shipping accuracy. 99.9% of the time the product that's delivered to you is the product you ordered. It's not on here, on-time delivery. We're running at almost 99% on-time deliveries. Our trucks now show up within that window allotted to our customer base. Fill rates. We've drastically improved our fill rates. We're still not at the highest level, but the delta between that fill rate and, let's call it, 100% is really when you have manufacturing product outages, we can't get the product from our manufacturers. And what we do now is we work actively with our customers and proactively with our customers with alternatives to make sure we never impact the patient because the customer is so important. Last, quality. So this quality metric is a metric we created in 2018. And here's why. You think about the space we're in today. We have to be able to measure different types of customer interaction. Customer can call our call center on phone, they can text us, they can fax us, they can e-mail us or they can live chat. So we've used metrics to measure all of those to come with an aggregated score, and what we've seen is significant improvement in customer satisfaction. And then lastly, I talk about teammates and the importance of teammates, workers' comp. So I talked about this on multiple earnings calls. The key aspect of workers' comp is this. One, if the employee is the most important asset you have, you need to make sure you're taking care of that teammate. We spent time and money on training, we spent time and money on focus, and we've seen our workers' comp claim drop year-over-year 40%. Financial benefits, but service benefit too. Our ability now to take well-trained employees, keep them working versus the temp coming in who doesn't have the training to pick, pack and ship, and that's helped result in that shipping accuracy improvement, fill rate improvement and on-time delivery improvement. So next, the third one was financial. So we talked about financial improvement. Here's what we've done. Q1 adjusted earnings per share $0.02; Q2, $0.10, a 5x improvement; Q3, $0.20. So a 10x improvement in adjusted operating income from Q1 to Q3 disclosed. More importantly, operating cash flow: in Q2 and Q3 combined, we generated $200 million of operating cash flow through working capital management and through improved profitability of the business. Why is that important? Because on average, we generate $100 million of operating cash flow a year over the last 3 years. We've doubled that in 2 quarters. So what did we do with the money? We took $130 million and paid down debt. We took $70 million and reinvested that in the business. We reinvested that in people, infrastructure, technology and future initiatives. What do you expect in 2020? More of the same. So you just think about it, in those last 2 quarters, it was roughly a 2:1 ratio of debt paydown versus reinvestment back into the business. So where is the future? Where is that reinvestment going? That reinvestment is going in providing us the opportunity to really leverage our differentiation. So investments in our Home Healthcare, investment in technology like QSight and myOM. QSight and some of our technology really drives operating room efficiencies. It drives inventory reduction and management within a hospital. So investments in that to continue to provide more value to the customer. Again, customers looking for value, they're looking for risk mitigation and continuing to improve that clinician and/or patient's experience. Next, we're going to put it into operations. We put money into operations this past year. We invested in our warehouse and some level of technology, both voice pick and train pick. So now why is our accuracy 99%? We have technology that our warehouse workers are validating every single product that's picked real-time as it's going into that tote. In addition to that, instead of having to go through the warehouse with 1 order, now we can do 4-plus orders as we go through the warehouse and drive operating efficiencies. Those are levels of technology. What other technology do we invest in? We invested in people. We invested in systems and algorithms. So how do you reduce inventory? You manage it on the front end better. And those algorithms, those systems and those people have enabled us to take significant amount of dollars out of inventory. The -- another thing we did was we focused on our receivables, is how do we now do and put together a plan and then implemented it, a simple solution where we can split an invoice. Customer orders 99 items, 97 of them are correct. We can split that invoice, collect the 97 items instantaneously. The other 2, we sit and we will figure out how -- what's correct on those. In the past, that whole invoice may have been held. So again, additional technology to drive working capital, operations and cash flow. And then the last investment, while it's not on here, recently, we just relaunched or restructured our commercial organization with Mark Zacur leading it. We have an investment in our commercial organization, in which now we have an enterprise group of commercial leaders. They can be with the customer every day, being able to work through those 3 pillars of Owens & Minor seamlessly and driving and understanding what the customer needs and using our advantages, our pillars to better serve them. So strategic action. Announced this morning. Many of you have probably already seen this. We announced this morning that we intend to sell our Movianto business, which is our European business. The way we think about it, and as part of a normal course of managing the business, you're constantly looking at your assets, you're looking at what fits within the strategic plan, what doesn't. And the reality is, we like Movianto. But if you think about what I've just talked about in those 3 pillars, by divesting this business, it enables us to increase our focus and increase our investment in those 3 pillars of our business. So we did elect to sell the business. We're selling it to a private European-based logistics business. We believe that was the best fit for Movianto. We believe that's the best fit for those teammates that are there and can drive significant success to that buyer as well as continued growth to our teammates. Obviously, you can see the rest of the slide here, the bulk of this is really, it's going to be contingent and dependent upon -- or I shouldn't say dependent. It's really going to -- we have to go through the normal closing conditions, I guess, I should say, and the regulatory reviews. But we're on path for this sale to happen within the first half of 2020. So investment merits. Let me close here. The next slide is the GAAP to non-GAAP reconciliation. Again, that will be in the presentation within -- on our website. So the simplest way to think about this. One, I believe we put together a world-class management team. That world-class management team has already done 3 things. They've helped change the culture, which we talked about earlier in this year. We've done that. We know we need to continue to do that every day. They focus relentlessly on operational execution to drive service improvement and done an incredible job with that. We know we have to continue to do that. This leadership team, in addition to that, has driven significant financial improvement sequentially quarter 1 to quarter 2 to quarter 3. We -- that's why I believe this management team can help drive what we're doing as a business. In addition to that, so we're back to industry-leading service levels. We've deleveraged the balance sheet through operating cash flow and now, in addition to that, through the divestiture of our Movianto business. We believe we can still generate strong operating cash flow as a distributor, a products manufacturer and a service provider. Lastly, now that we've got that foundation set, we're now going to start to begin to leverage and use QSight, Byram and other areas to continue to drive more growth going forward. And I'll leave you with this. Here's the way we think about it from a management team. We are not just focused on today. We are focused on the long term. We are focused on making sure that we continue to pay down debt. We continue to reinvest in the business for both current and future growth and continuing to drive improvement within the business. That's how we're thinking about it. We're a company that's been around for 137 years, and it's our expectation that we're going to be around for another 100-plus years, too. So with that, I thank you, and I look forward to talking to you in the Q&A next. Thank you.