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

Thank you, everyone, for joining us for day 2 of our Leveraged Finance Virtual Conference. Trust everyone enjoyed the first day, and we have -- kicking off day 2 here, we have a -- the team from Owens & Minor. Thank you, Andy and team, for joining us at the conference. Joining us from the team, it's Andy Long, who will be handling the presentation. Andy is the Executive Vice President and Chief Financial Officer. Also joining the team and the group presentations throughout the day will be Jonathan Leon, who is senior Vice President and Corporate Treasurer; and Chandrika Nigam, who is the Director of Finance and Investor Relations. Andy is going to walk us through the presentation today. It should be up on the site for everyone, a 12-page presentation. Please follow along accordingly. And with that, Andy, I'll go ahead and turn it over to you. And again, thank you for joining us at the conference.

No. Thank you very much, Larry, and good morning, everyone, and thank you for joining me this morning, where I've got the pleasure to share with you an overview of Owens & Minor and our recent accomplishments and the recent financial performance to date in 2020. So on Page 2, you'll see our safe harbor statement for your review and reference. If we go to Page 3, you'll see an overview of our company. It shows the 2 reporting segments, our Global Solutions and Global Products businesses as well as the brands we utilize as we go to market. Our Global Solutions segment is made up of our distribution and related service businesses. Owens & Minor distribution is our acute care business, which offers a broad portfolio of branded products sourced from third-party manufacturers as well as our own proprietary branded products, enabling our customers to choose the best solution for their patients. Byram, our home health care business, operates in one of the fastest-growing markets in health care and works directly with health care providers and insurers to seamlessly provide patients battling chronic conditions with products they need to address their conditions in areas such as diabetes, wound care, incontinence and ostomy. I'll go into more detail on the home health care market and specifically, our Byram Healthcare business later in my presentation. And rounding out our services -- our Solutions segment is our services offering, which provides data and information management and includes QSight which is an end-to-end perpetual inventory management system that allows hospital staff to manage and track inventory on hand to help ensure product is ready when it's needed. SurgiTrack, which is our unitized delivery system; PANDAC, which is our inventory management system used in the operating room; and myOM, which is a real-time inventory management dashboard that allows supply chain professionals to easily access the exact status of their orders and shipments. Overall, our services offering delivers great value to the customer by increasing their savings, mitigating their risk and improving the overall clinician experience. Our Global Products segment is our manufacturing arm of the company with great products represented by well-known brands such as Halyard and MediChoice, with a portfolio covering surgical and infection prevention products, including a wide range of PPE products such as facial protection, N95 masks, isolation gowns, gloves as well as products tied to hospital procedures such as custom procedure trays, drapes and other sterilized products. Our Global Products segment is unique and provides differentiation in the market due to our significant North American manufacturing footprint and depth of our Owens & Minor owned facilities, which I'll elaborate on shortly. Page 4 illustrates the breadth and reach of Owens & Minor. We have well over 15,000 teammates worldwide and have expanded our workforce rapidly during 2020 as we work to scale up our production of critically needed PPE products in light of the COVID-19 pandemic. We service customers in over 70 countries worldwide with a broad portfolio of products, supplied by over 1,400 branded suppliers, offering over 4,000 health care providers we serve, the choices they need to best care for their patients. And we do this with over 95 Owens & Minor facilities across the globe. Our robust national distribution network ensures that we can serve our customers in a timely manner. Byram, our home health care business, has access to approximately 85% of the insured Americans, giving us tremendous reach across the United States. And as I mentioned on the previous page, we have a large North American based manufacturing footprint with facilities that are owned and operated with Owens & Minor teammates producing a wide variety of critical PPE supplies. We turn to Page 5. I'll cover our key investment highlights. We're a leading PPE manufacturer with company-owned facilities throughout the Americas with a captive distribution outlet direct-to-hospital systems. Our Byram Healthcare business serves the fast-growing home health care market and is a leading provider in direct-to-patient products for chronic conditions. Owens & Minor is a leading distributor of a broad portfolio of medical products in the U.S. acute care space and plays a critical role in the U.S. health care infrastructure. Strong demand and higher-margin self-manufactured products, both PPE and non-PPE has been driven by new health care protocols and expansion of our portfolio. Our balance sheet and cash flow generation has been rapidly improving over the last 6 quarters, driven by consistently strong financial performance. And I want to stress that in addition to strengthening our balance sheet, we've continued to deploy some of that cash to invest in infrastructure, manufacturing and technology to drive long-term profitable growth. Turning to Page 6. I'll cover some of our Q3 highlights from our recently released Q3 earnings just a couple of weeks ago. So in that, we reported a 250% increase in adjusted earnings per share compared to the third quarter of last year. We went from $0.23 last year to about $0.81 this year. We've achieved this with a 240 basis point adjusted operating margin expansion over last year. Our Global Solutions segment experienced revenue growth of $317 million sequentially as elective procedures continue to recover. We generated $118 million of operating cash flow in the quarter, bringing our total year-to-date cash flow generation to $268 million. We also completed a $200 million equity offering which was significantly oversubscribed, netting us about $190 million in that transaction. And I want to note that this transaction closed in the first week of October, so the cash we received from this transaction is not reflected in our Q3 financial statements. In the quarter, we reduced debt by about $70 million. And to help our customers in their efforts during the COVID-19 pandemic, we delivered nearly 11 billion units of PPE since January. Our third quarter performance was not an anomaly. And over the last 1.5 years, our performance has been consistent. The third quarter represented our fourth consecutive quarter of year-over-year adjusted earnings per share improvement year-over-year. It was our sixth consecutive quarter of year-over-year gross margin expansion as well as positive operating cash flow. And it was our third consecutive quarter of adjusted EPS improvement year-over-year. We experienced a 300% sequential quarter increase in adjusted EPS from $0.20 in Q2 to $0.81 in Q3. And the key takeaway here is really that we are well positioned to deliver double-digit adjusted earnings per share growth in 2021. So going to Page 7, I'll cover a few of our financial achievements to date, starting with the balance sheet. So we've reduced debt by 23% to over $400 million over the last 6 quarters. We successfully raised $190 million of equity and used the proceeds to reduce debt in the month of October. We retired outstanding -- an outstanding $179 million of our 2021 notes as of yesterday. And we lowered interest expense year-to-date by about 13% versus prior year as a result of lower debt levels. All of this has enhanced our leverage profile, as debt levels have been reduced and earnings have consistently strengthened. And we've received upgraded credit ratings at all the major credit ratings, and I expect this trend to continue as we further strengthen the balance sheet. So looking at cash flow, we generated $268 million of consolidated operating cash flow to date. The strong cash flow has been driven by improved profitability in 2020 with an expectation of double-digit adjusted EPS growth in 2021, as I previously mentioned. Stringent working capital management has also contributed to the $268 million of year-to-date cash flow. And delivering superior customer service levels is a top priority for us, and we aim to achieve this by working with suppliers and developing algorithms to optimize inventory. And I want to continue to stress that we're deploying cash flow not only to strengthen the balance sheet, but we're also funding investments in infrastructure, services and technology to drive long-term profitable growth. We go to Page 8. So -- I like this page because it does a nice job of laying out the supply chain in the industry and illustrates how we add value and way that's differentiated from our competitors. It all starts with supply chain resiliency. Giving the product the customer needs in a right quantity at the right time is critically important to avoid disrupting the operations of our customers. We are uniquely positioned to do this, given that we're -- that we design our broad range of products with our own engineers. We manufacture key raw materials, including nonwoven fabrics at our facility in Lexington, North Carolina, which is then used to produce finished PPE and non-PPE products in our own factories, majority of which are located in North America, with our IP, our technology, tested under our own strict quality protocols and all of this done by teammates that collect an Owens & Minor paycheck each week. And so this is very different from many of our competitors who source product from third-party manufacturers located in Asia who simply apply the competitor's label to the product and ship it overseas. We have a distinct advantage of providing supply chain resiliency to health care providers because of this value chain large North American-centric footprint that enables us to provide product in days versus weeks or even months, if at all, from those that are sourcing product out of Asia. Another advantage that we have over large manufacturers is that we have a nationwide captive distribution outlet linking our manufacturing directly to the health care providers with our expansive network of distribution centers and our ability to deliver product to final mile direct to the customer. And finally, as I mentioned earlier, we've got a range of services and technology that we provide to customers within their 4 walls that improves their efficiency, drives down costs, mitigates risk, all while improving the overall clinicians experience. It's through this value chain that we enable our customers to continue the critical work of caring for patients. So next, on Page 9, I'd like to spend a little time talking about the market dynamics within the home health care market, which we service through our Byram business. We believe the home health care market will continue to be a very attractive market for a number of reasons. As the overall population in U.S. ages, we expect the market to continue to expand. We also see favorable trends with respect to the Medicare beneficiaries, and we believe that receptivity to being treated at home, especially for patients with higher acuity, will increase as a result of the dynamics created by the COVID-19 pandemic. As a leading direct-to-patient distributor of medical supplies, we believe our Byram business is well positioned to take advantage of these trends. And we'll do that with a broad portfolio of products, including ostomy, diabetes, wound care, urology, incontinence and breast pumps. Coupled with the largest customer-facing sales team in a direct-to-patient channel, we've amassed over 650 managed care contracts, which is unrivaled in the industry. This access, along with our footprint, that you can see on the map on Page 9, enables us to serve approximately 85% of in-network insured Americans. It's also worth noting that Byram was recently recognized as being the best overall diabetic supply company of 2020 by Verywell Health. And before we leave the page, I think it's also worth noting that the complexities of collecting from the various managed care payers that participate in this space and that we believe we've achieved the best-in-class collection rates due to our experienced team that manages the revenue cycle, which enables us to drive superior returns to the bottom line in this business. And finally, as we move to Page 10, I'd like to cover our response to the surge in demand for PPE and to share with you some of the market insights and opportunities that this should create for PPE going forward. So let's go back to the onset of COVID-19 back to Q1, where we experienced a surge in demand, at times exceeding several hundred percent increases compared to pre-COVID levels for certain types of PPE. So we moved very quickly in response to the supply and demand imbalance and drastically increased our production capacity. We immediately went to a 1 shift, 5-day a week to a 3-shift, 7-day a week production schedule. And simultaneously, we initiated process improvement programs to look for ways to run our production lines faster to increase output in our existing equipment. And in parallel with that, we began the process of installing new equipment to expand production capacity of both finished goods and key raw materials utilizing our existing manufacturing footprint. Our internal deployment of capital to expand manufacturing was supplemented by a $30 million grant from the federal government to increase our capacity of N95 masks and nonwoven fabric production as a key raw material in the process. We expect heightened demand for PPE to continue at levels in excess of pre-pandemic levels as health care protocols are now calling for increased usage of PPE, and we're experiencing higher levels of adherence and compliance to these new protocols in the field. We're also seeing new government and health care system regulations requiring the stockpiling of PPE, and we expect this demand to continue to grow. And in fact, earlier this year, we were awarded a contract with the federal government to supply approximately 200 million N95 masks to support the strategic national stockpile efforts. And for obvious reasons, health care providers prefer medical-grade PPE. And we believe that as we ramp up production of our medical-grade PPE, we'll displace non-medical-grade PPE, much of which was -- received approval for use only due to the pandemic and from daily consumption as well as replacing existing stockpiles that contain non-medical-grade PPE. Another opportunity that I'll highlight is Owens & Minor -- for Owens & Minor PPE is to expand beyond our existing acute care market. So far, we've been focused on serving the domestic acute care market to date, but there are opportunities to expand into other health care channels, non-health care markets and international penetration, all of which present outlets to grow our presence in the global PPE market. We're very proud to say that we've been able to deliver almost 11 billion units of PPE since the beginning of the year. And so in closing, as we turn to Page 11, I'd like to summarize why Owens & Minor is well positioned for future success. Our strong operational execution and solid financial performance has resulted in 6 consecutive quarters of year-over-year gross margin expansion and positive cash flow, which has led to over $400 million in debt reduction over this time period. And we've reestablished our record of high-quality service by improving our on-time delivery, fill rates and service level statistics as we remain laser-focused on our customers. We expect the market for our PPE products to remain high due to adherence to new protocols, regulations calling for stockpiling and opportunities to expand beyond our traditional acute care channel. In our Americas-based Owens & Minor owned manufacturing facilities where we control the design, technology, quality control and production is a key differentiator in the industry. In addition to using our strong cash flow to reduce debt to strengthen our balance sheet, we're deploying cash by investing in infrastructure, technology and services to best serve our customers for the long term. And finally, we're partnering with our customers to develop customized solutions to enhance the resiliency of the supply chain, capitalizing on our integrated production and distribution capabilities. Overall, I hope you see why we believe we are well positioned to empower our customers to advance health care and why I'm so excited about the future of Owens & Minor. That concludes my remarks, and I would like to thank each of you very much for joining me here this morning. Thank you.

Thank you, Andy, and thank you, everyone, for joining us this morning. That is going to wrap up our call with the team from Owens & Minor. I know the team is going to host a number of calls this afternoon, the broader team that we highlighted earlier. So thank you again for joining us, and thank you, Andy and team for taking the time. Have a good day, everyone.