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

All right. Good morning, everyone. Thanks for joining us for the Owens & Minor fireside chat. Very pleased to have with us Ed Pesicka, the CEO; and Alex Bruni, the CFO. So welcome, guys. Bit of an interesting time for you guys. It's been a wild ride since you've joined, right, you've had the COVID and it come down. So maybe you tend to be one of my biggest debate stocks, and I cover a lot of debate stocks. So maybe if we can kind of go over some of those big debates and dig in a little deeper.

To begin with, you made the biggest acquisition in Owen's history, completely reshaped the business with the acquisition of Apria and now around 50% of your EBITDA is going to come from outside what I think most folks had historically known Owens & Minor for, which is medical and surgical distribution. And that deal has, I think, exceeded your expectations, exceeded our expectations for sure. And continues to be a significant tailwind for you guys. On the other hand, and I think this is where most of the debate has come from the products business has had some issues with PE destocking and really underperformed over the past few quarters. You had a pre-announcement in October, which was a little bit disappointing. And then this past earnings, some of the same issues, I think, became not sure if it accelerated or if it was just more persistent than originally anticipated. But let's dig into that a little bit. If we start there, can you describe the PPE headwinds that you began to see late last year, and where we are currently with some of those headwinds?

If I think about -- yes. Thank you, Daniel. First of all, thank you for inviting us here and having us here today. If I think about those headwinds, we started calling them out probably earlier than most. And here's what I think is fundamentally different in the situation, you have to understand. There's a difference in usage in the hospitals compared to what's already built up in the system. And the real question is, what's the time line of that? So actually, tomorrow I'm going to visit with one of our biggest customers, and we're expanding our relationship there of them buying more of our products and committing to those. But they're also looking at it in the fact, this is just one example that cuts across the entire network, hospitals -- some hospitals built up a month's worth of product. So when COVID hit, procurement people were just buying whatever they could because they were tired of hearing about clinicians that didn't have products. So we had customers build up safety stock. And some customers may have built up 2 months, some may have built up 6 months of product. There's a step further within that. So if a customer built up 6 months of supply of isolation gowns, they may have 8 months' supply of size medium isolation gowns and 2-week supply of extra large and then stuff in between them. Because what could they get at the time, maybe it was only medium, so they bought whatever they could. So we're seeing that bleed down. I think the other thing that was missed on this, and as we looked at it in the quarter, it's not just the customers, it's the channels to the market. So you take the other distribution channels, whether it's healthcare, whether it's life science, they've also bought as much as they could. So what we're seeing is usage in the hospitals from conversations with our customers at higher levels than they were in 2019 because protocols are in place. Clinicians are changing their PPE. They're doing what they did, and they continuing to do that. It's just the time factor of that bleed down of that excess inventory that's in either at the hospitals or within the channels. So then you go to the debate when does it end, right? And we saw it accelerate in the fourth quarter. We saw the third quarter be soft because of that, the fourth quarter accelerate. Some of our peers out in the market are talking about the same thing right now. There was a survey that was done, and it's relatively consistent. I think you can't paint a brush across the entire healthcare network that says, okay, on average, it's 3 months because of the factors I just talked about. When we talk to hospitals, what we're seeing based on order patterns through our own channel, about 1/3 of our hospitals seem to be through that already. And they're back to their normal order patterns. They don't have the safety stock or they bled it down and their order patterns are consistent. When we talk to our hospital surveys say about another 1/3 of them probably have several quarters' worth of excess stock. And then the last 1/3 says, "Hey, we probably have close to a year of excess stock on average." And it's going to depend on the product. So that's why when we look at our year and our calendarization of the year, we expect Q1 to be the bottom and then to track out of that in Q2, Q3 and Q4. And then get to a normal state going forward. And that's part of what we talked about on the earnings call, when you think about the calendarization so that's what we're seeing in the PPET track. What I don't want the group to miss, though, is in 2020 -- in March of 2020, when COVID started, and we saw the huge spike in demand, we took the approach, pencils down, heads down, let's produce and procure as much as we can, so we can fill the needs. We didn't want to see clinicians in New York, for example, wearing trash bags instead of PPE. So we ramped up our production beyond belief for what we normally would do. So, hey, one aspect of patient protection went from 2.5 million a month to 40 million a month produced. That enabled us to generate an incredible amount of cash flow, which, as you talked about earlier here, is that cash flow is used to pay down debt and also do the acquisition to really reposition the company to where we are today, which is drastically different than where we were in the past. But -- so that's the aspect of it. If I think about it in detail. I know it's a lot of detail on the PPE. The usage continues to be very high. We're seeing the excess stock that's out there start to be drawn down. We think it's going to continue to ramp coming out of the other -- as we get into the back half of the year, and that's why we predict the year to be where it is specifically from a seasonality and quarterly basis.

Yes, that makes sense. And if I think about how maybe behaviors changed during the pandemic, more durable behavior change during the pandemic. Do you think your visibility has been reduced because health systems are more likely to stock up and use their own stocks rather than rely on you for inventory management, kind of they don't want to get fooled again, so they're going to buy what they need. And therefore, your visibility is permanently reduced.

So here's what we're seeing too. We're seeing very mixed. You've seen some hospitals that have that built up inventory and then you compound that with some of the financial crisis that -- maybe that's a harsh word crisis but the financial implications that our hospitals are facing. All of our customers are coming to us and saying, "How can you help us save money?" If a hospital has 3 months of PPE already on site, they don't have to use cash flow to buy it. They've already paid for that stuff. They're using that to help them with their cash flow position they're in today. I think visibility, you're right on some aspects. This was a once-in-100-year pandemic, something that hasn't happened. Historically, the way it worked was hospitals are primary just in time. The distributors carry the safety stock and manufacturers carried some safety stock. Well, that all changed. So we didn't have visibility into what customer safety stock was because that wasn't part of the normal S&OP process. So as they built it up, it was difficult to identify that. So I think that as that -- we're seeing that deplete down, I think I really do believe you'll see less and less hospitals keeping -- may keep a little bit more safety stock, but over time, that's going to dwindle because the system is back to working the way it worked before.

Got it. Okay. And so you've put into place a few things to help rectify some of these issues. In October, you put in a plan. Andy Long was moved from the CFO position to Head of Products and Services. And Alex came aboard as CFO. And then just this past week, you put in a new kind of more -- maybe it's more of an accelerated plan. But can you just describe your -- if you can call it the operating model realignment plan, how that compares to what you put into place in October, and kind of what changed between October's plan and this plan?

So here's what changed with Andy in that role, we've got much -- in November, December, January, we got much more visibility into the entire landscape of both what customers demand, our customers' usage is, what we think is excess in the system as well as what we've done. So having that November, December and January, that helped us solidify what the plan -- what our plan is, and I'll talk about the operating realignment model here in a second. In addition, we're not abandoning our Owens & Minor business model or business system, the continuous improvement. But the way that works is you're getting small incremental continuous improvement, we recognize we need to make step function changes right now. As inflation is high, interest rates are high, customers are struggling, we have excess stock, we have the ability now in the window to take some of those step function changes. And that's really what this is -- this operating model realignment is about. And what it does is the 4 key works teams tied directly in with our goals, and they tie directly in with our 2 segment initiatives that are out there. So here's what it is. Again, I talked about earlier what we did during COVID, which was ramp -- aggressively ramp up. Look, the reality is our manufacturing and operations right now are bloated. I mean that's a reality because, again, going from 2.5 million units a month to 40 million units a month, how do you do that? You ramp up. Now we're back to pre-pandemic levels, slightly above. We're seeing usage to be still above the 2019 levels. So now we have to rightsize the organization. And it's not just rightsizing it within our Global Products Division. It's rightsizing it across the whole company. And it's taking those initiatives, so take demand, procurement and demand utilization. That's one of our demand management. That's the first one, is how do we make sure that we are aggressively sourcing raw materials and indirect materials at the best market price because our customers are looking for the best price we need to make sure we do that. How do we rationalize on the second one, rationalize and optimize our manufacturing facilities? What is the right size we need in our facilities? So that way we can run at full capacity so that we are fixed cost and our cost per unit to come down and we can be very competitive. What's the right balances of sourcing versus manufacturing? That's going to be looked at. What's the overall organizational structure from a corporate standpoint to the 2 segments. So when I say it's across the company, it doesn't just affect the product and healthcare services. It affects all the corporate functions as well as our patient direct. And this is just a continuation of what we're doing in patient direct by bringing the Byram Division and the Apria Divisions together under Patient Direct. And you know what it was interesting, we're sitting and talking about this in January and saying, okay, this is what we need to do. We really think it can drive a tremendous amount of value very, very fast and actually not just survive, but thrive coming out of this phase. And Dan Starck raises his hand and says, physically raised his hand, but says, "Hey, because I've done this before." He said, I've done it before at Apria, we've been doing this as part of the integration. "I want to lead this." And it's rare to have a person that's running a very, very profitable, very strong segment step in and say, "I want to be able to look across the whole company and find ways to help us execute on that. We were lucky to have Perry who has been running Byram. And I think everyone knows we bought Byram at $400 million. It's now north of $1 billion in revenue in about 4 to 5 years. The profit margins continue to expand and the growth rates have been incredible to now help look at the cross the patient direct segment as a whole. With Andy's focus, he's very detailed. He's making sure that things are getting done. And he's really highly focused on driving these initiatives. So the reality is what's changed much clearer visibility. I think the expectation of what the current market realities are, and what it's going to be going forward, having the time and ability, at least on manufacturing side, because we have excess inventory right now, we've built that up. We have the ability to make adjustments when necessary versus having to build that safety stock, and then three, the appetite across the company for us to do it and do it aggressively and lead it. And we have brought an outside group in to help us. I think that's also important because they provide us with some tools and resources that we don't necessarily have within the organization. So the example I use on that is sourcing. We may have 50 categories we need to look at. And I'm going to use this as an illustrative example. We may have 50 categories we want to look at. If we do that internally, we may able to do 1 or 2 categories at a time by bringing in outside resources that can run algorithms, that can give us market baseline pricing, we may be able to run 10 or 20 of those RFPs at the same time. So it just accelerates it, which gives us the high level of confidence that we can hit the $30 million impact this year, the $100 million run rate for the -- at the end of the year and the $200 million run rate in 2025. And also, it saw a cash flow opportunity for us, to look at $250 million to $400 million of cash flow benefit from this. So that's what gives us the confidence. We've got the dedicated teams. We had the backfill. It's not going to impact the current impacts of the 2 segments and then the ability to look across the whole company to not just take cost out but position us for growth. And that's important. This isn't just about taking cost out. This is about positioning us for growth, too.

Yes, yes. If I look at your manufacturing footprint, I think one of the positives for you guys during the pandemic was you were largely based in North America and South America as well, but the Americas. So you didn't struggle like some of your competitors did with sourcing supply from China. But now that the pandemic has died down. Do you think you -- and you mentioned some manufacturing rationalization, do you think you still need to be so heavily focused in the Americas? Or will you start to, as you rationalize your manufacturing footprint, start to move some of those overseas?

Here's the way we're looking at it. We haven't made -- we haven't talked publicly on a decision we're doing X or Y. I think the way we're looking at it and just to be open is can we, through sourcing, can we raw material and indirect, can we look at ways to optimize our facilities. And if we optimize the facilities and we do a better job on procurement, can they be competitive, that's one question. Two, we have in North America 3 facilities at [ defacial ] protection. Do we need 3? Do we need 4, Do we need 2? Do we need 1? Or do we need that? That analysis will happen. We're vertically integrated from the raw material that the fabric [ Tula, ] final assembly of the finished goods. Do we need to have both aspects of that? So everything is on the table. And look, if customers come in and say, "Hey, we recognize that what you did for us was great, and we're very pleased at that, and we're willing to actually maybe pay a slight premium for something that's made in the U.S. or North America, that has an impact on it too. So we're looking at all of that. But I think our mentality has been, and I don't know if we're going to cover this later, but as our portfolio expansion has been, we'll make it, we'll make it, we'll make it. I think as we look, even on the portfolio expansion going forward is maybe we don't need to make everything. Maybe what we're making today is great that we make it in our factories because our competitors primarily don't make it, they source it, but maybe we do a blend of making of certain products we're making today and sourcing it to be able to cost average those down. In addition to that, if we're going to expand the portfolio, we don't necessarily need to make it in our factories. We can find the right partners whether it's domestic, nearshore or offshore to help us with that too.

Yes. Maybe if I can get Alex in here. So for the -- in aggregate this year, this operating realignment is going to lead to around $30 million of EBIT improvement, mostly in the products and services, but some in patient direct as well, correct? Can you just talk a little bit about the cadence of that improvement throughout the year? I assume most of this is going to be back half weighted?

Sure. Thanks, Daniel. Yes. So the way the $30 million will phase in through the year, Ed talked about the fact that we've already taken some actions, and those will really show up here in Q2, and then they'll begin to ramp as we go through the back half of the year. We've also talked about how we expect to achieve a $100 million run rate by the end of the year. And so if you think about kind of putting those together, I think that gives you kind of the components of the phasing.

Yes, let me talk about cadence. So we recognize to get the $30 million of share, actions have to happen early and fast. We have taken in -- and the 2 areas really where those will come from will be headcount reduction, and the other area where that will come from will be around sourcing, more aggressive sourcing. So just to put a little more context on where that -- where the bulk of that $30 million will come this year.

Yes, yes. That all makes sense. If I look at your business -- your products business pre-pandemic, you were operating at around 5-ish percent margin, some quarters up to 78%, but mostly around 5% margins. And then the those went to 14% and even up to a 20 percentage at one point. But as we normalize and look at '24 and beyond, where do you think on the product side, margins should normalize?

Here's what we said on the call 2 days ago is we think the segment as a whole should be 2% to 3% segment margin. If you look at the product side, the Global Products division, that division preacq when we acquired it originally from Avanos, it was at about 10%. So we actually think that's reasonable of where that segment should be or that division should be and then delivering the whole segment in the 2% to 3% on a steady state. That's the expectation. That's what it's done in the past. You're right, it did fluctuate up. But again, when you -- when your volume goes up that much, the fixed cost leverage you get really drives that in the past.

Yes, yes. And Ed, you mentioned private portfolio expansion, it's going to be a big driver of strategy. And I suspect that you'll get some margin uplift from that as that grows, but perhaps that's more of a medium-term driver here. If you could just describe a little bit of -- to the audience, your strategy for your private products and when we can really see that take hold.

So the strategy really is outside of the S&IP products. So we've got a strong surgical infection prevention products, which subcategory is PPE, that strong. We're going to see the expansion on that is outside of that area. And again, I actually said this earlier, historically, we've taken the approach. Well, if we're going to add products, we need to make it. And now that's changing very differently. It's saying, let's find the best products out there. If it does make sense for us to make it, it will but to do this faster, we will primarily be partnering with great manufacturers out there to source it. And it's going to be -- if you think about the way that works. In our industry, you can add it, but it takes time to get it, get the customers' acceptance, get it on GPO contracts and get it out there. So the strategy is also working through timing it out based on where there's opportunities from a customer need and GPO contracting to be able to broaden that. I think the biggest takeaway on this one for people who are looking at us is part of the approach has changed, where in the fact that sourcing those products can provide a quicker -- ability to more quickly expand that portfolio.

And is this more about 2024 type of expansion? Or can you give us a sense of timing?

Yes, to get the benefits in '24, we have to do it now, and we're doing it right now. We're looking at, for example, incontinence is something we're looking at. It's a very large category. We're looking at expanding that potentially into our own private label. We've stratified the categories based on the opportunity and the size, but those will come in and then they slowly ramp, but as you do those, you have to balance it, too, because you have to make sure you don't get caught up with inventory. If you're moving from brand A to our brand, you have to make sure you're depleting the inventory appropriately as you're bringing it in, so you don't get caught up with that.

And how have you changed the incentive structure of your sales force to help with that?

Yes. So in -- there's 2 different sales structures. The patient direct has a different sales structure than the product and healthcare services. The product and healthcare services team are paid on margin now. So if it's an external supplier or a private label, they're going to get paid on margin. So whatever, drives the best margin for them, that's what it paid us.

Yes, yes. Talk about your core distribution business, which I think gets subsumed in all of the noise around that products. But on the core, it's doing much better than it has historically. You've notched some nice new wins, you renewed all of your GPO contracts recently. Of your new wins, were those competitive takeaways? And if so, why did the clients decide to go with you?

So the answer to the question is, yes, there were competitive takeaways. And then the question is, why did the customers decide to go with were several reasons. One is frustration of service from their incumbents, frustration of continual product price increases once they've been converted to our competitors' private label. And then three, our ability to be creative from a service model. So you take each 1 of those 3. So the first one is, some of our competitors are struggling from service, delivery, on-time delivery, fill rates, product availability, and that's creating issue. Actually, billing and collection has been issues. So that's one reason why they moved and say, "Hey, we want to just streamline this, make it easy. " We want the stuff to show on the dock. When it's supposed to be the right product, have it in stock. And we did invest in inventory outside of PPE to help with that. The second is there's a very strong sense of frustration where a customer may be out there and has gotten a great contract that gives them rebate dollars on the proprietary brands of our competitors. Well, when the proprietary brands of our competitors, they raised the prices 5%, 8%, 10% over the last year. They're looking at it and going, well, really, I'm actually underwater by 5 points. So really, what I expected, I didn't get. So the frustration of our competitors constantly raising price, and that's the second aspect. And then the third is a uniqueness. So customers are saying, we don't want to have what happened to us again during the pandemic, but we don't want to have safety stock. We want to have more control. So our ability to do unique things like partner with them to build a dedicated warehouse and facility just for them as well as then be able to use that facility to service the rest of the region, which gives us fixed cost leverage. It's the ability to put an activity-based model in with our customers, say, okay, we're going to be your distributor, but we're going to run this on an activity-based model. So that way when we can take cost out of the system, you win and we win. It's the third example, which is in that is, "Hey, we just had a customer, 1 of our top 10 customers, it's about a $200 million customer that also did self-distribution of about $200 million." Saying, look, this isn't our expertise. Let's move rest of our business into you, and you can manage the whole $400 million, and then you can get some leverage within the distribution. So those are 3 reasons why they move for us. And look, it's still competitive. They still want to be able to drive savings. That's important. But these 3 models and these 3 examples enable us to help them do that.

Yes, yes. It's been a challenging inflationary environment for you guys as well. With the contract renewals that over the past, I guess, a year or so now. Have you been able to pass through some of those inflationary challenges to your lens?

Yes. Let's just be transparent on this. In medical distribution, it's a cost-plus model. That's the model. And the cost plus is very, very low. So that's the market dynamics. Where we've been -- where there's been much more receptivity. So we're at a customer this past week that again, this is another one that had their own distribution center. We've looked at it and we worked together for us to take cost out and then to take cost down. So I'll give you the example of how we've margined up an account in this case. And it's actually helped the customer. We used to deliver at 8:00 in the morning, and they have had -- their cutoff times were tough. They've now worked with us to agree that we could actually deliver and drop at the dock in the middle of the night. And that enabled us to change the way we pick in our warehouse. So that way, we didn't have to have -- we weren't compressed in time. We had more time to do it, which took operating cost out for us. It made it easier for them. So that way, when their workers showed up in the morning, the stuff was there, and that was the first thing they did in the morning. So that's an example where you can take a couple of hundred basis points out of our operating cost which is meaningful in that distribution business and then the same on the other side. We've been working with customers on other things that can also provide value that, for example, as their product portfolio grows and what they bought from us, that can give them additional incentive to take cost out of their system, but also drive profit improvement for us.

Yes, yes. Are there any outstanding large contracts in your distribution segment that will be renewed next year or so?

Majority of our top 10 we've recently -- are under a multiyear agreement still. From -- at a high level, here's what I will say. At a high level, contracts are 3 to 5 years long. So we have between 20% and 30%, 35% of our contracts coming up every year. So that generally is between $1.5 billion to $2 billion of our contracts coming up every year. And we're just in the process of proactively renewing those. The other side of it, though, is that means most of our competitors have -- the rest of the industry up, there's several billion dollars of opportunity that come up every year for us to go after.

Yes, yes. Let's turn to -- we've got about 12 minutes left here. So we'll talk about home health for the remainder. As I mentioned at the outset, it's been a standout for you guys. Wherever you see the most strength in, are there any segments that haven't performed up to your expectations?

Actually, no. I mean it's rare to say no to that because if I think about it, let's take the top line growth. We grew again -- when you put the businesses together on a pro forma basis around 10%. I mean I think about what our -- the competitors of that business in the market are doing in the low single digits. That's just continual share gain for us. And then you look at that and say, well, what would we have expected. And it's not one category. I mean our diabetes for the whole year has been growing in the high teens. We've talked about that publicly. That continues. We continue to win share in the diabetes market. Our sleep market, that's another market that's grown well for us. And I say sometimes it's better to be lucky than smart. We were partnered with ResMed. We've been with them for years because they've been a great partner to us. And as Philips has had their recall issues, we've been able to utilize our ResMed availability of product to capture share there, where clinicians are saying, it's not necessarily a Philips or ResMed, just get them what they can get because we need to make sure that the patient is taken care of, that's helped us gain share with. Last year, we generated basically 15 months' worth of placement of units in 12 months. Because of the backlog we had coming into the year, we took down back half of the year. And then the other thing on the revenue side, which has been incredible is that all categories outside of one, all major categories were growing near -- in double digits. The one that we had anticipated to slow down was home respiratory or oxygen post-COVID and that was in line with where we thought. But -- and then on the profit side, that has far exceeded our expectation. We talked about synergies of which $10 million this year and $40 million for the full period. We're at that run rate already on the full amount. I mean it was just really strong execution. And when I talk about synergies, and the good thing that the one thing you can point to on that and the math can be done pretty easily is that on a pro forma basis year-over-year in the fourth quarter, we were up 280 basis points in profit. So you just do that 280 basis points of profit over a $2-plus billion segment. It shows you where the run rate is potentially in on that. And the synergies wasn't just one direction. It was both ways. We had huge synergies in our Byram business that took best practices and learning of what the Apria Division was doing. And then the Apria Division took best practices of what the Byram business was doing, and you put those together. And that's what's driven it. And we've yet to really scratch the surface on continuing to look at what other opportunities we have to bring those 2 together. And that's what Dan and the leadership of the company-wide program. We'll also be able to help continue to drive that. So look, we can't be more pleased with the leadership of Dan and Perry and their extended team. I can't be more pleased with double-digit growth again in the fourth quarter, the margin portfolio expansion, share gains and really 2023 continues to -- we expect it to continue. We know there's some headwinds out there in the future. We've got a few of those, but we're already accounting for those as we aggressively move forward. And the year continues to -- we expect '23 to be very similar from that standpoint.

So we should expect kind of high single-digit, low double-digit top line growth with a couple of hundred basis points of expansion?

I think the top line makes sense. I think expanding on top of the expansion we've already had is a little bit difficult. But I think the top line growth is fair. And then I think you'll see some expansion, not to the same degree, not going to see 280 basis points of expansion.

That would be impressive.

And I think you have to remember that business, there is seasonality too. Our fourth quarter in that business, whether it's the Apria Division or Byram Division is the strongest quarter. So that's the other impact that we'll have in Q1 is the normal seasonality of that business because it is a consumer business. And in Q1, there's more -- there's 2 things. In Q4, most people are still using their insurance because they've already met their deductibles. Q1, you start all over again. So there's more deductibles that we have to go out and collect and the volume tends to be slower in Q1 traditionally than Q2 to Q3 to Q4.

Yes, yes. And one of the great things about this model, too, is it's kind of a razor, razor blade for a lot of these products of CPAP, for example. What percent of the business now is kind of the equipment? And what percent is more on the consumables side?

Yes, sure. So the consumables is the majority, roughly 2/3.

Got it. And higher margin, I assume?

Yes.

And that's the other beauty of the amount of placements we had last year in CPAP, yes, this year, we're going to have higher depreciation. We're going to have 15 months' worth of placements last year that will create higher depreciation this year. But you then have that recurring revenue going forward. Same with diabetes, you get the recurring revenue. And the one thing that was interesting is, again, our Byram division is for the fourth year, one, the best diabetes supplier, and we talked about that in the press release. And that's just because of the nature of how we do things.

Yes, yes. On the Philips recall, obviously, it was very lucky that you were ResMed weighted. But as we think about Philips' challenges this year in both CPAP and NIV. How was that impacting your backlog? Are there still supply chain challenges, which I think there were some with ResMed, but not terribly.

Yes. So here's how they're impacting us. On CPAP, as Philips continues to get to speed, that's great. We're pleased for that because it enables us to actually fill those Philips orders where customers want them and make sure that the clinicians can prescribe Philips and do it with confidence. So we know we're comfortable that they're going to -- they're moving faster, moving to get everything cleaned up. On the NIV, there was another recall. So how did it impact us, is we had a lot of our Philips equipments already fixed based on the previous recall. So we were looking at this year back in December -- November, December time frame, saying, okay, in '23, when that clears up, we're not going to need as much cash flow because we'll be able to take the refurbished units and put those back into the market. Well, with the re-recall again on those, we're now having to spend some capital to buy other units to then push into the market. But eventually, when that clears, we'll be able -- we'll get that cash flow benefit. It doesn't impact the numbers we published because we took that into consideration for this year as assuming that recall, we have to just buy the equipment we need this year. So we've already taken that into consideration in the numbers.

Yes, yes. And as you mentioned that going back to the synergies that you've kind of outperformed there. When you first announced the deal, I think you were around $80 million to $100 million of revenue synergies, $40 million to $50 million of EBITDA synergies for the next few years. Any update to that given your outperformance?

Yes. As again, I said, we're pretty much -- look at the run rate, you're there. Again, if you just do the simple math of, call it, 280 basis points margin expansion on $2-plus billion of revenue, that's $56 million of bottom line improvement. So there's -- I still believe though there's opportunity on the revenue side. I still think there's opportunity to continue to drive that going forward.

On the revenue side, how much of that $80 million to $100 million, would you estimate you've realized already.

We're there. We're close to the low end on that. We're still -- I'm not -- I still think there's tremendous opportunity on the revenue growth side in that business. And you look at our growth relative to the market. You look at traditionally, Apria was in the low single digits. Now most of those -- most of the categories outside of oxygen and home were in double digits now in those space -- in that space.

Yes. And those synergies are going to come from selling maybe Byram diabetes to Apria CPAP.

Yes, that's exactly, that's part of it. That's right. That's right.

Okay. Going to some of the headwinds in the business. I think there's been a lot of chatter in DME just around Medicare fee-for-service pricing. There was some favorable things enacted during the PHE, which have been extended through some legislation temporarily, but will be a headwind, I think, in '24 and beyond, naming the blending of the unadjusted fee schedule, competitive bidding coming back in '24. How are you thinking through some of those pricing headwinds in Medicare fee-for-service?

Maybe you can cover a little bit on what we're thinking for in that, and I'll cover the competitive bidding.

Yes. So on the fee-for-service, the relief related to PHE, we do expect some headwinds next year, but its single-digit millions of dollars. It's not tremendous. And our guidance does reflect all the latest fee schedule adjustments, PAYGO, PHE relief, et cetera.

And then on competitive [ bidding, ] so that's -- we know that's out there in '24, part of our normal business system continuous improvement as well as part of the operating model realignment and help us make sure we've got more than enough to cover that next year. And on the competitive bidding, we're really not hearing. I mean I know it's supposedly coming out of '24, we're not hearing and seeing that right now, but we'll be prepared for that.

Great. All right. It seems like the DME space also is a ripe for disruption, I would say, from new entrants. We've got CVS really getting into primary care, they are buying Oak Street. You've got Amazon buying One Medical, which has Iora Medicare provider. I'm curious if you see the increasing verticalization of retail and in healthcare as a competitive threat in DME specifically.

I think you always look at where the competitive threats are. That is one of them. I think with our model being a little bit different is that the patient gets what they want, when they want in their house and at home. We haven't seen -- even though that's happened, we haven't seen that impact our business. So as long as we're maintaining those relationships with the clinicians, as long as our service model is good, as long as our ability to collect is what I would say is probably elite versus others. On insurance claims and the cash cycle, I think that's going to continue to make the difference for us.

Got it. Last question for you on capital deployment. Where are your priorities now? You're around 4.7x levered, do you think you'll still be able to get down to 2 to 3x levered within the next 2 years?

So capital deployment is simple. It's one patient CapEx. That's first and foremost. We can't -- that's one -- that's the first place it goes. Second is debt paydown. That's the second place it goes. And that -- and we talked about this on the earnings call, we think we can probably -- if we -- by execution of the working capital benefit of the operating realignment and the other normal benefits, we're looking to target a one-turn reduction in the next year.

Okay. And when do you think you can get down to your 2 to 3x target?

I think you're looking at that probably about 24 months or so.

Got it. Okay. And if you hit your guidance, no issues with the current debt covenants.

Not at all, not at all.

Great. While we just ended right on time, look at that, how efficient are we. Well, I'd like to thank Ed and Alex for joining us this morning. Thank you all for joining us as well.

The one last thing I'll close with is we talked about the transition of the company. If you look to 2018, we generated about $114 million of cash flow. This year, it's $325 million. So we've nearly tripled our cash flow from where we were prior to when I joined to where we are today. So that's the other thing I think that's missed often is what we've started to do from a cash flow generation to company.

Yes. Great. Thank you so much.

Thank you. Appreciate it.

Thanks, Daniel.

Thanks, Alex.