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

The next session here with Owens & Minor. My name is Steven Valiquette, by the way. I'm the health care services analyst here at Barclays. Owens & Minor is a company that I've covered off and on through a lot of the last 10, 15 years or so. It's funny. We've done a lot of fireside chat so far today. This is more of a straight company presentation. We have spent the last minute trying to find the clicker for the slides. So now that we have that located, let me do a quick intro for the management team. So yes, with us from the company, we have Ed Pesicka, the company's CEO; and also Andy Long, the CFO, is here as well. But I'm going to turn it over to, Ed, to go through the slide presentation. Ed?

Thanks, Steve. Any luck, we'll have the slides pulled up here in a moment. Well, I'll start as they're pulling it up. So what I plan to do today is talk a little bit about Owens & Minor. And the reality is we're not the same company we were 3 years ago, let alone 5 years ago or 7 years ago. What you'll see is that, today, we're very different in the fact that if you look back years ago, call it 5, 6 years ago, most of our revenue came from the acute care distribution and the majority of our profit came from the acute care distribution. Where we are today is very different. And the fact that after this acquisition of Apria, which we should close on here sometime in the first half of the year, we will have half of our EBITDA coming from the home health or our patient direct space, and then the other half of our revenue coming from the combination of our manufacturing products business and distribution, most of that being out of the products. Obviously, this slide is safe harbor rules or safe harbor disclosure. Continue to -- move the -- advance the slide, would you mind? Yes. So just at a high level, from an Owens & Minor standpoint, 140-year-old company. As I stated earlier, we are not the same company today we were years ago. If I move forward and I talk about on the next slide, we'll talk a little bit about our value proposition or our value chain and the fact that at Owens & Minor, it really starts with our manufacturing business. It starts with our manufacturing, then goes to distribution as well as in the home. Let's see if we can get the slides caught up here. Here we go. So as I stated earlier, from an Owens & Minor standpoint, first and foremost, we're different in the fact that we're a manufacturer. There's a lot of distributors out there that are sourcing companies that source their products and talk about a broad portfolio of proprietary products. But what makes us different is really the manufacturing. And it's not just manufacturing, it's everything from the raw materials to the design of the product, to the creation of the next layer of materials to the final finished goods. We then have a distribution business that, frankly, over the last 3 years, we spent a lot of time working on improving our service, improving our delivery. And has that paid off -- that has paid off substantially as we moved forward into last year, into 2021. We also have some great supplier partners, some external supplier partners. And then lastly, the ability to serve the customer in the hospital. And then as we say, all the way through the hospital and into the home. On the next slide, I want to cover a little more detail about that home part of the business. So first and foremost, let me talk about the alternative care market outside of the acute care space. We have our Byram business. Our Byram business, that is our patient direct business, primarily is focused on chronic conditions, or as we look at it, the soft goods space. With the acquisition we announced back on January 10 of the acquisition of Apria, that's going to expand us into the DME, particularly in the respiratory and home respiratory. Just the combination of those 2 markets are nearly a $50 billion market. We bring the Byram business together with Apria. We will end up being about a $2.5 billion player in that space, and we'll have the ability to continue to look at ways to roll up that industry. That space includes roughly about 4,000 smaller mom-and-pop players. Let me go to the next slide and talk a little more detail specifically around our Byram business. So you can see from the footprint on Byram. Byram is focused geographically in key areas, and it's really a reorder type business in the categories that we're in. In addition to that, we have the ability to satisfy about 85% of insured Americans. We'll contrast that on the next slide here to what we're looking at from the Apria standpoint. And the reality from Apria's standpoint, very different operational footprint, in the lower left-hand side of the slide, with about 275 locations throughout the United States to really deliver that first delivery of product because of the fit. If I go to the next slide, I'll really talk to the heart of this transaction, and here's why we really like this transaction. Last year, Investor Day, we talked about long-term profitable growth back in May. We talked about investments in our manufacturing business and investments in home health, while we have a strong, stabilized medical distribution business. In our Byram business, as you can see from this chart on the right, in the lower half of it, here's the categories we're in today, that's soft goods categories. It's diabetes, it's ostomy, it's incontinence, it's traditional wound care. It includes urology and breast pump. Whereas Apria is focused on obstructive sleep apnea, home respiratory, advanced negative pressure wound therapy and lastly, DME. So what we liked about this business is there wasn't a product overlap. The products actually fit very, very well together. That's the first component. But what's interesting is not only do those products not overlap, the reason they fit well together is because of comorbidities. So take type 2 diabetics, 50% of type 2 diabetics in America are also using obstructive sleep apnea. That rise is almost 80% when you look at obese type 2 diabetics. So we have a different product portfolio, so we're broadening the bag and the ability to serve patients with comorbidities. Second thing we like about it that can drive substantial revenue growth is the fact that both businesses have different call points. Our Apria business, their call point is primarily the physician in their office, whereas on the Apria side, their call point is really the discharge nurse in the hospital or even the discharge nurse in a sleep clinic. So you have different call points, different referral sources that come in with a broader portfolio, you can cross-sell there. And lastly, what we liked about this is it increases our ability to attach or be able to serve about 90% of insured Americans. So you have that broad pool. So the question is -- this transaction is really going to drive one thing, which is growth. And here's the proof point on growth. You take our Byram business and what we've been able to do. Since we acquired that business about 5 years ago, that business has grown from about $400 million of revenue to over -- to close to $1 billion of revenue. In my tenure here at Owens & Minor, that business has grown in the high teens or close to 20% organic growth CAGR year after year after year, whereas the Apria business the last several years has grown in the low single digits, which we believe with the discipline and the rigor and the process we have within our Byram business, we can get that growth rate even higher. Then think about it from a simple standpoint, it's not going to take massive amounts of integration. And I leveraged the history of what I had when I was at Fisher Scientific and we merged with Thermo Electron. We didn't put in 1 system. We could do simple analytics that looks at the Byram patient portfolio of who we're selling diabetes products to. We know the patient, we know the payer, we know the ship-to address. On the other side of it, on Apria, we're going to look at who's got obstructive sleep apnea. We have that same data. Where they match up, great. Where they don't match up, that says there's an opportunity roughly a 50% to 80% opportunity based on demographics of type 2 diabetics. If they're a diabetes customer and not a sleep apnea customer, we have the ability to outbound communicate. We have the ability to work with the providers to make sure that they know we can service both. So it provides tremendous opportunity. Last thing we like about this deal is the operational footprint, a very different operational footprint with Apria with 275 locations, which are used to do the first fit and then everything else is outsourced for replenishment versus the Byram, which is central distribution. So again, tremendous opportunity, we believe, for advancement and really, this acquisition is around driving tremendous amount of growth by still getting some cost synergies out there, which we believe would be around the $10 million mark based on traditional company costs. We can move to the next slide. I'll take you through a little bit of what this looks like as a company. I alluded to this upfront. So today, if you look at our business, we're about a $10 billion revenue business. What's going to happen on this in the future is once this deal is closed, we're going to expand to have about 20% of our revenue coming from our patient direct and 80% coming from the combination of our manufacturing and the distribution business. But diversification of EBITDA, it's going to be roughly 50-50 split. And this is what I was talking about earlier. If you go back 6, 7 years in the company, most of our revenue came from our distribution business. Now you're going to have the bulk of our revenue going forward coming from the patient direct in that fast-growing home health care space, as well as the other half coming from the combination of our distribution and products business with the bulk of that also coming from our products business. We can advance to the next slide. Let's talk about the 6 key items on an investment thesis of why Owens & Minor, and it's really -- it will talk about why we're different than we are today, why we're different today than we were in the past. If we go to the next slide, we'll talk about the first point, which is really around favorable trends. And really, this is about simple demographics in the United States. You continue to have an aging population, and you continue to have an unhealthy population in the United States, which is driving comorbidity as well as more and more advanced treatment at home. If you look at just the simple CAGR here of at home or treatments at home, it was in the 4% range, growing to a 6% range. If you look at us in the history, 2019, 2021 -- through '21, our Byram business grew at close to 20% in a market that was growing around 6%. Again, we believe we can take those same activities of what we've done at Byram, translate that to the Apria business and move them from low single digits at a minimum first to market growth and then more advanced growth. If you go to the next slide, some of the other robust trends we're seeing in the market. And we get a lot of questions on this. This is on our manufacturing business. And the question comes up and says, "Hey, prepandemic, your volumes were here, pandemic peak, you were here. Why is it going to be closer to that peak level going forward?" Here's the reasons why. Here's what we did over the last several years. First and foremost, we won business. We gained market share within our PPE in the marketplace. Why? because our model is different. Our model is different in the fact that we're manufacturing that product. We have the raw material, the design as well as the manufacturing versus others who are sourcing that product and couldn't get the product. It was also the aha! moment for our customers that said, just because the other company's name's on the box, the assumption was they made it and didn't realize that was being sourced, and sourced from Asia. Second is protocols. We've seen hospitals increase protocols. That's who we're selling to, medical-grade product to the hospitals. We're not selling to the person who's walking down the street, who's turning around and going to the grocery store. We're selling those to hospitals. So those protocol levels have increased drastically, and we expect them to maintain. Third reason why we think there's -- we're going to continue to grow much faster. Over that period of time, we diversified our portfolio, and we did it 2 ways. We did it first by expanding our manufactured portfolio of PPE beyond that into other areas like chemo-rated gloves, surgical gloves and frankly, clean room products. Those same products that can be used in the hospital, we now have the ability to use in clean rooms. So expanding that product portfolio into new marketplaces, taking the existing product portfolio and expanding that into other areas like retail space. In addition to that, why we think this is very different is the fact that we've driven so much operating efficiencies within our facilities that we believe we can continue to manufacture those products at a much lower unit cost than where we were in 2019 when we still did relatively well in the marketplace. So those are some reasons why we expect this to continue in those levels to be much higher. I'll touch on a couple of other areas. One is international market. During the height of COVID, we cannot export products from the United States out to other parts of the world. So our international market did constrict. Right now, we have the ability to go back after that business, and we're seeing tremendous growth in that space where companies are coming back to us that have always used our product. Here's the other thing that this slide doesn't talk about, and it's the global supply chain crisis we're in today. So a lot of people look at it and say, "Great, global supply chain crisis, that's going to help you for the next several years." But then what happens when that's fixed? How are you going to compete with a Chinese-made product? Here is what we don't talk about a lot is over the last several years, we've made substantial investments in our manufacturing business, not just to drive throughput, but expanded our manufacturing capability because there's a perception that all of our stuff is made in the U.S. The reality is we have flexibility. We've improved and enhanced our operations in Mexico as well as Honduras. So from a wage standpoint, we have the ability to make the same product in North Carolina or in Honduras, in Texas or in Mexico, and the ability to wage arbitrage to make sure we're competitive against products that are being manufactured in Asia. In addition to that, we're going to have a distinct advantage on transportation because for us, it's a truck drive. It's not necessarily shipping the product from China across the ocean to the United States. So those are reasons why we believe PPE is going to continue to be robust and strong for us. If we can go to the next slide and talk about a second point. This is really -- I covered it earlier. We're frankly a market leader in the fast-growing home health care sector. You can look at the growth rates on here, and you really -- if you want to take a look at it, some of the 3 highest areas: diabetes, expected to grow at 9%; respiratory devices, 6%; obstructive sleep apnea, those 3 categories will be the strongest 3 categories and the largest 3 categories we have of this combined business. So not only are we in the fast-growing home health care space, the space that we're in is in the fastest growing within those categories. In addition to that, strong growth throughout the rest of it. If we can go to the next slide. So I've touched on this a lot already, and this is really -- it's important to understand this vertical integration. So the vertical integration creates stability. You think about inflation, of where inflation is today. For us, inflation is different than companies that source their product. Because about 80% of what we make, we're making in our factories. So take a simple mask. Here is the only raw material we're buying, that's polypropylene. That polypropylene is then shipped to our factory from Texas to North Carolina, where we make the nonwoven fabric. Then we take that nonwoven fabric and convert it into any type of PPE that's fabric based, whether it's a mask or gown, shoe cover, buffon, drapes and surgical wrap. We then convert it into that, and then we drive it to our warehouse and distribute it versus others where all parts of that manufacturing chain create inflation. Others aren't buying it in polypropylene, they're actually buying the finished good, which means inflation and margining up has occurred from the polypropylene acquisition to the fabric manufacturing, to the actually converting of that to the finished good, and then actually on the shipment back to the United States. So that has made a huge difference, and it's enabled us to create a competitive advantage and build relationship with customers long into the future for volume and price commitments. If we can go to the next slide. We'll cover a little bit here on this vertical integration. I talked about this before. I talked about it that really the ability to make the product versus sourcing it, the ability to have a strong distribution business, which is where we're at today, and then continue with that patient beyond the hospital and into the home continues to add value. If we can go to the next point on investment, point number four, which is, really -- I touched on this a lot again. This is the -- we're not the Owens & Minor of old. We're the Owens & Minor company today that, frankly, you're going to see post acquisition where you're going to have a substantial portion of the revenue split 80-20 between patient direct and products and home health care services. But on EBITDA, as you saw earlier on the slide, we'll have a 50-50 balance between those 2. We can move on to the next slide. Here's the other aspect of it, continuing to drive strong cash flow. As a company, when we joined, we had north of $2 billion of debt. We had a 7x ratio of debt-to-EBITDA. We've driven that down now well below 2. We're going to spend some of that money to reinvest for growth. We're not looking at doing share buybacks. We've eliminated dividends and that's going to have our ability to continue to invest. And we believe that within 18 to 24 months, we'll be back down into our target range of 2 to 3x. And that's really driven by the strong cash flow of the business, both the manufacturing business as well as strong cash flow within our patient direct or the recent acquisition combined with Byram. If we can move on to the next slide. Really, the last aspect here is we got an experienced management team. And experienced management team that has strength both in manufacturing, distribution and all aspects as well as in the home health space. Whether it's Andy, Jeff and obviously, myself, Andy and Jeff, we all worked together at Thermo Fisher for years, and really understand the combination of manufacturing and distribution. And then you have both Perry and Dan. Dan, the former CEO of Apria, who's agreed to stay on, and Perry, who's run a tremendous business. I think if you just look at the track record from 2019 to where we are today, in early '22, of this management team, really it's a group that rolls their sleeves up and wants to get in and understand to continue to fix the business and advance it forward. And an entire group that's focused on one thing: long-term profitable growth. Let me go to the next slide. I touched a little bit about this, is the 2 acquisitions we've done historically, both our Byram business and our Halyard business. Frankly, Byram has been tremendous over the last 3 to 4 years with incredible growth, close to 20% growth, and all the decisions we made in real time over the last few years and reinvested back in our manufacturing business has done a couple of things for us. It's going to make sure we're competitive for a very long time, to make sure that we have tremendous amount of flexibility to be able to serve the customer as well as our ability to grow substantially. And with that, we can advance it to one last slide, I believe, which is really a summary of what we've talked about here -- what I've talked about here. It's really all the different things of why Owens & Minor is very different today. Strong financial performance, debt pay down, leadership team that wants to drive the business forward, the right investments we've made in our manufacturing business to grow that substantially, the right investments we've made in our home health care business to get -- to again grow substantially, the right investments we made, frankly, in our distribution business that was broken 2 years ago or 3 years ago. The investments we made from technology and touch as well as artificial intelligence, whereas now we're at 99.9% on-time delivery, our service levels. The right product picked in for the right customers up to 99.9%. And that continuation of driving continuous improvement to fix all of those businesses and then all 3 components of that value chain. All of our manufacturing capabilities, which makes us different, a strong medical distribution business, and then lastly, growth in our home health care space. So with that, I will pause and we got a minute or 2 if there's anything you want to go forward with.

Yes, sure. I was taking some notes. I'm more than happy to answer a few questions. You want to sit down because I have a 2-minute fireside chat. Okay. So one thing, obviously, think about overall home health, whether it's home oxygen or home nursing or some of the other home health services, there has been some different historical dynamics going on as far as the industry from time to time being a source of reimbursement reductions to pay for other health care initiatives and some of the administrations in Washington. So the 2-part question around that is, one, how do you think about that risk going forward? But two, kind of more conversely, is there anything about some of the recent reimbursement changes either in home health or home oxygen that maybe made this Apria acquisition potentially more attractive from your perspective?

Yes, I'll start with the second part of it. Look, we're happy and pleased with what CMS did. CMS increased reimbursements over 5% for 2022. So from that standpoint, we're really pleased around that as an opportunity for us to also look at that as the baseline for the private payers, sitting down and having the conversations and pointing to the baseline that CMS has created with that increase. I think the other aspect of this, I talked about it, I think there's an opportunity to drive operating efficiencies and industry roll-up. We have the ability within our product portfolio to look at some bundling approaches where others don't. And I think those are going to continue to have a benefit going forward.

Okay. And then the other question is, as we think about the holistic margin for you guys in home health between dispensing some of the products versus manufacturing a decent percent of what's going to be dispensed and used in the Apria assets, would it be appropriate or inappropriate to think of yourselves as a potential disruptor of the home health market, given your vertical integration strategy? It's been pretty successful for you guys, obviously, in your core operations, but would you consider yourself to be a disruptor now potentially in home health the way you're approaching it? Or will it be the best way to...

The way I would describe it, I think its ability to be a market leader in reimbursed home health products. It's nuanced there because what we're not going to be is we're not going to be the provider. We're not going to have the clinicians there. And as -- we're not in the retail side. It's really around being a market leader disruptor in the reimbursed home health space today.

Perfect. Okay. All right. Well, with that, we'll end it there. I want to thank you for your time today, and thanks, everyone, for joining this session. Thank you.

Thanks, Steve.