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

Good morning, everyone. Thank you for joining us at the BofA 2023 Healthcare Conference. I'm Michael Cherny I'm the health care tech distribution analyst. It's my pleasure today to have on stage with us the Owens & Minor management team, CEO at Pesicka, CFO, Alex Bruni, who's been in the sea for a short period of time, but a long time, oh, my person. This is going to be all fireside chat. I have a whole bunch of questions ready to go. So I was going to kind of fire away. But maybe time-wise, I guess, Ed, let's just start, you paid earnings last Friday, saw a nice recovery of your profitability metrics in really both segments, both your patient direct and your products and health care services.

Maybe let's start on the Patient Direct side. Talk to us about where that business is positioned now and especially with whether it within the quarter or the quarter as a proxy for the rest of the year. What drove that outperformance?

So Michael, thanks. First of all, thanks for inviting us and having us here today. So on a Patient Direct, I think the thing that's interesting and fascinating to look at the businesses. We had the Byram business on itself, bought it was roughly $400 million rotor north of $1 billion, double-digit mid-teen growth quarter after quarter. And when we looked at the space, we spent some time looking at various assets to bundle in with Byram. And we really believe we've got the right assets with Apria and the fact that now we have 2 leading brands in the market. That business, when we think about the first quarter, it's really a continuation of what we saw in the third quarter of last year, fourth quarter last year and even this quarter. Virtually all of our categories, major categories showed double-digit growth. We had some of our bigger categories continue to perform well. In addition to that, on a pro forma basis, again, the segment is in double-digit growth. And I really think it's what we do that's unique in that business from relationships with both the payer, the provider and the patient that has enabled us to grow. And the expectation is that, that momentum continues into the year. And if you use last year as the proxy for it, we not only saw growth in revenue growth quarter after quarter after quarter. We also see margin expand quarter after quarter after quarter. We can go into the factors of that if you'd like us to why we expect that to continue.

And I think maybe one of the big things that jumps out on that, that both impacts the revenue and the margin is that product availability. This well-known cases on the operator side relative to obstructive sleep apnea [indiscernible] some of the product shortfalls in the CPAP side. Where do you think you are right now? And I guess, how does that impact the flow that you have of not only revenue growth that's embedded also that profitability and the margin improvement?

Yes. So I'll start on the -- start to sleep at the CPAP is last year, we did catch up on our back orders by the end of the fourth quarter. So we were completely caught up. Q1, we had a strong quarter again, obstructive sleep apnea, and we actually ended the quarter with our backorders growing again. So we have probably more than we would normally have in back orders, but that's not necessarily supply driven. That was really demand driven. And as the year progresses, you're right, that's one of the things that will continue to drive stronger growth in the back half of the year, all the placements we had last year plus the placements we have in the first quarter, the consumables stream. And I think the other thing is normal seasonality in that business. They have so many patients that once they hit their deductible, they have a tendency to use more products or see their doctors more often, and that helps drive that acceleration in the back half of the year. And then the other thing is really payer mix. So beginning part of the year, a lot of it is the independent or the person paying themselves, the private payer. And as that -- as their deductibles are hit, the payment really comes from third-party reimbursement. So we have to make sure we do the right reserves in the early part of the year related to the risk associated with receivables. But then I used again last year as a proxy, we saw our operating profit increase quarter-over-quarter on last year when we had the businesses combined, where we ended the year at 10% and 11% operating profit in that segment. And look, I mean, we're excited about where that segment is. We're excited about the 2 leading brands we have in the market, and we're excited about the momentum that it has and expectation that also seasonality in the back half of the year in there.

And sticking with Patient Direct, you talked about double-digit growth in most, if not all categories, if there's one that's not it. I apologize for leaving now. But maybe just because it's now been a year plus since you did the Apria deal, just can we level set, especially in this volatilization environment on those double-digit growth areas? What are the biggest areas within Apria within the patient direct business of growth and how have they been impacted by what's been a choppy now improving utilization environment?

Sure. You're right. We've seen really strong growth in the business. Probably the 2 areas where we're seeing strong growth, and we've talked about this in the past, they're really in diabetes and obstructive sleep apnea or sleep. Those are 2 of our bigger categories. There are categories where when we brought the businesses together, it's helping drive that growth. We can talk a little bit about that and the synergies associated with it. But we're seeing really the discipline from a commercial organization, a commercial structure within the Byram business, some of that getting transferred to the apnea brand. And really, in addition to that, it's the therapies that we're in today that we support and provide. We have plenty of depth in that. Again, the expectation is what's happened today will continue to go forward is that strong growth. So again, if you got your top 2 from a size -- 2 of your larger categories growing in double digits, that's actually helping carrying the overall growth. But again, I don't want to miss the fact that it's just not those 2 carrying it. It's the other categories, whether it's ostomy, urology, incontinence, wound care that's also growing at strong rates.

And maybe, again, just to level set this business now because it's become a meaningful some portion of your probability. Have you seen any changes in demand curve and timing curves on how your patients -- I mean, I know it might be hard at Apria, but even looking at the buyer business, have interacted on the ways that they approach purchasing habits, timing throughout COVID. You have more people have just gotten more comfortable doing care at the home. Obviously, this is a patient cohort that's been more used over time. But have they changed any way at their interaction with you that also ties back to the broad-based growth and financial profitability dynamics?

Yes. Sure. Some of the things we haven't talked a lot about, but we did mention on the call on Friday is some -- as our investment in technology. And that technology investment in there is to make it easier for the patients as well as the providers. In technology, so that way from a phone person can place their reorder, a person can manage their account, a person can have contact with us. It makes it easy for the patient. So when you think about a person with diabetes who push the button to reorder. They don't have to get up getting the car drive the pharmacy don't have to do any of that. They just push the button, it's reordered or they have a reorder cycle that's automatic for them that we've just automated it, that the replenishment happens. Those are things we've done to make it very easy for our customers to interact with our patient direct business, whether that's on the burn side or whether that's Byram brand or the Apria brand. And I think that as well as the discipline in the commercial is really driving, I would say, continuing to win in the marketplace as well as some very, very strong top line growth. And you're absolutely right. I mean treatment in the home is becoming more and more accepted. COVID is a great example of that. Most people would have never thought you're just going to swab your nose, use a lateral flow test, something like that, that quickly gets you a result. And we're continuing to see that grow more and more. And now we're starting to see the ability were to tie the 2 businesses together, our product and Healthcare Services segment and our Patient Direct business, where you have in our product and Healthcare Services segment, IDNs that are looking for companies to help and support them as more and more treatments go to the home, and that's where our Patient Direct is the ability to step in there and provide support for them. Again, not competing with the hospital. We're not going to provide the care where we make sure the products, the DME and other things needed for the patient in the home, we can get it to them.

And you talked about your ability to win. So maybe just a reminder, what do you see as the competitive landscape that you're going into with this combined business? I think of what Cardinal has with their [indiscernible], which looks like Byram but doesn't have much of an area component to it. I mean I know you have adapt on the more appealing side. But how do you think about being the -- from what we can see at least largely integrated player on such a broad base of home health opportunities.

So that was the thesis of the acquisition. And you got to step back to that first. The thesis of the acquisition is we were strong in categories there are other categories we want. We had depth in those therapies in those categories and other categories we didn't. So bringing that together actually put us together where we had the broad breadth of products. I think the other thing we've done that kind of as a differentiator, if you take Apria was in diabetes. Well, we've taken and moved that to consolidated into our Byram model where we're very strong in that. And it's been -- it's made it easier for growth standpoint. So those are some of the things that we've done. And I would tell you, the other thing that-- has asked this question a couple of times is what was the -- or what was expected and what wasn't expected in the acquisition. So we had anticipated when we acquired Apria that we could take the best practices we have around the customers from Byram, which had tremendous growth, double-digit growth for all the years I've been with the company and since we've acquired them, translate that over. The other side of it was -- and that proved out and we hit our synergies really quickly within the first year. We've moved down from that. But it was the learnings from Apria that we're able to bring over to the Byram side of the brand that has really been a great results that have helped drive faster revenue growth and more profitability. So I think if you look at us versus some of the others in the marketplace, I would say our team is executing extremely well. I think the combination of those 2 versus having to put together multiple businesses, just having to put together 2 made it a little simpler, I guess, never is an acquisition easy, but you're bringing those 2 major players and market leaders together has made it easier for us. And then really, the culture between the 2 businesses or the 2 Byram and Apria has really been tremendous. And we spent a lot of time pre-acquisition, making sure that it was going to be a right cultural fit for the company.

And I guess as you think about it now, a year plus into the acquisition, I know, obviously, you're not done to put the business together, but what comes next, I guess, when you look across, especially feedback getting from your customers with this newer offering, where do you feel now looking back, say, you know what, we'd like to be bigger or there's more we can do here that we don't sit in right now.

Yes, I think it's really additional depth within the categories and the therapies we're treating today. There's plenty of opportunity within that. I also think it's really the opportunity to start to work with the IDNs or the hospital networks as they're looking for solutions in the home and partnerships with those in the home, that's kind of the next evolution of this. And I think longer term, it's continuing to look within adjacencies of what therapies that we're providing products for today. There's additional adjacencies. I believe we can start to get into that will continue as the acceptance and the growth of treatment in the home increases.

We might come back to Patient Direct, but I want to turn now to products and health care services. Obviously, this is a business that's seen the highest of highs in terms of the ability you have to service your customers importantly during the height of COVID and the far side of that as demand has changed, the stocking has changed, it's flowed through your business. Maybe just also to level set, where do you think we are right now in terms of normalized customer purchasing behavior against the backdrop of normalized customer utilization that you'd expect to see from them?

And so that's -- it's a complicated question, right? It's because you have different components. You have utilization in the PPE world. You have destocking, which those products are being utilized, but they're being utilized from the stock that hospitals potentially have on hand. And then you have the manufacturing, the normal JIT. So here's what we tried to do this quarter and try to openly talk about this publicly. And Alex and the team did a really nice job drilling into additional analytics. And let me try to cover utilization as one component and then destocking is another component. So we wanted to get a feel for utilization or health of the hospitals and procedural volume as well as normal utilization. And so what we did is we looked at same-store sales. We said, okay, we had a customer last year, all the customers we had a year ago, all the customers we have today, what is revenue doing? What is volume doing at those customers this year in Q1? And when you pull out -- and you had to pull off the noise, which is really PPE because PPE sales for those customers were high and really high last year and now they're destocking. So we're not seeing that. So within our world, and what we saw was the hospital same-store sales, excluding PPE, we're seeing mid-single-digit growth at those hospitals, which is consistent with what some of the public hospitals have talked about that they're seeing procedure volume come back. It's telling us procedure volumes coming back. Utilization is there, patients going through the hospital are increasing from where they were last year in Q1. That's important because that tells us that further affirms kind of the anecdotal comment that PPE usage hasn't slowed down. If anything, it's still above 2019 levels because of protocol. So that takes a look at what are we seeing as usage in the hospitals when you carve that up. Then you have to go to the other side of it and say, okay, what's going on with stocking and destocking. And when does this trend finally remove beyond this trend? So we captured it outside data. We've done surveying. And the way we looked at it was this, so you wanted to make the survey simple enough that you could get responses back quickly. And what we looked at was, in essence, from PPE stock on hand, we ask hospitals, what do you have in stock on hand. And we asked them if it was 30 days or less, 30 to 90, 90 to 120, 120 to 180 and 180-plus PPE stockpile on hand. And we did it by the various categories, but I'll just talk in aggregate -- and what came back to us was approximately 10% of our customers that were surveyed said they have more than 180 days, which means 90% of them have less than 180 days. So you just look at that and say, ratably going through, that's obviously 6 months, but it's probably 3 to 4 months until you start to go through that, which is why we believe we're going to continue to see the destocking through the first half of the year and then start to level out in the back half of the year. And look, if a hospital has 120 days on hand, and they want to get down to 0, once they get down to 0 days on hand, then it goes back to just in time, and it's the traditional normal pull-through. Some hospitals may say, you know what, we have 180 days, but we want to keep 30 days on hand. When they get down to that 30 days on hand, that's when the just-in-time inventory starts to pull through again. So what we tried to do is share obviously, from an internal analytics, but then share with the market is hey, usage within the hospitals. Hospitals, we're seeing mid-single-digit growth in same-store sales, excluding PPE. That's kind of the normal throughput we're seeing. That's exciting because that means the health of the hospitals and the volume continues to is growing year-over-year. And then when we look at the stuff on hand, it's that 90% of it is less than 180 days on hand. So that's how we see it, and that's why during the call on Friday, we've said that we expect the first half to be -- continue and then the back half would start to ease out.

And so I guess, are the surveys the best view of visibility you have into understanding when that destocking will end?

It is because, look, I mean, in 2019, most hospitals were on JIT. So we knew that it kept several days on hand. And whatever was coming out of our distribution center was really a true volume. Now it's not because that data isn't captured. That volume and usage isn't captured and fed back to us. It's just not part of the sale and operations process. The other thing, too, is the thing that's still an openness is still the question out there is, when you say you have 30 days on hand is that 30 days at today's usage or 30 days of pandemic usage. So that's -- the interpretation of that can be somewhere in between there.

And I think we all appreciate the comment you gave about the mid-single-digit same-store sales that you're seeing with your customers. Is that in terms of what's embedded to guidance what you're expecting for the rest of the year? I know -- I mean I think everyone the companies at this conference have probably been asked by utilization and what they see relative to the 1Q strength, mid-single-digits is obviously strong. From your point of view, how do you expect that to trend going forward?

We expect that trend kind of the nut hypothesis that, that trend continues from now to the end of the year. Obviously, Q1 last year was a slower quarter than some of the other quarters. And [indiscernible] was still running unnamed, but the expectation is that type of trend continues to look through the back half through the rest of the year. And then just on a sequential standpoint though, Michael, is you have the normal sequential growth. Just like in patient direct as people hit their deductibles, they buy more and more product as the year progresses. We believe you'll see somewhat of a traditional -- as people hit their deductibles, the utilization or elective procedures should actually we expect to grow as the year goes on sequentially.

And then think about the model, at least thing in my head. Last year, Alex, you were not here, we had Andy Long here in the CFO role, Andy is now tasked with being in the business. So I guess a bit of a weird question, but is a microcosm for operational improvement. So can you give us an update on Andy in terms of the charges leading inside the business and how that's factoring into where you're focused on re-ramping the operational excellence.