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

Good morning, everybody. Thanks again for joining the UBS Healthcare Conference. I'm Kevin Caliendo, health care service analyst. We are very proud today to have management from Owens & Minor. We have Ed Pesicka, the CEO; and Andy Long, the CFO. Gentlemen, thanks so much.

So good morning, everyone. Obviously, we filed this information in the 8-K this morning to safe harbor there, which everyone can read. Here's what I want to start first and just a little bit of background on Owens & Minor. And the reality is where we are as Owens & Minor, we are focused on long-term profitable growth. From a company standpoint, really where our strength is, is we have a long history of distribution, which -- whether that's distribution in the acute care space or even in the home. In addition to that, we've got a really strong manufacturing capabilities, and we continue to strengthen and advance our home health care solutions, which I'll talk about in a little bit. The foundation of Owens & Minor really is our people and our teammates. And it's really the Owens & Minor business blueprint. And that starts with our teammates focused on our mission, which is really around serving our customers or empowering our customers so they can advance health care. We're there to make sure we're doing everything we can to support them. And then our values and how we operate. We then partner with a tremendous amount of suppliers. In addition to that, we have very strong payer relationships as well as provider relationships. And ultimately, we have the ability to serve them throughout the world. If I think about some of the several key business highlights. From a highlight standpoint, the reality is we are a leading provider of health care, really being able to serve the customer all the way through the hospital and now expanding that into the home. In addition to that, it's a vertical integration model that we have, both in manufacturing, where we're actually producing the raw materials all the way to finished goods, having the ability to take that product into the hospital and now continuing being able to serve the patient all the way through to the home. Our 114-year-old business. What's unique about that is the fact that we have evolved over time. We continue to evolve. We talked a lot about it last year, about a year ago in our virtual Investor Day of how we want to continue to expand into home health. We're doing that. So the business will continue to evolve. And the expectation is we last hundreds of more years into the future. The Apria acquisition, you'll see later how that's really helped diversify both revenue, but more importantly, it's helped diversify our EBITDA. And finally, you'll see the facts and figures here around our strong operating cash flow, our ability to pay down debt, deleverage the business while still being able to invest in what we think is necessary for long-term profitable growth. Moving on. We use the slide often. It really depicts how you connect the different parts of Owens & Minor. We call it our value chain. It starts with the manufacturing of our products where we actually manufacture the products with our people, with our process, with our technology in our factories. Then finish the products and then deliver them through our network as well as other networks as well as bringing a significant amount of external suppliers. We've got great product brands out there like Halyard, like MediChoice. In addition to that, like I said earlier, we do partner with a lot of external suppliers to best serve the customers' needs. And then on the far right side of this page, we've actually continued to expand our ability to serve the customer into the home, which I'll share in a little more detail later. So a little bit different depiction on this. So if you think about it from a starting standpoint -- is the reality is the distribution network enables us to control the channel. And that -- the word control can be used in different senses. But what it does, it has the ability in the acute care space or even in the ambulatory space or even in the home to be able to provide choice to our customers, to be able to lean in appropriately with our brands and our products into that space. The model that we have, which we'll show in a little more detail, it has fewer logistics touch points because we're manufacturing a good portion of our products and our factories. We have the ability to get them to the customer with fewer touch points as well as being able to drive more efficiency in the operations. We have a great distribution network, whereas we can get to a majority of the United States population within several hours. In addition to that, we have invested in the right level of technology and touch in our distribution centers to drastically improve our service levels. Now our accuracy, our shipping accuracy, putting the right product in the right tode for the right customer, we're 99%-plus. On-time delivery, the trucks showing up when it's supposed to, and that's critical for our customers because that helps drive efficiency on their side, that's at 99%-plus. So that's where that distribution model continues to be -- continues to strengthen. So we talk a lot about this as a vertically integrated approach of the value chain. Let me use an illustrative example here on this slide. So on the top of the slide is our model. This is what we do as a company from our manufactured products all the way through into the hospital. The bottom side of the slide is what others in the industry do, which is really a sourcing model. And I talk about the reduction in steps as well as the uniqueness. So in our model, you take a fabric-based product, whether it's a gown, whether it's a mask, whether it's an N95, whether it's wrap, whether it's drape, those types of products. First and foremost, we start by making the raw material, the nonwoven fabric in our North Carolina facility, whereas others actually potentially source that product. So the only true raw material we're buying is the polypropylene that's coming out of primarily Texas. We're then converting it into that fabric. That fabric is then moved into our facilities, whether it's in the United States in North Carolina, in Texas in our facilities in multiple locations in Mexico or in Honduras. We then finish that product into, again, whether it's a gown, a drape, a mask, an N95. Then we have the ability by truck, not by container ship to move that product right to our wholesale distribution, which then can go to -- through our own delivery methodology into the customer. So there's tremendous amount of control in that process versus others. Others primarily source their products. And when you're sourcing your product and those products are primarily sourced from overseas in China. So what happens in that process? In that process, there's a time difference and a complexity difference. So if you think about it from a time standpoint, first and foremost, an order is placed for a product to be made by a third party in China. That third-party manufacturer most likely isn't vertically integrated on making the fabric and then turning around and making the finished good. So you have that level of complexity. You have that ability to drive inflation and cost. Then once that product is finally made, it's got to ship to a port, whether it's a Shanghai port, which may not be open or another port in China. Then it's got to be transported across the ocean. And again, container cargoes used to cost $2,500. Now they're up to $20,000 depending on the routes you're taking. Then it has to arrive in our ports and then it has to be unloaded from the ports, it has to then be delivered to the distribution center. All of that has to happen versus in our scenario, we're making the product, we're putting it on a truck and it's at our distribution center. So why is that critical? And why is that important? Because as prices have fluctuated, you've seen a lot of changes in the marketplace and the fact that you may be buying product from a third-party 3 or 4, 5 months ago at a premium, and now it's complex and difficult to sell that at premium because the market prices have come up and down. The other thing it's done is it's enabled us to control inflation better because, again, the true inflation aspect we have is the polypropylene coming out of Texas. It's not the inflation associated with buying the fabric. It's not the inflation associated with all the other aspects. In addition to that, in our facilities, we're running as close to capacity as we can, which takes our piece price down. I think there's a lot of thought and a lot of conversation around this that says, okay, great, you're U.S. manufacturer, American-based manufacturer. With that manufacturing footprint, we also have the capability to manufacture product in multiple locations. So we can make a gown in North Carolina. We can produce that same gown in Honduras. We can look at that together and cost average that down to be globally competitive. And then in addition to that, we're competitive because our transportation cost is vastly less than the transportation coming from Asia. So I think it's important to spend a little bit of time on this illustration of what makes us different in our manufacturing products that then go through our distribution versus some of our competitors that are distributors, but primarily source products from overseas. So let me move from the hospital, our manufacturing and our distribution business, which we call our Products and Healthcare Services segment to the end aspect of that, which is our patient direct business or that in the home space. So a year ago, we had a virtual Investor Day. And we talked about the home health care space. We talked about how much we liked it and why we wanted to invest in that space. And here's why we like it. I won't start at a macro level from demographics. You continue to see the aging U.S. population. As population ages, chronic conditions and other health care conditions continue to increase, which can create market growth for us. We looked at certain areas. We were strong in diabetes, and we looked at the comorbidity or co chronic conditions of that, home respiratory and obstructive sleep apnea was an area we wanted to get into because you look across some of the data points of why it's important because you can -- with that aging population, there are still a number of people, a significant number of people we believe about 80% of the population that still hasn't been diagnosed with obstructive sleep apnea. You take that obstructive sleep apnea, which is where we didn't have strength and we needed to grow that. But you look at our diabetes space where we have strength, and you put those together, about half or 50% of type 2 diabetics also have obstructive sleep apnea. When you get an obese person, a clinically obese person, that moves up to 80%. So there's opportunities to drive that together. If you think about the aging population, you think about some of these chronic conditions, you also think about the acceptance of home health. COVID has expanded that and accelerated the acceptance of home health. If I think about the generations that are getting older, they want treatment in the home, which is why we wanted to continue to invest in it. So a lot of people in the market were doing the same analysis and looking at it, we actually acted on it. And we acted on it and we acquired Apria. We closed on that in the first quarter. So just a strong acquisition, and here's why we like the acquisition. We looked at where we were strong. We were strong in diabetes, ostomy, incontinence, wound care, traditional wound care and other categories. Apria was very strong in obstructive sleep apnea, home respiratory, traditional DME and advanced negative pressure wound therapy. So the product portfolios did not overlap. They actually fit together perfect and the fact that you also had chronic conditions that needed and relied on each other. You look at the macro level market growth rates on the right side of the slide, fastest-growing space is diabetes. That's where our strength was. The next 2 fastest-growing spaces were obstructive sleep apnea as well as home respiratory, strength of Apria. You put that together, it creates a tremendous ability to better serve our customers. Besides the products not overlapping, our call points were different. Call points were on the endocrinologist in diabetes versus the sleep clinic in -- for obstructive sleep apnea. So you have the opportunity to now work together. You can provide a broader solution also for the payers, so that way they can go single source on this. Great relationships had some of those IDNs that are both IDNs as well as payers or providers and payers together or IDNs that don't have a payer relationship or a captive payer that is now looking for the right solution to help them serve their patients and be able to do the third-party reimbursement. We also like the fact that we've historically had shown very strong growth in our Byram business, and I'll talk about that in a couple of slides later. So you look at this and you say, okay, from this management team, one of the biggest acquisitions that have been done in the company's history, north of $1.5 billion, $1.6 billion, $1.7 billion acquisition. But what we've been able to do is prove that we've been able to integrate businesses and be successful. So we joined about 3 years ago, we had just bought out Byram about 1.5 years before that. And about a year before that -- the year before we joined, we just closed on our Halyard acquisition. I will tell you this, in my tenure at Owens & Minor, our Byram business has grown in the high teens year after year after year. As a matter of fact, in this last quarter, as we continue to accelerate our Byram business, our Patient Direct business grew at almost 21% in Q1 of this year, 100% of that organically. So we've been able to drive that business, keep it in the right channel, keep it focused to see huge growth. In the Halyard business, when we joined the company, again, the business was struggling a little bit. And yes, pandemic did help us. But in the same sense, we used different ways to maximize and optimize the throughput of that business to take cost out of that business and to significantly gain share in the marketplace. Again, being able to put the integration of that business together with our Patient Direct or -- I'm sorry, taking that Halyard business, the manufacturing business and put it together with our acute care distribution business. So as a leadership team, here at Owens & Minor over the last 3 years plus or almost 3.5 years, we've successfully integrated the Halyard business for great growth, great EBITDA output. We've successfully grew the Byram business at tremendous rates. And the expectation is that's going to continue with the most recent acquisition of Apria. So I look at where we are today. And if I would look back 5 years ago. 5 years ago, Owens & Minor's profit and EBITDA primarily came from the acute care distribution space. There was a high concentration. If you look at how we've accelerated the business over the last several years, specifically in the last 3.5 years, we now have virtually half of our EBITDA coming from our manufacturing business with some of it coming from the distribution business and the other half of our EBITDA now coming from our Patient Direct business, again, one of the fastest-growing spaces in health care, where we have very strong positions. And I think that's important to understand. We're not the Owens & Minor we were 5 years ago, where everything was about third party -- distribution of third-party products in the acute care space, completely diversified and have created equilibrium between manufacturing and the Patient Direct space to drive our profitability, long-term growth and the EBITDA within those 2 segments. So let me talk a little bit about why we have comfort in our ability to move forward. So first and foremost, strong free cash flow. If you look at our cash flow, our cash flow has grown at 30% under this management team over the last 3-plus years. And that expectation is that continues. That free cash flow has enabled us to pay down debt, enabled us to execute acquisitions and enabled us to invest in organic growth in our business. We expect this year alone to generate roughly $400 million of free cash flow. Why is that important? That is important because it enables us to pay down our debt, it's going to enable us to hit the long-term targets in 18 to 24 months to get our debt back within the 2 to 3x. In addition to that, here's what it doesn't do. It doesn't hinder our ability to invest in our organic investments in the rest of our core businesses. So that's strong free cash flow we expect. And really, the key takeaway on that one is the real capital deployment. We've been disciplined in our capital deployment over the last 3 years. We'll continue to be disciplined in our capital deployment. We'll focus on paying our debt down. While in the same sense, we're going to continue to reinvest back in the business, back in our manufacturing footprint, back in making sure that from a distribution standpoint, we have the right mix of technology and touch, investment in operations like our West Virginia announcement that we did with the State of West Virginia to expand our footprint there. And then continuing to invest and pay down our debt from our acquisition of Apria as well as continue to look at that industry. The home health industry is significant. It could be as high as $50 billion of total opportunity in the home space where all the different categories we currently participate in today, plus future categories, and you're talking 4,000 to 6,000 players in that space. So that's the way we're thinking about the future capital deployment. I'll talk about one thing because our last -- we just released Q1 results roughly 3 weeks ago. And our Q1 was another very strong quarter. We talked about this last year. The momentum we had from Q4 in last year would continue into this year, and it did exactly what we expected. That momentum carried into this year. So what's unique too is the fact that revenue was up in both of our segments. While in others in the industry, you're seeing decreases and decreases, we grew our N95 sales sequentially from Q4 to Q1. So we continue to grow our product portfolio of sales into the marketplace. And we continue to see sequential margin expansion. We talked about this in the fourth quarter that we would anticipate a sequential growth in margins, which we saw from Q4 to Q1. And you can see from the slide, 22% growth in adjusted EBITDA and 90 basis points of sequential growth in both the adjusted operating margins as well as EBITDA margins. And why are we able to do that? I spent a lot of time talking about what makes our business model different. Our manufacturing footprint, the fact that we actually manufacture, the fact that we can control costs much better in that space, the fact that we used our Owens & Minor business system to eliminate waste in the business, continue to gain share there. The opportunities we've had in our medical distribution because of that, what we've been able to service them on in our products in addition to being able to have a unique model that serves them best, provided growth. And lastly, our Patient Direct, our Byram business, which has just been tremendous. Again, high teens growth over the last -- since in my tenure with the company, and last quarter, almost 21% growth. In addition to that, first quarter, we completed the -- sorry, the Apria acquisition, announced it January 10, closed it on March 29. And the momentum from that is already starting to translate. Some of the synergies we've talked about are already in place and the expectation is they continue. And I want to leave the audience with making sure you understand is that in the last 3.5 years, we spent a lot of time working on integrating both Byram as well as Halyard in Owens & Minor, both with great success. It's in our DNA. It's -- we know what we're doing. And we have a detailed plan already on how we're going to -- how we're in process already of implementing the acquisition. So one of the things I do want to talk about before I close here is our focus has been also on ESG. We haven't just focused on the fact of running the business well, but running the business well in the right way. From a Board of Directors' standpoint, we have a keen focus on this. We've created a separate subcommittee to focus on ESG. And one of the things, we issued our first ESG report last year. We look at this as there's a lot of things we're doing. And it's very difficult to not want to brag about what we're doing, but we're making progress. We've launched some unique things like an electronic tractor trailer system in the West Coast. We're testing that right now. And then some basic stuff like lights that go off. I mean everything from the extreme to the basic, and that's really what our focus has been. In addition to that, last year, we created a foundation which the company put in $10 million to focus on ESG and really the aspects of ESG and how it impacts health care. So it's stuff that we're doing and we'll continue to do as we move forward. So as I close on the last slide here, it's really the whole investment thesis around Owens & Minor. It starts with that vertical value chain that we talk about that has created and will continue to create competitive advantage. And that has really translated itself in 2020, 2021 and continues to translate itself into 2022. I talk about market trends. There's opportunities, whether it's in our product manufacturing, where there's market opportunities in international markets where, frankly, we have consolidated and weren't able to sell products during the height of the COVID when products were restricted in the U.S. We now have the ability to sell those internationally again. Market dynamics that we have the ability to take our products and actually move them into new spaces. Some of the market dynamics that customers are looking for new and unique solutions in traditional distribution because what happened during COVID, they don't want to have happen again, and we have the ability to do that for them. And then market dynamics in the home health care space, whether it's, again, the aging population, comorbidities, the acceptance of home health care. Those are things that will continue to drive robust demand for what Owens & Minor has to offer. The acquisition of Apria, which I can tell you how excited we are because the reality is all those different reasons. Products don't overlap, they're complementary. Call points don't overlap, they're complementary. Service models are different, they're complementary. You can go through it again and again. The history of our Byram business growing in the high teens and last quarter growing at 21%, whereas Apria historically grew in the low single digits. Taking that rigor and discipline and moving it over to the other side of the business and driving more growth. And I talked a lot about our diverse revenue and earnings. Again, we're not the Owens & Minor we were 5 years ago. Half of our EBITDA is coming today from the home health space. The other half is primarily coming from our product space. Strong cash flow, I talked over $400 million of cash flow, ability to pay down debt as well as ability to reinvest in the business. And then last one, I know everybody says they got experienced management team that has a track record of success. But I would say that it's not just the management team, it's the entire leadership of the company. It's everybody from our factory workers to our shop floor managers to varying levels in the company that are completely focused on how do we serve the customer, how do we do it so they benefit and how we do it for long-term profitable growth. And we've got a great team that's focused on that. So with that, I will stop, and then I think we're going to take a few questions.

And if anybody in the audience has questions, I think there's a little thing you can send them, and I can read them up here. So feel free to do that. . Ed, that was great. Thank you very much for that. And that slide, in particular, where you explained your business model versus your competitors, the difference. It's a question we get all the time. Why is Owens & Minor succeeding when maybe some of the other public peers have struggled in their medical businesses? I guess the logical follow-up there, and I get everything the way you did it is very clear. Do you not have -- or you do not any exposure to Asia shipping? Do you not have any sort of exposure to any of the other sort of macro factors? Are you really able to bring everything, I don't want to say all U.S. manufactured, but near shoring, are you getting a majority of your stuff from there?

We do have some exposure, but I think as a percentage of it is very low compared to others where most of the products are sourced. So that's one aspect of it. So our footprint is very different. Our footprint is the raw material is primarily coming from here. The one exception, I would say, is gloves. We make about 50% of our gloves in our factory, that's in Thailand. And again, the only raw material we're buying in there is nitrile. That's a plant we just recently expanded. We're making about 40% to 50% of our gloves there. We're going to add another 10% to 15% of our gloves being made there, another 1 billion to 1.5 billion gloves in our own factory. And so the way we thought about that one, it's a good example. Yes, there is transportation, but we were able to add 10% to 15% capacity within our existing facility without having to add any infrastructure for boilers, without having to keep the nitrile warm, without having to add any water cleaning additional product. We're able to fit those new lines in. So actually, when we hit that capacity, once those lines are full up and running because they're running right now, it will take our piece price down even more. So that will help mitigate some of the costs associated with transportation. The one thing I didn't cover, as I talked a lot about our PPE, but one thing that we are so different on the fact is we don't just make a single product. We make the entire portfolio of PPE. So it enables us also to work with our customers to bundle things and the fact that one company may just make great N95s, well, we make N95s, we make level 1, 2 and 3 surgical masks. We made fluid-resistant masks. We make ISO gowns varying level, surgical gowns varying level, the wrap, the drapes. So that's the other thing that I think with the footprint we have enables us also to diversify. And the one last thing I'll add is since we're making the fabric, that fabric can run at capacity. And then that fabric can be directed, whether it goes to N95. So those -- the fabric that's being produced, an isolation gown, a surgical gown a wrap. So that's also helped us keep flexible versus others that are sourcing a finished good from China that's driving a tremendous amount of inflation to them.

All right. Speaking of inflation, in pre-COVID, one of the concerns, this is pre your time at the company. Owens & Minor was not necessarily considered price competitive. It was always -- you could always -- it was cheaper to go overseas. And it costs you -- costs the company in terms of market share, competitive positioning and the like. Now you're saying you're able to figure out if you want to manufacture in Honduras or the U.S. Is there a risk if the shipping costs and everything else moderate and get back to normal? Can you still be price competitive in that environment?

Yes. I would say absolutely. If I think about the price competitive nature of where we were, and this is just purely on the manufacturing, where we did lose a lot of business was in distribution, that was service-related, which we fixed. But on the manufacturing side of it is, we were, I would say, relatively price competitive. I think there's a misconception that Owens & Minor has just expanded the U.S. footprint, whereas over the last 3 years, we've invested in Honduras and Mexico to actually be able to make more products there. We believe that also while we -- from a price competitiveness in the past, now we've implemented our Owens & Minor business system, which is around continuous improvement. It's about taking waste out of the system. It's about finding ways to produce more product off the same line. And we've done a tremendous amount of that. In addition to that, we're -- as you continue to run close to capacity, your per unit cost comes down, which enables us to compete even more than we have in the past. And I'd say this, we're hearing a lot from customers. Customers are looking at it now that's saying, okay, it's not just a spreadsheet exercise. There's also got to be a waiting factor that says what's the supply chain disruption risk for me. And what did it cost me? We had customers come to us that during the height of pandemic used to pay $0.60 for a gown were paying $6 for a gown. We didn't do that. What we did was we continue to charge what our cost -- what we historically charged. So we were competitive and we're well below market when prices were at the inflated amounts. And I think that's also being looked into it, too, is how do you, from a long term, create some risk mitigation similar to insurance on that. But I actually believe that with our ability to produce in different locations, we're going to have the ability to be -- as well as the operating efficiencies we've made over the last 3 years, we can compete some with product made all over the world.

Okay. Let's shift over to Apria. That deal closed 2 months ago. Can you talk a little bit about how the business has been performing relative to your expectations? Any surprises on the positive side? Any surprises on the negative side so far?

Yes. So I love the deal. I mean, we, as a management team, loved it. And I talked about this in the prepared remarks, is we talked about the home health care space. Everybody is talking about the home health care space. We actually did a deal that strengthened our company and strengthened our position there, gave us nice opportunity for leadership over the long term in that space. We like the way it's all overlap. But I'll let Andy talk a little bit about some of the synergies that we're already seeing today, albeit small, but it's ahead of schedule of where we thought it would be. So Andy, maybe you can comment some of the synergies?

Yes, absolutely. So as Ed talked about, I mean, this was primarily a revenue opportunity, right? And so as we look at the synergies this year and then into the future, this year, the synergies are relatively small. It's the takeout of dual public company costs. It's the takeout of corporate overhead. But as we move through the year, that's where we start to expect to see more of the revenue synergies going into play. And what's really great is the validation that while we didn't expect some of these synergies to happen until maybe later in the fourth quarter, we're already talking to our sales teams on both sides and the interactions that they've had just in a quick 4 or 5 weeks since we've closed on this deal, we're already seeing leads being shared and actually deals being closed. And not significant amounts, but just the fact that it's happening sooner than what we expected is really encouraging and validating kind of our assumptions on the synergies. And then as you look longer term, in the next 2 to 3 years, we're looking at over $80 million to $100 million of sales synergies and $40 million to $50 million of EBITDA synergies that will pull through on that. So again, a very attractive deal, both in the short term and the long term.

Here's the other thing I'll add is so last week, I spent -- I met with 3 senior executives of 3 different types of health care networks. One was a provider and a payer, so captive insurance and payer provider combined, another one was a traditional hospital IDN group. And we believe right out of the gate, there's opportunities in those. So Apria's openly disclosed, they -- one of their biggest customers is Kaiser and strong home respiratory sleep apnea products. We have a very strong relationship in Byram and diabetes there. So those we see as an opportunity to continue to expand the portfolio. . We expected that to be similar at other IDNs that also are either owned or captive with an insurance company. But the uniqueness is I spent time last week, one-on-one sharing some industry insight and getting some knowledge on it. From an IDN standpoint, they're critically focused on how do they make sure they capture the home also because they're seeing this move in there. And if it's an IDN that doesn't have an insurance, one of the things that's tough is the third-party reimbursement, which is what Byram and Apria are great at, making sure you get the third-party reimbursement as well as making sure the patient is taken care of. So there's tremendous opportunity also in those traditional IDNs where they want to expand into the home health space. What's unique is that one of the questions I get often is, well, great that you're going in home health, but what are you doing and what are you not doing? And we're clear with our hospital partners. We're not going into that space to compete with them. We're not going into that space to provide nurses or doctors or other types of clinicians. The only thing we have is we have a home -- we have a respiratory technician that goes in for the initial fit of the CPAP or the home respiratory and that's it. We're there to really going back to our mission of empowering our customers to advance health care, making sure that those customers, that being an IDN, their clinicians can be extremely effective and more efficient going forward. So we really see that as an opportunity because of what's unique about what we've done with Byram, bringing it together with Apria and really helping hospitals serve the patient in the home.

The -- I believe ConocoPhillips is actually here this week meeting with some investors. And a lot of people are sort of asking what's happening with some of the sleep apnea supply chain issues? Are they starting to clear up? How has that evolved since when you first announced the deal versus your expectations? Are they -- is it getting better? Is it still a bigger overhang? Can you give us an update on that?

So I know when we looked at -- did the due diligence, we modeled out in our model that it didn't recover when everyone -- it doesn't recover until late in the fourth quarter. Even though there -- if you would have looked at it 6 months ago, they would have said, hey, by the end of the year, it will be fine. End of 2021, it would be fine. So we modeled the end of this year. Here's the way we see this is Philips with their recall -- and if a patient -- if it's a patient that is one of our patients that's been diagnosed with sleep apnea, they're waiting for the product. It's not like they can go to another channel and get the product, whether it's a ResMed or a Philips product. So they're waiting for that. . So the reality is right now, we have a significant volume of pent-up demand that once Philips can start producing product or ResMed can get additional product out depending on which device the patients designed it -- was set up for that's going to create, I'll call it, future revenue tailwind that you have this pent-up demand. We modeled it in for this year and the numbers that we had to really not start to recover into the fourth quarter. That recovers earlier, great. And look, we want Philips and we want ResMed to be able to get the product out as soon as possible because once the patient gets it, then you also have that consumable going forward every 90 days where you're filling the consumable order or depending on the agreement, however many days out. So that's where it's critical. Andy, I don't know if you want to add any comments on how we modeled it? I know we modeled it conservatively.

Yes. I mean the whole recall situation started back in June of 2021. And so we've been able to see this play out through our entire due diligence process. And we saw promises being made by the manufacturers and not kept. So as Ed said, we were very conservative in terms of our expectations. But that's exactly right. By the end of this year, we're giving that time for the manufacturers, both to get up to speed as well as some of the other supply chain issues to get resolved in terms of getting chips to make additional equipment available. And then with the pent-up demand, we've essentially built up that backlog that it's talked about. And I think in Q1 of next year, we'll start to see that backlog reduce and that will translate into revenue.

Okay. I got a couple of questions from investors. So I'd like to hit on those, if that's okay?

Sure.

The first one, broad for both of you, which is how are you thinking about M&A going forward? Post Apria, you talked about delevering. Is there still opportunity? Valuations in the marketplace seem to have come down.

I would agree with that. Yes, there is opportunity. And I think we've been clear that the goal is to delever and get within 18 months -- 18 to 24 months in the 2 to 3x range. But it doesn't mean we're not looking at opportunities that fit, and it doesn't mean we're not looking at opportunities that can't -- that could potentially provide additional long-term profitable growth, additional EBITDA that can continue to be funded. So we now have it in our normal business rhythm that we're looking at the right opportunities that are out there, both reactively or proactively how we're going to see it with stuff coming in or proactively trying to look at the landscape of where we want to go next. In addition to that, we still want to make sure we're keeping enough powder or dry powder to do our organic investments, which we continue to do. I think the home health care space is an area we still like a lot. We also like the fact that there are so many smaller home health care space players in the home health space where actually, I think there's synergistic opportunities of rolling some of those up longer term.

Would you go vertical into home -- into the home care? Or more -- there's a difference between what Apria did and what Byram does versus Amedisys or LHC or something like that?

Yes, I think in the horizontal expansion, I think that's important because our customers are asking, again, what are we not going to do? And there's some aspects of what we're not going to do. But from a portfolio standpoint, if there is complementary areas, we would look at that too, but also continuing to have a model that can better serve the patient. If there's certain geographic areas, maybe we don't have a strong position. I don't know if you want to add anything else, Andy?

No, I think that makes perfect sense. I mean the nice thing is about the Apria acquisition is we now have a backbone of infrastructure from which to build on, and I think that's critical.

Yes, that's a great point because any of the deals we look at a make buy analysis and for us to have made and tried to grow in obstructive sleep apnea and home respiratory, the time it would have taken as well as the ability right now to grab one of the leaders in the space and create our presence that stronger was critical and important. That's right.

Time versus complexity.

Yes.

Andy, I have one for you. The $400 million in free cash flow that you talked about in 2022, is that unlevered? There's no interest expense in that calculation or...

That is correct. That will be our --Yes. And I believe we delivered just over $100 million of that in Q1. So I think we're on pace to do -- the $400 million seems very comfortable for us.

Okay. The -- we have less than a minute. There was one more question, which is if Philips and ResMed can't fill what you need by the end of the year, let's just say, it gets pushed out. Is there -- are you looking at third-party opportunities? Or are there any other manufacturers out there that might be able to alleviate some of the log jam?

We are looking at that, but we are going to be strict regarding what's FDA-approved we're not going to look at stuff that was potentially temporarily EU authorized that's no longer EU-authorized. We are going to be where we are looking at it, but it has to be the right product that's FDA-approved because integrity and doing it the right way is important. So if that's the case, if we find one, then we'll look at that. But Philips, ResMed, FDA-approved, appropriately defined for the right level of service, that's how we're focused right now.

Great. Gentlemen, thank you so much for your time today. Thanks, everybody, for participating. Up next is our keynote, which is Keith Parker, who's going to be talking strategy and a little bit of health care. Thanks. Thanks, guys.

Thank you.