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

Great. Thanks, everyone. Welcome to this session of the BofA Healthcare Conference. I'm Michael Cherny, the health care tech distribution analyst. It's my pleasure to welcome Owens Minor. We have Ed Pesicka, CEO; Andy Long, CFO. I think we're going to keep this in a pretty informal fireside chat. [Indiscernible] format. Obviously, you reported very strong results last week. We're going to work through it as we go. But maybe let's talk about some of the new stuff or newer stuff of the patient direct segment. So over the last -- this year you've announced what has become a large deal in the company's history. Can you give a little sense on why Apria was the right fit at this point in time and how it expands, and I want to make sure everyone knows this, that's not a new entree, but expands your role into the patient direct space.

Yes, sure. So I think we really started to signal this back last year in our Investor Day in May. And I really like -- and we, as a team, really like the home health space for a lot of the secular reasons, because a lot of secular tailwinds. One, and COVID actually helped advance that and the fact that treatment at home has become more and more accepted and it's growing very fast. I think the other thing is you look at the U.S. aging population and then you look at some chronic conditions, you look at obesity. So from a secular standpoint, we really like that. Within the space, we also like the fact that we think it's roughly about a $50 billion space. And within that, there's about 6,000 different players in it, and there's a small amount of large players. And then you take a look at it, and Mike, you're absolutely right. We had a business, our Byram business. And that business was buried within our previous segment, our Global Solutions segment. And I think when we unveiled it in January, there was some surprise that we've owned that business for about 5 years, and we had a CAGR in that business of nearly of high teens. In this past quarter, we grew again at 21%. So it's a market that we -- a business that we grew from around $400 million, $500 million to over $1 billion in 5 years. So those are the reasons why we really liked it because we had an anchor there. And then you take, we took it a step further and we said, where are we in with our Byram business and the patient direct? We had very, very strong position. We continue to have extremely strong position in the diabetes. So that business, our Byram business is focused on diabetes, it's focused on incontinence, it's focused on urology, it's focused on ostomy and several other categories. I also look at why we liked it as we've invested heavily in that Byram business. So that's the brand we had in market, the Byram business. We invested -- we added resources, commercial resources and other resources in the last several years, where others may have been constricting their investments in that space. We've continued to pour our investments into that space and it continued to show in strong growth. So we started to look in the market, we looked at different areas. And one of the areas we wanted to get into was -- is in obstructive sleep apnea as well as home respiratory. And that's really because of the comorbidity on it. Looking at data, we saw that roughly half of type 2 diabetics also need CPAP devices. And that goes to almost 80% of type 2 diabetics when they're obese. So we saw that comorbidity and we looked at how do we get into that space. We looked at it both organically and inorganically. We then looked at several targets and we met with Apria, we liked the culture, we liked the way that would fit within our business. So that was the transaction we ended up going after. We ended up closing on it, and we're really excited that their business matches up well with ours. And there's a lot of different potential synergies as well as how it fits together, which we think can drive tremendous growth going forward. As you said, the other thing I really like about the acquisitions from a capital deployment standpoint in that -- we're able to invest -- going back to our strategic plan that we announced back at the Investor Day last year, this investment allows us to invest in the patient direct business, but it doesn't prevent us from investing in our products and health care services business, right? We're still able to invest both organically as well as through other merger -- through other joint ventures or other relationships to expand our product portfolio. So I think this acquisition allows us to implement our capital deployment strategy, focusing on organic growth and the pay down of debt. And with the cash flow of this acquisition, we think we can be back to our target leverage range in the next 18 to 24 months.

I know there's a lot of positive tailwinds I want to talk about, but I do want to make sure I hit some of the potential near-term concerns, especially so because it's out of your control. You have a recall with one of the key suppliers in Philips. This is a business, not just some of the others that have some supply chain demands. As you think about those near-term headwinds relative to your view, your expectations what you reported, how do you factor those in against what are -- I think everyone in this room would agree to, cycle multiyear tailwinds on that patient direct side of health care delivery?

Yes. So let's just take the one category that's Philips and the recall and ResMed -- there are -- here's what happened, here's what's happened to our business. We have created a very, very large backlog of being able to fulfill those CPAP devices from a respiratory standpoint or CPAP, I should say. But what it's done for us is those back orders are in place right now. And we really don't think that we'll start to recover from that until late in the fourth quarter. So that's going to create a tremendous tailwind for us actually in the fourth quarter and into next year. So the way to think about this is, let's say, we have 50,000 -- I'll use an illustrative example. We have 50,000 units that are on back order right now. It's not like those patients can go to someone else to have that order filled because they have the same backorder issues for their patients. So we actually believe once Philips starts to produce the products and hits the targets as well as ResMed gets additional product out, we'll start to fill those back-ordered units, and that's going to create the ability then for us to get the annual recurring revenue on that, which is another reason why I really like the space as about 80% of our revenue is recurring revenue. So yes, it has created some secular headwinds right now. But once Philips starts to produce the product, that we're going to fill those back order units, and it's actually going to create; one, the opportunity to fill the units and then 2; the major opportunity which is that reorder -- the 90-day reorder for all the components associated with it.

And is that relative to the patient direct business, the biggest supply chain issue that we're currently contemplating near term?

Yes, that's probably the biggest one near term. You have other products that are still shortage stuff that where external suppliers may be having shipping issues from China or from Asia, but primarily that's where it is. And we've built that into our model. I know Andy has built that into the model for the rest of the year, assuming on the Philips that it doesn't start to recover until the fourth quarter, but we really believe it's going to create a tremendous tailwind for us into next year because you'll have your orders continue to build. Then once they start to produce and overproduce, we'll be able to fill those back orders, get the recurring revenue going forward as well as continue to capture more orders going forward.

And it may result in a timing issue on capital spend, right? I mean, we're eager to put forward that capital investment, right, because it is driving that -- the revenue growth. And as Ed said, that consumable stream, but I view as more of a timing issue, right? Once more equipment becomes available in the field to be returned, refurbished and put back in the field, it's more of a timing issue over the next, say, 7 to 8 quarters.

And so going into that because I like to look out past at least a couple of quarters typically, that's a good approach. How do you -- you mentioned it a bit in terms of talking about diabetes as a category where there's clear overlap. How should we think about that? Whether that's the illustrative example or other areas where essentially having Byram and Apria together makes each one better than they were on their own.

That's a great example. So we looked at the acquisition, a lot of times in acquisitions you have overlap and then you -- it's a cost-cutting exercise. So this is not -- this is a growth exercise. We did have $8 million to $10 million of public company costs that we're able to take out. But we've also openly talked about synergies at this point in time. Again, we're 5 weeks post close. We believe $80 million to $100 million of run rate revenue synergies and $40 million to $1 million of EBITDA run rate synergies on this. And it really comes down to the fact that without the overlap, the product portfolio kind of fits perfectly together. Apria was focused on obstructive sleep apnea, home respiratory, DME and then advanced wound therapy. And those are categories that we weren't in an environment business. And I talked about the facts and figures about 50% in the overlap with type 2 diabetics. But -- when we have that, we have the ability now to work together. And from a revenue synergy standpoint I actually thought it would take much, much longer. But 5 weeks in, we're already closing on business that's associated with that, where if we have a relationship because with Byram and the endocrinologists for a person who's dealing with diabetes, we also can have the conversation is your patient using, you have sleep apnea, need a device. And if so, we have the ability to market and work through that. So we're already seeing deals close. I think the bigger longer-term, big win on the synergies on this coming together is the fact that you're going to have IDNs that are also payers, so take large payer providers that are combined that are already partnered with Adapt on home respiratory -- I'm sorry, Apria, on home respiratory or they're partnered with one of our competitors on home respiratory. Then we can turn around and bring in our other products, the diabetes and the other products and work with them to do a combined effort. And I think a great example of that is there's a large West Coast provider and also payer that uses Apria for all of their home respiratory. They also use us for all of the diabetes. Putting that together can provide a unique solution that we can actually use that at other IDNs that have that need.

I know you're only 5 weeks into the deal. So this might be a bit of an early question, but I guess, how is it going so far? And is there anything that, at least having the 2 businesses together has thought you about how you want the evolution of your patient direct business to go from here, i.e., do you feel like you now can address the totality of what your customers are asking for you -- from you from patient direct business?

So, so far, I would say it's going great. Previous jobs I worked at, integration of companies can be difficult. But if the cultures are the same, it makes it a lot easier. As I stated earlier, we're already starting to see revenue growth associated with this. From a product portfolio standpoint, I think there are several other categories where we can continue to expand in the home. I think there's also opportunity for us longer term to produce some of the products, some of the more consumable-based products that our customers are needing. That's going to drive the synergies. But ultimately, it's this. So here's what's ingrained in our DNA as a company. Again, 5 weeks into it, we have targets out there, $80 million to $100 million on revenue, $40 million to $50 million on EBITDA. That's not the closing mark. There's opportunities. We continue to lend more, continue to find more and more opportunities for synergies. Once we -- I believe we implement our business system, we'll be able to drive more savings. But here's the data point I would point to. So our Byram business. Our Byram business has been growing, again, in mid-teens for the last 4-plus years since we've owned that business. In my tenure here, it's grown at that pace or higher and last quarter at 21%. Frankly, Apria, when we bought it was growing in the low single digits. So a small low single-digit growth versus close to 21% growth. Putting the rigor and discipline in the commercial process in Apria that has not existed leveraging that commercial process in Apria is going to drive organic growth just on a stand-alone basis. Then you layer on the synergies and the opportunities to cross-sell and comorbidity, that's going to continue to accelerate growth. So the history of what we've been able to do with Byram gives me a lot of confidence in what we're going to be able to do with Apria on a stand-alone basis, let alone the synergies layered in on top.

Got it. Let's turn to the products and services business, and I apologize, you rebranded them, so I might go back and forth between some of the other recent segment names. But -- and this isn't meant to overly criticize competitors, but there's been a stark contrast between the consistent results you've been putting out versus some of your peers that have seem to struggle more. I'm not trying to ask for this to be an advertising for all my share alone. But from a strategic differentiation perspective, what are you doing? Where are the components of profitability generation coming from that your peers may fall short on?

So let me first start on the segmentation, I know it wasn't part of the question. But one of the things I do want to point out is the fact that with our 2 new segments, about half of our EBITDA will be coming from the Patient-Direct segment and the other half is now coming from this segment, our Products and Healthcare Services segment. So here's the thing that makes us different. It's really our operating model or we call our value chain. So from a manufacturing standpoint, there's a lot of companies out there that have their labels on boxes. And most of those products are sourced from overseas versus ours, our surgical infection prevention products, our Halyard brand products, we're making ourselves. So the bulk of our private label, if you want to call it that, are our brands we're making in our factories. So what that's been able to do is during COVID, be able to capture opportunities and capture business. In addition to that, when you have fluctuations in pricing, our fluctuations in pricing have been far less than others because we're controlling that entire manufacturing process. So I used an illustrative example of this, which is really around fabric-based PPE. So the only commodity item we're buying is the raw material, that being polypropylene. We're then making the fabric, we're then converting the product, and we're then shipping it primarily from the United States or Mexico or at a stretch Honduras. Versus others, others are having to buy their product in a spot buy in the market. So we've seen prices fluctuate on those. And you've seen -- we've seen some of our competitors take significant write-offs in their previous quarter and even this quarter. We've seen some of our other competitors talk about the cliff for the revenue drop off. We haven't seen that. Why have we not seen that? I think it's; one, starting with that manufacturing model. I think the second thing is, as we've been transparent with our customers, a product price may have gone up from $0.05 to $0.07, and we've showed them that the $0.02 increase is the raw material, whether that's nitrile or whether that's polypropylene versus others are sourcing the product from somebody who is using market dynamics to set the pricing. So ours may have gone from $0.05 to $0.07, theirs may have gone from $0.05 to $0.10, well, the customer is only willing to pay for the $0.07, which is what we're setting it at. So we're able to capture that. And I think what's interesting is, in the last year, we have pushed into the markets, $0.75 billion worth of cost increases. Then the second aspect of it really has been around our ability to drive continuous improvement and take waste out of our system to continue to offset that. So those are some of the main drivers in our manufacturing than the fact that we're actually making the product versus other companies are primarily sourcing. And the last thing is, I would say, is during COVID, our ability to flex up, it created the ability for us to go out and capture business and put together long-term agreements. So just a couple of data points in this quarter is our Q1, which we just reported, we actually saw PPE grow from Q4 to Q1 sequential growth in PPE in our manufacturing business. We actually saw N95s, which a lot of other people were talking about shrinking grew again sequentially from Q4 to Q1. So the question is, how are we doing that when others are actually seeing it shrink. It's more than just -- it's more than just our manufacturing footprint. It's the fact that, one, we have long-term contracts with our customers; two, we don't make; two, we manufacture products; three, we don't just make one product like an N95, we make the entire portfolio of S&IP products, which then enable us to bundle and put that together in a broader offering, where others are in one area. Next, we talked about taking our products and moving it into new markets. So we're taking gloves, and we move gloves from traditional gloves from health care, we're moving it into retail. We've invented new gloves -- new clean room gloves to go into the clean room markets. We have a broader clean room portfolio apparel to go into the clean room market, gloves that go into life science now. So broadening that portfolio, and you take N95s internationally, we shut down our international sales, in essence, during COVID. We're making our N95s in the U.S. So when the U.S. government shut that down because you couldn't export product, we frankly lost market share internationally. Well, now that, that restriction has been lifted, we had tremendous amount of customer base that was out there. We've been able to now go back and replenish that and start to grow our international market again. So while others have seen that drastic fall off, we've actually -- we have seen fall off in what I would call was peak pandemic demand, but filling that gap with all these other things have helped us tremendously.

And I guess along those lines, one thing that always struck to me is the fact is that onshore and nearshore manufacturing components. We don't -- maybe I'm mistaken here, but a lot of us didn't think about shipping routes [ partnership ] in terms of getting here, it's just always here. How do you think about where this becomes an ongoing competitive footprint in terms of manufacturing capacity in the event that we do get shipping routes reopening? And where do you sit right now in terms of that capacity, build out capacity utilization that you've been talking about previously?

That's actually a really good question on capacity. So here's where we are on capacity. On gloves, we're at 100% capacity in our facilities. We can't -- we don't make enough of our own gloves to fill orders. We historically made roughly 40% to 50% of the gloves in our own facilities. We added an extra 1 billion to 1.5 billion of gloves, and that's still going to only add another 10% to 15%. So our glove capacity is at a 100% with that glove capacity we added. The other benefit we got those are our variable cost or our cost per unit has gone down because we added no infrastructure, went to an existing facility with the existing infrastructure that was there. So our cost per units gone down on that. And that's going to remain at 100%, I think, for really forever, you can never say forever, but that's in our glove capacity. If I think about the fabric-based, so in 2019, we added capacity to add additional fabric. That fabric production is still at 100% capacity because that fabric can be used for multiple things, which is everything from surgical wrap and draping to isolation gowns, to N95s, to surgical masks. So that's the live capacity. Then on -- in our overall PPE, some of the garments and the facial protection, we're below capacity on that, but we have the ability now to flex up with surges with customers. So we've worked out -- we worked agreements with certain customers, where we have the ability that product coming off of a line, the extra capacity off of that line is dedicated to them for a fee and a service. So that way it's safe for them. But we do have the ability now to flex and scale with that. So that's really where we are on capacity across the board. I think to Andy's point, we're going to continue to look at where is the right investments and where is the right capital deployment on that. Our biggest one was the glove manufacturing in Thailand. And in this quarter, we just started producing gloves, and we'll continue to optimize that for the year. So that's where we are from a capacity standpoint, as of today.

And I guess along those lines, and I hadn't really thought about 100% glove capacity forever, but a good problem to have. We've all been debating where the new normal is for PPE and PPE demand. And I think pleasantly surprised as I was to see your PPE sequentially improve given what feels like less usage just from observational [ components ]. So along those lines, do you think we're at the new normal yet? And if we're not, what -- what is it going to take to get there?

Yes. So that's a difficult question to define the new normal because when we do it, we don't say that, that these masks or these gloves coming off of our line are going into health care because they're also used in other space. So gloves is another great example. Those example, gloves are used in another space. So we've seen that we've seen it come down, but we've also -- we've also seen us fill that gap with other opportunities. So I would say from the peak of pandemic to now, we're pretty close to that new normal. We have modeled in some more decline between now and the end of the year. But where we are right now, we are below where the peak was obviously. But what's been fantastic is the initiatives we put in place to fill that gap, again, by taking the products into new markets like life science, like health care -- sorry, like retail, the international markets, frankly, during the peak, if we would have maintained our international markets, we would have been even higher -- could have been even higher. But we were at the peak, and we weren't selling internationally. So when that came -- that came down, we helped fill it with international sales. So I would say we're pretty close to the new norm on pandemic-related sales, and we do anticipate a little bit more of a decline, but yet continuing to use those other ways to fill those gaps.

And I guess along those lines, in terms of filling gaps, one of the other things, I know it's been a big focus point has been share gains. I remember prior to you both Ed and Andy joining, it felt like every -- all my call that I was on, there was a loss, unfortunately. It's just -- and the business has really been revamped in a spectacular fashion, obviously, the success has been there. As you think about those share gains now, how do you think about the bifurcation of who you're winning share from whether it's traditional markets, new markets? Is there a geographic component to it? How do you think about those dynamics in terms of what's led to recent share gains. For us, all we see is the periodic press releasing, all my one sharp contract. That's great. But beyond that a lot of it is just under the hood in terms of unless we see a result -- until we see results.

Yes. So you're right, Michael. We lost a tremendous amount of business in 2016, '17, '18 and even into '19, billions of dollars of business because our service was so bad. And we joined -- we focused on service, service, service, figuring out a way to continue to improve it. Now our fill rates, our on-time delivery, our shipping accuracy, just take those last 2, on-time delivery and shipping accuracy, something you have 100% control over. Those are in the 99% plus range now. Fill rates at times with external suppliers are tough because of international -- some of the export or import issues, but fixing the service levels enabled us to win business. And we've won business in that sense. In addition to that, our model is a little bit different in the fact that we have manufacturing. We also are a distributor. We can help them in the home. We won business that way. We've won business because of our flexibility and the fact that we have the ability to adjust quickly to change from a customer to drive operating efficiencies within their business. We've driven waste out of our own business, so that way, we could -- we could adjust our pricing, too. And if you take tens and hundreds of millions of dollars out of your system, because there's waste in it, now you can price more competitively too, as well as winning share. And then really all the goodwill we've done, we've earned during the COVID era or the COVID period to help us win -- win and gain new market share. The short answer is this is we talked about it last year in the third quarter, we talked about it in the fourth quarter, we talked about it in Q1 of new market wins, net new wins that is driving revenue growth for us. We used a couple of examples like University of West Virginia, where we partnered with them. And that's actually a good example because it's a unique approach. So customers are also looking at it and saying, I don't want to have what happened to me during COVID happen again. And there's now customers saying, I want to control supply chain. I don't want to have a distributor potentially. I want to partner. And that's where we can step in because our ability to take our model and put it in a warehouse, and that's actually a way to service them, where we can manage or they can manage the inventory. We did a deal with a company out on the West Coast, where they were looking for that solution. Others in the market said, put your product in our warehouse, we'll do a warehouse within a warehouse. And we just said to them, if you want to buy the warehouse, buy the warehouse, we'll let you determine the amount of inventory that you put in it. But we'll put in all the systems, we'll put in our racking, we'll put in our warehouse management system, we'll put in our people, we'll put in our processes. And now we've got a decade-long agreement, where we're going to manage that system for them, we're going to manage the warehouse for them, and they're going to own the building and the inventory. Just think 10 years down the road when that comes up for a bid again. And now we're sitting in there with racking, with the systems, with the people, with the process, that creates stickiness that just being a transactional-based customer doesn't. So that's why we're continuing to win in the markets. And frankly, I think with expectations that, that continues.

I want to make sure I address this. You did your Investor Day in May 2021. You provided 2022 guidance at that point in time, which for most companies is early, which is great. Since then, I might be missing some things, but global supply chains have gotten worse across the board, inflationary pressures, both in terms of [ I'm sure ] acquiring products, but also within your own employee base that clearly have risen interest rates are higher, yet EBITDA guidance and core EPS guidance was maintained -- has been maintained from May '21 now sitting almost a year later. You talked also as well about the fact that [Indiscernible] inflationary pressures, guidance would have gone up?

You bet.

So as you think about all of those factors, I guess, what is it about your model, most importantly, that allows for that natural balance to occur?

I don't -- we -- I didn't talk about a lot here, but it's -- we have a business blueprint, and it starts with our culture, and this is going to sound cliche, but having 17,000 teammates knowing of how we want them to operate and all row in the same direction makes a huge difference. The second thing is our Owens & Minor business system, which is really around continuous improvement. It's not Six Sigma. It's not a [ drawdown ] process. It's extremely practical. It's really focused on fixing problems. We've taken a tremendous amount of waste out of our system. So as inflation has occurred, we've taken waste out of our system. At times, we probably expedited some of those programs because of the need, because of the inflationary pressures we had. We've now taken an approach with our customers, which is unique that we'll optimize transportation and customers are now receptive to it because if you can find a way to make it easier for them and easier for you and save both size money, they're willing to be receptive to that. Example is changing routes, so that way, we can get into a city early in the morning versus at 9'o clock. We can then now have our driver potentially make a second run, not delivering to 3,000 locations because that forces the hospital to put the products away to 3,000 locations, narrowing that down. So -- it's been that focus on continuous improvement, where we've eliminated a tremendous amount of waste and drove huge efficiency. When inflation goes away and comes back down, that efficiency is still going to be there. And we've used that now to offset the inflation, the expectations of inflation would -- and if gas prices stay at $4.50 a gallon, well, then we'll continue to drive more efficiency that to already offset that. But if it comes down we're going to have tailwinds behind us. And that's one of the things we did. I think being transparent with customers, where we pass through $700 million of glove cost pass-through instead of the other option on it. That's another reason. So in full transparency, we were probably starting with more low-hanging fruit than others had from where we were. So it's a combination of all of that. But that's what's enabled us to not move, not waver from it and as well as better growth than we've had experienced in the past.

Awesome. One last question, sure, almost out of time. I think it's a quick one. Andy, you talked about 18 months, 24 months being the target for debt paydown to get to your target leverage levels. How should we think about what happens on capital deployment perspective after that?

Yes. I think after that, I think we'll be -- can go back into the marketplace. We'll have that ability to leverage up again for the right acquisition. It doesn't necessarily have to be a large acquisition, but it could be something that's more strategic and targeted. But I think we see a very long runway of organic investments in the business. And then, I think longer term, we've stopped the dividend. We're going to get to a point, where this business is going to be generating cash flow, have debt under control. And I think we'll have really all the levers available to us in terms of capital deployment. We've got a very stringent, very disciplined capital deployment process. We've demonstrated that in the past, and we'll continue that into the future.

Awesome. Both Ed, Andy, Alex, so recently joined IR. But thank you all for being here, and thanks for all the update.

Thank you.