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

Thank you, everyone, for joining us this afternoon at our conference. With the -- our next presentation, we have the team from Owens & Minor, both Jon Leon and Andy Long. Thank you, Andy and Jon, for joining us today and for -- certainly for joining us at our conference. As always, we truly appreciate it. Andy is going to walk us through the presentation, as highlighted in the Veracast website, and then we'll follow up the presentation with a handful of questions. And if there are any questions that any of the participants have, please channel those questions through the Veracast, and I will process those questions accordingly. So with that, Andy, I'll go ahead and turn it over to you. Thanks again for joining us.

Well, well, thank you very much, Larry. I appreciate it. And good afternoon, everyone, and I want to thank you for joining me today. We're -- I've got the opportunity to share with you an overview of the Owens & Minor company and our current and recent accomplishments driving our financial performance to date herein 2021 through the third quarter, and our path to achievement of our long-term targets. So as housekeeping, we make sure that you see on Page 2 that we've got our safe harbor statement for your review and reference. And then to get into the presentation, if you want to go to Page 3, I'll start by providing you with a high-level overview of Owens & Minor. So we are a growth-focused, integrated health care solutions provider, serving acute customers in a hospital setting with our medical distribution business. And we offer a wide range of services to help hospitals operate more efficiently. And we can follow and support the patient as they move from the acute care setting to the home setting with our patient direct business, Byram Healthcare. And finally, we have our Global Products business with a broad portfolio of self-manufactured products, many of those are made in Owens & Minor, primarily located in the Americas. And we produce products in the surgical and infection prevention space, and that includes a wide variety of PPE products as well as products like custom procedure kits, which serve health care professionals as they perform various surgical procedures. Working out of over 95 facilities located around the world are 15,000-plus teammates work incredibly hard every day to provide the highest quality of products and services in an effort to support over 4,000 health care providers globally. So moving to Page 4. You'll see our 2 reporting segments: Global Solutions and Global Products as well as the businesses that we operate within each of those segments and the brands that we utilize as we go to market. So our Global Solutions segment is made up of our distribution, our Distribution business. It also consists of our Patient Direct to our home health care business as well as our Service businesses. So our Global Products segment is the manufacturing arm of our company with great products represented by well-known brands, such as Halyard, MediChoice and Medical Action. And on the next few pages, I'll go into a little more detail on each of our businesses within those 2 reporting segments. So if we flip to Page 5, I'll start with our Medical Distribution business, which serves health care professionals in the hospital acute care space. We've got over 40 facilities across the U.S., which enables us to reach a significant portion of the U.S. population within several hours, and we operate a broad -- with a broad portfolio of proprietary and branded products from over 1,200 suppliers that provides health care professionals with a wide choice of products as they decide how to best serve their patients. Our Medical Distribution business is very closely aligned with our Global Products business as it provides a direct relationship, a direct outlet for our product portfolio. And this provides us a level of differentiation from the many other pure-play PPE manufacturers, who don't have the ability to sell and deliver their PPE products directly to the end user like we can. And we've also got a third-party logistics service that we can offer to our customers in the health care space. Our facilities here are FDA-compliant and they can offer customers the services they need to manage their inventory as well as their pandemic storage needs. And as a distributor, we've got a tremendous amount of data, and that data consists of purchase history, delivery needs, service levels and other things that enable us to provide analytical tools to help our customers make better decisions and increase their operating efficiency. And finally, we offer a wide range of services, and I'll cover that in more detail in a couple of minutes. So on Page 6, if we move to Page 6, Page 6 is our Byram patient direct business. And that's a business that works directly with health care providers and insurances to seamlessly provide patients battling chronic conditions and products that they need to address their conditions. And our portfolio consists of diabetes, wound care, urology, incontinence and ostomy. So we really think this is an attractive segment for us. It's a higher growth market, and we'll continue to benefit from an aging population, a rise in chronic conditions and an increasingly favorable perception of being treated in a home setting due to the COVID pandemic. We think we're very well positioned to capitalize on this growth as we have over 650 payer and managed care insurance relationships. And commercially, we have a national footprint with a very strong regional presence. And as a result, we're able to reach over 85% of insured Americans. One of the keys to success in this market and this business is the ability to maximize collections from insurance companies, right? So anyone can ship product to patients. Anyone can ship a box from point A to point B. But the question is, can you get paid for that activity? And with our sophisticated back-office revenue cycle process, we're able to efficiently obtain the authorizations, the prescriptions, the other paperwork that insurers require that enable us to achieve that industry-leading cash collection rate. And of course, higher collection rates translates to improved profitability. If we go to Page 7, rounding out our Global Solutions segment is our services offering, and that's where we offer technology to provide data and information management to health care providers. And this includes QSight. QSight is an end-to-end perpetual inventory management system, and it allows our hospital staff members to manage and track inventory on hand to ensure product is ready when it's needed, it improves the accuracy of clinical documentation and it enhances the clinical and supply chain workflows. SurgiTrack, which is our unitized delivery system, and it complements our custom procedure trade business nicely to serve the physicians in the operating room. And I'll touch on PANDAC briefly. PANDAC is an inventory management system, which also is used in the operating room. But overall, our services offering delivers great value to customers by increasing their efficiency, which results in savings to them. It mitigates the risk and it improves the overall clinician experience. So if we go to Page 8, we'll transition to our next segment, which is our other segment, which is our Global Products business. And that's really the manufacturing arm of the company with great products represented by well-known brands, such as Halyard, MediChoice, and Medical Action. Our Halyard and MediChoice product lines are made up of both PPE and non-PPE products. And one of the key differentiators in this space for us is that we manufacture a broad range of medical-grade PPE. It's not just 1 or 2 products like many other manufacturers. Specifically, our portfolio includes surgical drapes, medical exam gloves and those gloves have leading brand names such as PURPLE, LAVENDER AND STERLING and they're made with our own patented technology. We have sterilization wrap, facial protection, including N95s, face shields, isolation and surgical masks and many other forms of protective apparel, including isolation gowns, lab coats, footwear, hair coverings and other. And we believe that we've got a #1 or #2 position for these products in the medical grade market. And in the non-PPE space, we sell general hospital supplies and equipment under the MediChoice brand, and custom procedure kits and minor procedure trays under the Medical Action brand. So if we go to Page 9, I'd like to share with you our global products manufacturing footprint. And this is another key differentiator for us in the fact that we own and operate our own manufacturing facilities. We use our designs, specifications, our technology and IP within our own quality and regulatory systems to produce product on our own machines with teammates that collect the paycheck from Owens & Minor. These are our employees. This is very different from many of our competitors who simply pay a third party to make their product for them and slap their name on the label, get claimed to be a manufacturer. In fact, we not only make many of our finished goods ourselves, we also have control over our supply chain in many areas. As you can see, if you look on the map on Page 9, our facility in Lexington, North Carolina, and this facility makes nonwoven materials, which is a key input to many of our other PPE products. Note that our manufacturing footprint is primarily Americas-centric. We are not dependent on getting our product in manufactured locations -- manufacturers located in Asia as our competitors are. And this differentiation enables us to, in large part, avoid the transportation delays in getting product from Asian markets through the ports on the West Coast and into the customers' hands. This enables us to mitigate risk with our customer supply chain by providing value through supply chain resiliency as our cycle times can be measured in days, not weeks or even months. Before I turn the page and before I leave this page, I'd like to briefly touch on the investments that we've made to increase manufacturing capacity in our PPE products. And the outlook that we have for PPE demand, and I've gotten a number of questions on this over the course of the day today. So I know that this is really top of mind for many of our stakeholders. At the outset of the COVID pandemic, if you go all the way back to Q1 of 2020, we rapidly began to invest in capacity to ramp up production of PPE across all of our manufacturing network. And we increased capacity anywhere between 100% to 1,000% across manufacturing PPE portfolio. And this investment included funding from the federal government through the Defense Production Act to quickly scale production to meet increasing demand. And given that this expansion was done within our existing footprint, we were able to gain significant fixed cost leverage, improving our cost to operate. Switching to the demand side of the equation, we believe that long-term consumption of PPE in the health care space will eventually settle in at levels below what we saw at the peak of the pandemic, but above pre-pandemic levels. And the rationale for this is that new health care protocols and regulations, which have been put in place, call for the additional usage of PPE, which we expect will become common practice going forward. Health care preference for medical-grade PPE, coupled with the recent ending of the emergency use authorizations and requirements to maintain stockpiles of PPE inventory and the need is very important to keep that stock current because this PPE has expiration dates. And finally, we have the opportunity to expand beyond our current customer base of acute health care in other markets, including the non-acute health care, industrial, retail and to expand our presence internationally. You'll see the impact that this dynamic has had on our financial results a little bit later in the presentation. So if we go to the next page, I'd like to share with you some highlights from our Q3 earnings release from earlier this month, starting with our operational highlights. So in our Global Solutions business, this business grew both top and bottom line, both year-over-year and sequentially. And this happened as a result -- as customers began to realize our ability to provide flexible and scalable solutions. And the segment also benefited from continued strong growth in our Patient Direct business. It was another strong quarter with net new wins among the acute care distribution customers. In our Products segment, higher sales of PPE -- we had higher sales not only year-over-year but also sequentially. And the sequential growth to me is particularly meaningful as several of our competitors have reported sequential declines in PPE over that same time period. And again, we've tried to strike a nice balance in terms of our cash flow by continuing to reinvest in infrastructure, services and technology, while at the same time, delevering the business. So if we turn to the right-hand side of the page, we're looking at our Q3 financial performance and some of the highlights there. We reported 14% year-over-year revenue growth in the quarter and both segments contributed to that. So our Solutions business grew 9%, and our Products business, after you eliminate the impact of price increases on a volume basis, our products revenue grew 8% year-over-year. Our strong financial performance has allowed us to reduce debt by over $330 million year-over-year, $42 million of which happened in the quarter. And we'll see what the impact that this deleveraging has had on our credit ratings in a couple of slides. We also saw a 45% decrease in interest expense versus prior year. So this is the combination of not only the reduction of lower debt, but also our refinancing activity that took place earlier this year. So currently, our leverage stands at 1.7x, which is currently below our long-term target of 2 to 3x trailing 12-month EBITDA, which puts us in an extremely solid position to implement our long-term profitable growth strategy. So turning to Page 11. We'll spend a little bit of time on our 2021 and 2022 outlook. So starting with '21. As part of our Q3 earnings release earlier this month, we actually narrowed the range of our EPS guidance for the year. We've narrowed that to $3.90 to $4.10. And it's important to note that at the midpoint of this range, that represents about a 77% increase over our 2020 adjusted EPS of $2.26. Adjusted EBITDA of $475 million to $450 million is our new range, so we took up the bottom of that range. And 2021 is really driven by our fast response, our quick response to the pandemic through the investments that I've talked about and investment in infrastructure and manufacturing capacity. And these investments have increased our productivity and increased our operating leverage, lowering our cost to operate. And this is where you see the benefits of leveraging our unique operating model from an America-centric manufacturing footprint, where we were able to provide supply chain to our acute care customers. And we've done all this overall by continuing to live by our ideal values, and the Owens & Minor business blueprint. And that business blueprint is our business system of defining how we operate on a daily basis. So if we turn to Page 12, how has -- how the markets reacted to our performance this year. So in terms of our stock performance, all of my shares to date through November 19 when we ran the data, our stock is up 55% year-to-date, and up over 700% from where we were on January 1, 2020. And you can also see how our notes, our 2024 and 2029 notes have performed as well over that time period. And I talked about earlier the deleveraging, and here's where you can actually see the impact that this has had on our credit ratings through the 3 major credit rating agencies. So you see that we've received a number of upgrades and improved outlooks over that time period. So turning to Page 13. We look at social responsibility. And since the founding of Owens & Minor in 1882, we've had a recognition. We've recognized our responsibility to make a very positive impact in the communities where we reside and the communities where we work and to support health care in general. 2021 was once again a really busy year for us, for O&M on the ESG front, where we launched the Owens & Minor Foundation back in Q1. And this foundation is committed to improving the communities in which we operate. We released our first sustainability report. We worked with our transportation partners to undertake our largest ever green initiative by piloting an electric fleet in California to deliver product to hospitals on a large scale. And we've initiated our supplier diversity and inclusion efforts to really enable greater competitiveness and expanded purchasing power. If we go to Page 14, so up to this point, I've shared with you how our business has performed in terms of income and earnings per share. But I think it's worth noting how this strong performance has transformed our free cash flow and our balance sheet over this period. So we've got 2 charts. The chart on the left shows our net debt and leverage, and the chart on the right shows our free cash flow trend. And you can see that from the peak of where we were in 2018, we've reduced debt by over $700 million over that time period. I talked about our improved credit ratings 2 pages ago. So you've seen what the impact has been on that. I talked about the restructuring of our debt and raising $500 million in unsecured debt at a 4.5% interest rate. That debt is due in 2029, and we used the proceeds to take out existing debt with shorter maturities. I talked about our interest rate expense reduction, and I've talked about how we've maintained our long-term leverage, our targets of 2% to 3% -- I'm sorry, of 2 to 3x trailing 12 months EBITDA, and we stand where we stand today is just below that at 1.7x. And again, we're focused on driving positive free cash flow going forward. So if we go to Page 15, Page 15 illustrates how our capital deployment will play a role in our strategic growth plans, right? To date, we've had a very disciplined approach to how we've reinvested in the business and that's been through organic growth, while deploying meaningful amounts of cash to pay down debt quickly, as you saw on the previous page. And going forward, we'll maintain that control over our capital deployment as we believe there's still many opportunities to grow organically and drive efficiencies. And with our strengthened financial position, our strong cash flow and solid balance sheet, with the lowest leverage actually of the major players in our industry, we're now in a position to invest inorganically, should the opportunity present itself. And to be clear, we look at every M&A opportunity through the lens of a make versus buy decision. Can we achieve this outcome by investing organically? And where it makes economic sense to buy, we're ready to put our balance sheet to work. And this slide highlights the criteria that we use to evaluate M&A opportunities, not the least of which is cash flow generation. So attractive targets to us will generate significant free cash flow to enable us to reduce debt and delever quickly in order to return us to our target leverage range of 2 to 3x long -- trailing 12-month EBITDA. And areas of high interest to us when we think about M&A landscape include opportunities to expand our Byram patient direct franchise in the high-growth, higher-margin owned health care space as well as opportunities to expand our portfolio in our Global Products business. So if you want to turn to Page 16, Page 16 is a slide that I introduced in our Investor Day presentation earlier this year, and it shows our 2026 financial targets. So these targets represent the expectations of what will result as we execute on our long-term strategy, which is expected to drive and fuel growth through a number of areas. And that path towards growth includes continued new wins and share gains in our Medical Distribution business as customers recognize the value that Owens & Minor brings with industry-leading service levels and supply chain mitigation. Ongoing investments in our Patient Direct business, portfolio expansion in our Global Products business and expansion beyond the acute care market into non-acute health care and other channels like industrial, retail, and further expansion into our international channels as well. And finally, driving growth will be the execution of our business discipline, and our business discipline is no more than our process to drive continuous improvement resulting in bottom line margin expansion. So if we go to Page 17, kind of in wrapping things up, I'd like to summarize why Owens & Minor is well positioned for future success. Our integrated businesses are able to serve health care providers as we care for patients in both the hospital and the home setting. In Medical Distribution, we've reestablished our record of industry-leading service levels and unparalleled supply chain resiliency to drive top line growth. And our Global Products business has demonstrated the value of differentiated Americas-based self-manufacturing footprint where we expect market demand for our PPE products to exceed pre-pandemic levels due to the adherence to new protocols, regulations calling for stockpiling and opportunities to expand beyond our traditional acute care channel. And our Byram patient direct business with its broad portfolio and payer relationships,is well positioned to capitalize on the favorable dynamics within the home health care market. As you've seen our achievements to data fueled increased cash flow that's enabled us to both reinvest in the business and make meaningful improvements to reduce debt, we're in an incredibly strong position to execute on our long-term strategy to drive profitable and sustainable growth by investing both organically and through M&A. Overall, I hope that you see why we believe that we are well positioned to deliver our mission to empower our customers to advance health care. And why I'm so excited about the future of Owens & Minor. So that concludes my remarks for the day. And I'd like to thank each of you. And Larry, I'll turn it back to you.

Thank you. Thank you, Andy, for your remarks, and thank you for the presentation. Andy, really just a question in regards to looking back over the summer, early summer in your Investor Day, you laid out the kind of $12 billion in guidance for -- $12 billion plus for 2026. And within that, I think it was Global Products, I believe, almost doubles within that revenue kind of context. Can you just walk us through how you get there from where you're at today in terms of is it assumption organically, assumption of what you're seeing in the model or is it acquisitions, a combination of all of the above, I presume?

Larry, I really see 3 drivers that would enable that growth that we talked about that gets us to our 2026 target. First is the success that we've had in our Medical Distribution business will actually fuel growth in our Global Products business. So as we continue to meet customer needs on our distribution side, we drive new wins. We expand that business. That allows us to drive more relationships in the acute care space. And the more relationships that we drive there, the more context we have, it's really more opportunity to take our global products portfolio and pull that product through the channel into new customer opportunities. I think the second leg of that growth platform is portfolio expansion, right? So we've introduced a couple of new products this year. We've -- we are in the works of introducing products next year, probably the most -- the one I'm most excited about is the expansion of our glove portfolio where we're going to -- we've created new manufacturing lines that will allow us to expand production into the industrial sector, producing gloves for the Queens Hospital. So that's an exciting element of portfolio expansion for us that we've done organically, and we'll continue to do organically over the next 4 to 5 years. And then the final opportunity is going into new markets, and that could be going into new markets with existing products, that can be going into new markets with new products and those new markets being like you understand, we're already doing it. We're getting into the industrial space. We've launched products into the retail space with a product that -- glove product at Home Depot. There's opportunities to go beyond our core acute care space and get into non-acute health care and then, of course, expanding. We already have an international presence, but we've got that opportunity to expand and make that a much more significant portion of our revenue base.

Okay. And you touched on it a little bit earlier. The acquisition -- in terms of what you're seeing or what you're looking at, as you lever -- you're below your target leverage profile versus a wealth of capacity. Is it an asset akin to the size potential of Halyard? Are you seeing assets that large or is it more framework of like a tuck-in type acquisitions?

Yes. I would say maybe just starting with the areas of interest for us, and then we can talk about maybe the size -- the potential size of those acquisitions. But the areas that are foremost in terms of interest to us are the very attractive home health care space. We've got a really established franchise in that business that we can grow from, right? So there's tuck -- to your point, there's tuck-in opportunities there where we can buy smaller home health -- regional home health care businesses, and bolt that on to our existing platform. And then there could be larger acquisitions in that space that allow us to get into areas that would be difficult to do organically, like getting into the oxygen space or the CPAP space or the ventilator space. That would be tough to do organically, that would make more sense to do through M&A work. And then on the product side, there's a lot of options for us, Larry. That's a really attractive business that we look to expand our portfolio, and all of the options to expand our portfolio are accretive. And whether that's expanding through acquisition, that can be expanding through licensing arrangements, contract manufacturing relationships. I see us expanding in areas of non-PPE because we've already got a really, really strong franchise in PPE. But that proprietary product regardless of how we expand, whether it's through M&A or licensing or whatnot, that would also be at accretive margins to us. And it ranges in size, right? It can be some very small product lines, and it can be some very large product lines. So it's really going to depend, Larry, on what the economics of the deal are. But regardless, we want to make sure any acquisition we do is an acquisition that drives free cash flow. If we lever up, we want to be able to lever back down. We want to be in that 2 to 3x leverage range long-term.

Right. Could you see yourself going above 3, 4x with the right asset?

Absolutely. Surely. A really good asset that's of strategic value, that will create differentiation and accretion to the bottom line and again, strong cash flow is going to be a requirement for anything that if it shows up out of our range, we want to be very quickly back into that target range.

Yes, it is conceivable. Okay. I know we're -- one last question because I know we're getting short on time. Supply chain, I know you get asked about it repeatedly. You touched on your predominantly domestic footprint, but you do have some sourcing from Asia. Has it created any challenges with fill rates or anything of that magnitude in terms of the supply chain -- sourcing on the supply chain side?

In our Medical Distribution business, we work with a number of suppliers that do source from Asia, and they are having difficulties. But we work with those -- we work with our customers to find alternate product even within our own portfolio. And of course, our North America franchise of PPE product that isn't dependent on getting product over the ocean and through the ports, that's really been a very strong selling point in terms of working with supply chain professionals in terms of mitigating their risk and ensuring continuity of supply.

Okay. Great. I think we're about out of time. I don't have any more questions coming through here. So I want to thank you, Andy, Jon. Thank you as well for joining and taking the time. I appreciate, as always, you guys joining us at our conference and our presentations, very, very helpful you know again.

Thank you for the opportunity, Larry. We really enjoyed participating in the event today. So thank you.

Okay. And good luck for the rest of the group meetings and so forth. Thanks, everyone, for joining today. Okay. Have a great afternoon. Good luck for the rest of the presentations, Andy.

Thank you.