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

Okay. Great. Good morning, and welcome to the continuation of day 2 of the Barclays Global Healthcare Conference. I'm Steven Valiquette, the health care services analyst here at Barclays. And our next session this morning will feature Owens & Minor. We're pleased to have a pretty full lineup of management from the company. With us today are Ed Pesicka, the President and CEO; and we also have Andy Long, the CFO; John Leon, SVP and Corporate Treasurer; and also Chuck Graves, Director of Finance and Investor Relations. So thanks for your flexibility around the change in our conference venue as we move to this virtual format. And since this will be a formal presentation with slides, let me turn it over to Ed. Ed?

Thanks, Steve. Appreciate it. Let me start on Slide 2, our safe harbors. I'll let everybody read that, but then I will move on to the base of the presentation. Really, what I want to cover today is a couple of things. One is really going to talk a little bit about 2019 and how we honored the commitments we stated we were going to do, and then into 2020 of how we build. We're going to build on that foundation that we established in 2019. We're going to invest and reinvest in the business to provide us long-term double-digit growth beyond 2020. So if I start with Slide 3, just at a high level what Owens & Minor is? We're really a health care provider that has the ability to leverage products, services and a medical distribution while partnering with significant number of leading external brands and serving large base of customers primarily in the U.S. and then with our products around the world. Moving to Slide 4, just to get a visual of how we position ourselves and go to market. We have 2 reporting segments: Global Solutions and Global Products. Within Global Solutions, we have our 2 basic pillars, which are both distribution and services. And then underneath that, we have various businesses. We have our Medical Distribution, that's the traditional acute care, med/surg distribution of Owens & Minor; our Home Health Care, which is both distribution and provide services, that being our Byram Home Healthcare and our various services. And then lastly, under our Global Products, many leading brands in the marketplace, starting with our premier brand of Halyard. Moving on to Slide 5, what's been our approach starting in 2019 in going to market. Our approach has been pretty clear. It was really setting that foundation, that foundation being maintaining an intense customer focus or bringing in that intense customer focus. In addition to that, driving operational excellence, which drives both service improvement and financial improvement. And then after building that foundation, starting to invest in leveraging our data as well as our technology and solution to provide a differentiated offering to our customer base. Moving on to Slide 6. Let me talk a little bit about 2019. So 2019, we did what we said we were going to do. We established a strong foundation where we had a laser focus around the customer. We put together a world-class leadership team, we restored our service levels, and we improved our financial profile as the year progressed. Really, what this enabled us to do is to have a much higher level of customer and supplier confidence. We've got a culture that is completely focused on serving the customer, but doing it with our values. And then we continue to drive debt down and grow our business as we move forward. So moving on to Slide 7. Let me talk about each one of those accomplishments in a little more detail. I will start with cultural change. And I think from a cultural change, as I talked earlier, we ended up developing and we have a very high level of intensity around our customer, where everything we do is focused on that. And it really starts with our mission. Our mission is a humble mission. It's the fact that we're empowering our customers to advance health care. It's what our customers do. They're the clinicians and the patients and we're making sure we're getting them all the products and services they need to do their job extremely efficiently and extremely well. Then it's about how we do business. And that's our ideal values, which each one of those letters standing for something meaningful. And you could see on the slide here, on Slide 7, it's, integrity is the I, that is you come to work every single day with the highest level of integrity and ethical approach to business; development, we're constantly developing new solutions for our customers, we're developing ourselves, and we're developing our other teammates; excellence, that is around intensity of coming to work every day to do the best you possibly can; accountability, owning it; and lastly, probably an over-missed value, and that is listening. Taking time to listen to the customers, taking time to listen to your fellow teammates, and really then adjusting and adapting as necessary. If I think about the cultural change, and moving on to Slides 8 and 9, we really put together a strong leadership team. And I'll start with our Board of Directors. So within this last year, really within the last 7 or 8 months, we've added 4 new directors. We've added 1 that has significant leadership as well as manufacturing experience to help us with our -- understand our manufacturing and products business better. We added 2 directors. The first one was Mark Beck, then we added Robert Henkel and Mike Riordan. Both of them are seasoned CEOs of health care networks, again, helping us gain knowledge and understanding of that better. And then lastly, from a leadership and supply chain, most recently added Gwen Bingham, who is a retired 3-star U.S. Army Lieutenant General. So we really strengthened our Board of Directors, focused around industry knowledge. Next, on Slide 9, we added leadership to the team. And I'd like to look at this as we added a balance last year. We added a balance of -- we have 2 great leaders in Perry and Chris that had been with Owens & Minor. One runs our Healthcare business, our Home Healthcare business, and one runs our Global Products business. Great leaders. On the operational side, I added 2 operational leaders, that being Mark Zacur and Jeff Jochims, both with tremendous industry knowledge as well as understanding customers, our supplier community, and then lastly, really understanding what it is to serve the customer. Most recently added Dave Myers as our Chief Procurement Officer, a long-time industry experience. And then lastly, on the nonoperational side, we had Shana and Nick from Legal and HR, respectively, and then recently added Andy as our CFO. So I look at it as, between our new directors and our world-class executive leadership team, we have the right people to help drive this company towards that, beyond 2020, that double-digit earnings growth. Next, we talk about the culture, results-oriented and really being around service. I'm not going to go into a lot of detail on Slide 10 here. You can see from the charts, we drastically improved our fill rates, our shipping accuracy, our customer service quality. And then really focusing on our teammates, we were able to drive and improve workers' comp claim. So we are able to, within our Medical Distribution business, drastically improve the service back to the levels that Owens & Minor was known for as industry-leading. And we're going to continue to focus on that going forward. Moving on to Slide 11, so financial. What have we accomplished in 2020 -- I'm sorry, in 2019, excuse me. We ended up taking our adjusted operating income sequentially and improving it every quarter, from $0.02 to $0.10 to $0.20 to $0.24. How do we do this and why do we believe it's sustainable? Because we did this through operating efficiencies and continuing to look at how do we provide unique solutions to our customers, in addition to that revenue mix. Next, in cash flow. Really, in the 3 quarters of 2019 that I was part of the company, that's Q2 to Q4, we generated $227 million of operating cash flow. And just to put it into perspective, in a year, we normally generate $100 million. So in those 3 quarters, we more than doubled our annual historical amount. We took that, and of that generated, we paid down a significant portion of debt. We reduced debt by $117 million for the full year. But during those 3 quarters, Q2 to Q4, we reduced debt by over $170 million. So we leveraged our operating efficiencies to drive improved cash flow, use that cash flow to pay down debt and then take a portion of that cash flow to reinvest back into the business, which leads me to Slide 12. So within 2019, obviously, improve the culture, improve the service, improve the financial and started to reinvest in that business -- in our business. And our investments are really focused on a couple of things, both capital investments as well as non-capital investments. And the focus was really around 3 things: infrastructure to drive operating efficiency, and then technology and services to provide differentiation to our customer base. A couple of examples of that, to drive infrastructure and ability to increase our production. In 2019 -- actually, early in 2019, we made the decision to expand our U.S. manufacturing capabilities to produce nonwoven laminated fabric. This is the fabric that's used in surgical gowns, surgical masks and other surgical infection protection products. We increased -- we made that investment, and that investment is actually in our Lexington, North Carolina factory. In addition to that, in our Home Healthcare business, one of the fastest-growing segments in the market, we took and we're -- we've invested and we're going to continue to invest in our B2C capability. So that Home Healthcare business, while it is B2B-focused, it also has to be B2C-capable. And that's what we did in 2019 and we're going to continue to do into 2020. And then lastly, we enhanced our commercial structure. We put together an enterprise sales team that enables the customer to better understand and better navigate Owens & Minor. Specifically, if you recall back on Slide 4, all those different leading brands, we now have 1 person that can work with the customer to navigate and support all of those leading brands as well as all the different businesses with a single point of contact for the customer. So we're making it easy for the customer to do business with us. So let me talk in a little more detail about a couple of those investments, specifically, the nonwoven laminated fabric. So we have a global footprint. So our Global Products business, a significant portion of everything we produce is produced in the Americas. And as you can see, the Halyard brand products, the bulk of those products are produced either in the U.S., with all the finishing done in 3 locations, in -- 2 in Mexico and 1 in Honduras. And I think this is an important factor that's now being recognized more and more in the marketplace. Our Americas footprint, our control of ability to make all of our fabric in the U.S., our control and ownership of our own facilities in those countries, us having our own regulatory group within those countries that are part of Owens & Minor, that, combined with having a very short supply chain cycle, has made a significant difference in the current environment we're dealing with today. So outside of the Americas production, primarily in the North Americas, we do produce a significant portion of our gloves in Thailand. So that's where the bulk of our product is produced. And in that Lexington, North Carolina facility, that's where we just recently spent millions of dollars in 2019, adding capacity to produce material. The second investment I'll touch in a little more detail is going to be focused around our new sales structure. And really, as I talked earlier, it's really simple. The customer is at the center of what we do. Our mission is focusing on the customer. Our value is just focused around serving the customer. Now we have an enterprise commercial organization that can navigate all of Owens & Minor and make it very simple to do business with us. It enables us to adapt and be flexible very quickly to offer our customers a variety of products and services that's best for them. So moving on to 2020, on Slide 15. So we set a great foundation in 2019. We're going to build on that foundation. We're going to reinvest on it -- on that foundation. We're going to continue to focus on service, on culture and financial. 2020, while we're only a little over 2 months into it, we're already off to a very fast start, providing us the ability to continue to reinvest in that business, providing us financial flexibility. We've accomplished 2 things in the first several months of 2020. We announced the sale of Movianto. Obviously, we're going to -- we sell to a privately owned European logistics company. We're going to gain about $133 million of sale price, and those proceeds are going to use to pay down debts. In addition to that, we improved our debt profile. We've amended our credit agreements, which gives us greater financial flexibility; we entered into an accounts receivable securitization of $325 million; and we've removed significant future refinancing risk. So those 2 events have helped us continue to deleverage our balance sheet, just like we did in 2019, with looking at different assets and different opportunities to provide financial flexibility for us to continue to reinvest in this business for that long-term double-digit growth. So moving on to Slide 16, what does 2020 look like? So it's pretty clear. We've already taken some good actions, that being the sale of Movianto or the pending sale of Movianto, and that being our improved debt profile. One of the things we have elected to do as a leadership team and as a company is we're not going to make mistakes that may have been made in the past. We are focusing on the future. We are not going to be short-term-focused. We're going to invest. We're going to invest properly. We're going to invest with the right level of rigor and discipline, and we're going to invest for long-term profitable growth. I think one of the investments that we talked about earlier, that being the customer approach, is one example of our investment for long-term growth. The addition of the manufacturing capability in our Lexington operations is another example that provides long-term growth. And we continue to look at other ways to drive long-term profitability, both from our own internal operations as well as providing additional resources to our customer base. In addition to that, I'll say, where we're reinvesting in the business? We're investing in our infrastructure to make our operations more efficient. We're investing in technology and services. And both of those we're going to highlight in our May Investor Day. We're going to highlight 2 of our new technologies and -- or one of our new technologies and one of our new services or expanded services. So you'll get a lot of look at that as we go forward. And I said this last week in the earnings call, we have done a significant job to almost binary change -- to have a binary change in our customer retention. In the last several months of 2019, including into the early 2020, we have done an exceptional job mitigating customer loss and beginning to start to win new business. And a lot of that, I believe, stems from the culture change, the service change, the financial improvement and allowing now our enterprise sales team to spend time to understand what the customers needs, going back to our value of listening, and then adapting a flexible solution that best services them. So ultimately, we want to make sure we have the best solution for the clinician, and the best solution, ultimately, let the clinician pick that solution for the patient. So what is it that makes our offering unique and different? If I think about what makes our offering unique and different: one, we provide customers with value. And we listen to them and understand how they want that value delivered. We do that by providing the customers with choice, which is really focused around flexibility and adaptability to customize our broad portfolio of both services and products, not just our own products, but also products from leading manufacturers out there, again making sure that they can pick what's best for the patient. We're not going to force the customer into some rigid framework that they have to adapt to. We're going to tweak and adjust and adapt so that way, they can drive operating efficiencies within their business and give the best service to their -- to patients. Next, we provide our customers with risk mitigation. I think if you look at our manufacturing footprint, primarily being in the Americas, you look at our supply chain being days or weeks instead of months because of the location of everything. You look at our ability to flex on capacity. That's just one example of ability to provide risk mitigation to our customers and potential customers. And ultimately, we believe our offering, and I've said this many times already this morning, provides an offering that improves the clinician and the patient experience. So how do we do that? We spend our time listening to our customers. We spend our time understanding their needs, and we're making sure that we're going to align our investments with what our customers want and need. So that's what our offering is. It's really focused around our mission of empowering our customers. And that's what we're doing every day. So let me move on to Slide 18, and I'll talk about this briefly because I'm sure there's been tremendous amount of questions on this. So COVID-19. So what -- how are we treating COVID-19? So here's how we're treating COVID-19. I think, first and foremost, we're treating it with our top value, and that being integrity. We're treating it that where we have commitments from existing customers, we are fulfilling their product needs at, at least 100 -- at least at 110%. So here's what we've done. We tried to make sure we looked at the historical buys from our customers, we want to make sure that everybody gets what they've been getting, an average weekly amounts, plus an additional 10% or 20%. And we're doing that so that way, we don't have 1 or 2 customers’ quarter stockpile it and we shut down other hospitals. We are honoring our commitments by maintaining and recognizing whether it's the GPO or the IDN agreed-upon prices that were set long before these issues. Here's what we've done from an operational standpoint. We have aggressively ramped up our production in our facilities in the U.S. as well as our assemblies -- facilities in both Mexico and Honduras. We have increased the number of employees substantially, anywhere between 400 and 600. We have the ability to increase our production, depending on the product line, various -- whether it's an N95 mask, whether it's traditional surgical earloop mask or whether it's gowns on AAMI 3- or AAMI 4-type gowns. We have the ability to increase production, and we are doing that, anywhere from 60% increase to closer to 300% increase. And it just depends on the product line, so that range is broad because the product line is broad. We are continuing to look at how we can drive more and more productivity through those operations. We are running them all at capacity and we're really running them at theoretical capacity. So 24/7, we have them operating. I will have to thank our teammates who have worked relentlessly to make this happen, to the amount of people we've had that are initially working over time to rapid production, to staffing up, to training our teammates, to making sure that we're focused on the teammate's safety as well as well knowledge of how to do the job. So over the last month, we ramped up. We made sure that as we ramped up, people were properly trained, both from an ability to do their job as well as their safety. We've aggressively ramped up volume through our 3 major whole -- distribution centers that bring the product into the U.S. And we streamlined operations significantly within our 40-plus distribution centers to get to our customer base. So the variables we control, we've done an incredible job with. The variables we control such as ramping up production, such as making sure we're getting the product to our customers, allocating it so that way, we can spread it. And then where we can, helping customers that need help within the industry. And I believe we've done it with a very high level of integrity and really focused on our values. I'll share a quick story with you, is, we had the opportunity from a customer that couldn't get a custom procedure tray. So we leveraged our SurgiTrack facility, we leveraged our distribution center that had all single-item sterile items to build trays in days that normally take weeks or months to spec out, and be able to get those to customers so that way, they did not have to stop surgeries. So what our team has done has been incredible. It's been great to see what we've been talking about, that being the diversification of services we offer plus our broad product portfolio, specifically our proprietary product portfolio, that being the Halyard brand, that's being manufactured in the Americas; be able to make sure we have mitigated as much as we possibly can any potential service disruption to our customer base. So extremely proud of us controlling those variables where we can. Lastly, I would say, those variables, we don't have control on this. We don't know how long it's going to last. We don't know the impact of it. So we're continuing to operate in the present state with the variables we control and continuing to monitor the variables we don't control. So I'll leave you with the last slide, Slide 19. Why am I pretty bullish and robust on where we are in 2020? 2019, we established an extremely strong foundation to build upon, focused around culture, the customer, service and financial improvement, then allowing us towards the end of the year to leverage that into investment, both capital and noncapital investments. We believe those investments plus the stability of what we created will enable to provide double-digit earnings growth beyond 2020. We expect to continue to drive strong operating cash flow. We recognize that with the COVID-19 issue, we're going -- we're continuing to look at how do we reinvest and make sure we have the right levels of inventory to serve that. We're going to continue to deleverage the balance sheet. And then the pending Movianto sale really allows us to do the basic thing of focus and invest in our core businesses, that being distribution, products and services. With that, I thank everyone for the time this morning. I look forward to talking to you all in the near future, and hopefully see everybody at our Investor Day in March -- in May, excuse me. Thank you.

We do have time for a couple of questions. Are you guys -- would you be entertaining few questions from me, if that's okay?

Sure.

Okay. So your comments towards the end around COVID-19 preparedness, et cetera, certainly helpful to kind of frame some of that. And it sounds like there's certainly a pretty strong demand for certain products. I guess as we kind of think about this from just a unit volume perspective, if sales could be accelerated, let's say, in the first quarter, only time will tell whether this is a pull forward of sales from 2Q and 3Q, depending on just how COVID-19 progresses from here. So I guess, because of the fluidity of the situation, does it make more sense right now for investors to just focus on the full year sales trend for 2020, knowing that the quarterly cadence could be a little bit different this year versus prior years, just given that dynamics in 2020?

Yes. So I'll share, our earnings range that we put out, a $0.50 to $0.60 for 2020 does not include any impact of COVID-19, novel coronavirus. And it is a fluid situation right now. And what we are doing again is trying to control those variables where we can control, which is making sure we allocate so everybody gets what they need to get, drastically increasing our productivity and production of products by adding lines, adding people, adding productivity on that. So there could be some impact -- different that impacts each quarter different. But again, right now, we do not have any of that in our 2020 adjusted EPS targets or revenue.

Okay. That's helpful. And then in light of the fact that there is elevated demand for certain product areas, I guess, I'm curious whether or not you're seeing any ability, either by manufacturers, other manufacturers or yourselves or even for -- as a distributor, are you able to increase prices on some of the products where there's greater demand? Which I know is probably not politically all that great in the sort of dynamic. I'm just curious whether or not there's any price inflation that's notable across the spectrum? Or is this more just about unit volume growth acceleration? Just curious to get some thoughts around that as well.

Yes. So on the retail market, I think everyone's aware, you've seen that on the retail market. To me, we want long-term relationships with our customers. We want both current customers and potential future customers. And I think in crisis like this, our mission is really around serving the customer. And from an integrity standpoint, we have pricing agreements, whether it's a GPO pricing agreement or an IDN pricing agreement, that I believe we have obligation to honor those commitments. So we are not going to go out and leverage this and try to "jam up" customers and raise prices to have short-term benefit. Because we're in this for the long term. I talked about our investments for the long term. And it's our objective that we can increase volume or share because we have product, and customers need it. We will do that. But we are not going to hold people hostage on a pricing because of the demand of the product. It really comes down to integrity in my book and being long-term-focused versus just being a short-term gain-focused company.

Okay. Great. All right, well, with that, I think we're out of time. So I definitely want to thank Ed and the rest of the Owens & Minor management team for your time today. And everyone, enjoy the rest of the virtual conference. Thanks.

Thank you.