Earnings Labs

Accendra Health, Inc. (ACH)

Q3 2022 Earnings Call· Wed, Nov 2, 2022

$3.79

+10.67%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.
Transcript

Operator

Operator

Good day and thank you for standing by. Welcome to Owens & Minor’s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instruction]. I would now like to hand the conference over to your first speaker today to Alex Jost, Director of Investor Relations.

Alex Jost

Management

Thank you. Hello, everyone, and welcome to the Owens & Minor’s third quarter 2022 earnings call. Our comments on the call will be focused on the financial results for the third quarter of 2022, as well as our outlook for 2022, both which are included in today’s press release. The press release along with the supplemental slides are posted on the Investor Relations section of our website. Please note that during this call, we will make forward-looking statements. The matters addressed in these statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied here today. Please refer to our SEC filings for a full description of these risks and uncertainties, including the risk factors section of our Annual Report on Form 10-K and quarterly reports on Form 10-Q. In our discussion today, we will reference certain non-GAAP financial measures, and information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release. Today, I’m joined by Ed Pesicka, President and Chief Executive Officer; and Alex Bruni, Executive Vice President and Chief Financial Officer and Andy Long, Executive Vice President and Chief Executive Officer of Products and Healthcare Services will be joining us for the Q&A session. With that, I’ll turn the call over to Ed. Ed?

Ed Pesicka

Management

Thank you. Good morning, everyone and thank you for joining us on the call today. I'd like to start this call by addressing the factors that were in line with our expectations as well as the unanticipated factors that drove the recent change in our outlook. While there were some new challenges combined with the continuation and acceleration of existing challenges, many key aspects of the third quarter occurred as expected. Starting with one, we continued gaining momentum in our Patient Direct segment, growing organically in the mid to high teens across all major categories. We also continue to see improvement in our ability to access equipment, which allowed us to meaningfully reduce our overall backlog of orders in our sleep product line. Two as planned, we successfully onboarded new acute care customers and our product and healthcare services segment with the investments made in Q3 and Q4 providing benefits in the future. Three, as a result of our investments in predictive analytics, AI and inventory optimization, we continue to improve our already market leading service levels. And four, as expected and discussed last quarter, procedural volumes in Q3 were soft and well below the 2019 pre-pandemic levels. Now let me discuss the unanticipated factors in Q3 that drove our recent change in our outlook. One, as the third quarter progressed, we saw more and more of our acute care customers delay reorders choosing to deplete their stockpiled items including our higher margin S&IP products. Simply put, our previous guide has been a factor [Technical Difficulty].

Operator

Operator

Ladies and gentlemen, please stand-by your conference will resume momentarily. Please continue to hold your conference call will resume momentarily.

Ed Pesicka

Management

Apologize about the connectivity issues but let me continue back to where I left off at. So now let me discuss the unanticipated factors in Q3 that drove the recent changes in our outlook. First, as the quarter progressed, we saw more and more of our acute care customers delay reorders choosing to deplete their stockpiled items including our higher margin S&IP products. Simply put our previous guidance not factored this in as an assumption. Second, from a macroeconomic standpoint, the Federal Reserve actions were more aggressive than expected. The U.S. dollar strengthened and fuel prices reverse course and began to increase towards the end of Q3. Three, as we ended the third quarter, we concluded that the execution and velocity of the actions we were taking in our product and healthcare services segment were insufficient to offset the future impact of macroeconomic headwinds as we successfully had done in the past. And finally, while we were beginning to see slight improvements in procedural volume, we did not see the extent of the ramp up of procedural volumes, we expect it at the end of the third quarter and into Q4. Accordingly, we have made changes to address these shortfalls and the good news here is that there are numerous short-term and long-term opportunities in this segment that will allow us to operate more efficiently and more cost effectively. Here are just a few of them. One, we will continue to leverage our industry leading service levels. This has helped retain existing customers and win new business with attractive customers. This is an important distinction since as we have said in Q1 and Q2 not every customer is going to make financial and operational sense for us. We remain focused on profitable growth. Two, we are refocused on expanding our…

Alex Bruni

Management

Thank you, Ed and good morning, everyone. It's my pleasure to be with you today and I look forward to meeting many of you in the weeks and months ahead. Today I'll review our financial results and key drivers for our performance in the third quarter, and then discuss our revised expectations and assumptions related to the full year outlook. First, let me start with our third quarter results. Our revenue in the quarter was $2.5 billion virtually flat from the prior year, driven by the contribution of Apria and strong organic growth within the Patient Direct segment offset by lower revenues within the products and healthcare services sector. Gross margin of $513 million or 20.6% of revenue was up 740 basis points from prior year. Growth was driven by Patient Direct and reflected the contribution of Apria sales and sales mix within that segment. Year-over-year for Q3 foreign currency negatively impacted revenue by $12 million, gross margin by $6 million and adjusted operating income by $5 million. Distribution, selling and administrative expense was $445 million driven higher primarily from the addition of Apria expenses and ongoing inflationary pressures, partially offset by operating efficiencies, and productivity gains derived from the Owens & Minor business system. Interest expense was $40 million in the quarter, which was $28 million higher than prior year driven by the debt financing of the Apria acquisition in late March. As a reminder, floating rate debt represents approximately 1/3rd of our overall borrowings inclusive of our interest rate swaps. The GAAP effective tax rate this quarter was 36.2% compared to 12.6% in last year's third quarter. The change in rates resulted primarily from the mixture of income and losses in jurisdictions in which we operate, as well as the prior year's utilization of foreign tax benefits. Our…

Operator

Operator

Thank you, sir. [Operator Instructions] And I show our first question comes from the line of Kevin Caliendo from UBS. Please go ahead.

Andrea Alfonso

Analyst

Hi, good morning, everybody. It's actually Andrea Alfonso in for Kevin. I guess if we could just get a little bit more granularity around, your expectations for the run rate of margin and products in 2023. And if I could just slip one in, would appreciate a little bit more color on your thoughts around sort of the sleep apnea backlog and how we should think about that manifesting of the numbers from next year. Thanks so much.

Ed Pesicka

Management

Sure. I'll start this is, Ed. I'll start with the second part of the question and Alex will talk a little bit about the projection going forward. I think the way to think about the sleep product is, we had a very strong quarter in sleep. We were able to basically get access to additional product, the team executed extremely well on it. And, frankly, we took our backlog down to back to almost close to where we sitting now today, closer to normal levels of what we'd anticipate. So while we had anticipated the depletion of that backlog to lead us into Q1 of next year, and early part of 2023, we actually were able to capture most of that business now, because of the additional capacity that we receive or additional volume we received. And frankly, incredible execution on the teams part to get those products out. So how does that manifest into the future? Yes, obviously, placing the equipment is one thing, it's now that that recurring revenue will start to occur in Q4 or late in Q4, because generally they get a 90-day supply with the initial deployment of the product. And then that recurring revenue will start to continue to flow throughout all of 2023 versus where we originally thought, we would fill those equipment orders into '23, and then start to gain that. So it's really been strong execution on the patient direct team, focus on partnering with sleep manufacturers getting the product out to get us ahead of the curve, and really get our back orders and backlog on that back down to what we would see as a normal rate where we sit today. And then, I will, Alex cover a little bit on the first part of the question on kind of standard run rates, and where we are in the process.

Alex Bruni

Management

Thanks, Ed. Good morning, Andrea. So within PHS, the trends that we've seen here in Q3, we do expect to continue at least in the short-term through Q4. And I think that's reflected in our guidance. And as I mentioned, we are in the middle of our budget process and do expect to have greater visibility in the first quarter. The markets continue to be very dynamic. And we'll work through that over the next month or so.

Andrea Alfonso

Analyst

Thanks very much.

Operator

Operator

Thank you. One moment for our next question. And I show a next question comes from the line of Daniel Grosslight from Citi. Please go ahead.

Daniel Grosslight

Analyst

Hi, guys, thanks for taking the question. It seems like most of the pressures you're facing are macro in nature. But you mentioned that there are specific actions you didn't take quickly enough and you're going to begin implementing. I'm wondering if you could put just a bit of a finer point on what specifically you can do in the near-term given these macro pressures don't seem to be abating anytime soon. And how quickly that will manifest in more normalized margins for the products and solutions business?

Ed Pesicka

Management

Sure, I'll take that. So really, it's both a mix of macro as well as some of the industry specific that we're seeing. So I talked a little bit about the destocking, that's having a material impact on us here in Q3 and then extending into Q4 and that's really the fact that hospitals are under financial constraint. They have a tremendous amount of stock on hand of PPE which historically they haven't had. They are electing to utilize that versus restocking. So they're using their “safety stock” to bleed down inventory, which is having a material impact on us. I think on the macroeconomic side there are several different things that we're in the process of doing. Some of those things to offset the macro impact one is Route Optimization as fuel prices continue to go up, there's still tremendous opportunities for us to maximize and optimize our Route Optimization within the customers and that's going to take a period of time to work with our customers from a delivery standpoint. There's additional really embedding the Owens & Minor Business System within our product and healthcare services segment. There's the ability for us to continue to take cost out of that business aggressively by driving continuous improvement and I think the way to really look at it is compare and contrast the two segments. Many of the same macroeconomic pressures impact Patient Direct that impact our product and healthcare services segment. Our Patient Direct through the embedding of the Owens & Minor Business System have been able to quickly take cost out of that system to be more effective. That same implementation has to happen on the other side of our business on the product and healthcare services segment. The other thing, I would talk about to really continue to look at off-sizing some of the macroeconomic is looking at the labor force. One of the things we had anticipated coming into Q3 and going into Q4 was the stabilization of the labor. We didn't see that in Q3 and Q4. However, we actually believe as the economy continues to tighten, the labor force will create opportunities for us to have a better labor force and then keep our employees and teammates for a longer period of time and reduce that turnover. So that's another aspect of it, continuing to look at ways where we've identified of how do we reduce the turnover of our teammates and our distribution centers so that way, we can have well-trained teammates that are much more effective than new hires. So that's another aspect of how we're thinking about it.

Daniel Grosslight

Analyst

Thanks. Appreciate the color. And if I could slip one more in here, you mentioned a lot of the margin pressure within products and solutions is due to product mix as well, the higher margin products just haven't come back as much as you expected. Given you had generally seeing higher margins within your proprietary products business, does this mean you're really seeing most of the pressure within proprietary products, rather than the core distribution segment?

Ed Pesicka

Management

I think that's the right way to think about it and really it comes down to this is, while we're winning customers, we're continuing to grow in our general distribution business, the one area we're seeing today primarily our Proprietary S&IP products, we're seeing less and less demand. We're not seeing utilization go down in the hospital of the product, we're actually seeing hospitals reduce their purchasing of those products because they have a stockpile and that's one of the things that's fundamentally changed is during COVID of the last few years many of our customers went out and bought product from us from other manufacturers and then directly anywhere they could find the product. They built those products up in a stockpile and now they're electing to actually utilize those products that are in their stockpile, deplete those down to a lower level and then that's when the recurring revenue will start to happen and increase again in our products business, specifically the PPE based products.

Daniel Grosslight

Analyst

Thanks, appreciate the color.

Operator

Operator

Thank you. And I show our next question comes from the line of John Stansel from JPMorgan. Please go ahead.

John Stansel

Analyst

Hi, this is John on for Lisa. Thanks for taking my question. I just want to dig in a little bit on the synergies that you're seeing, I think you called out kind of ahead of schedule but if I was hearing kind of the commentary correct about the same amount that $40 million to $50 million of EBITDA contribution. So I guess my question is, are you seeing a more than expected just synergies from your overall integration? And I guess, how should we think about that going forward?

Ed Pesicka

Management

Yes. The answer to that question is, absolutely we are. Again we -- I've watched the Patient Direct business come together at [Apria and Byram] [ph], I've watched them both collectively embrace and embed the Owens & Minor Business System. We've watched them continue to grow. If you think about the growth, right, I think Q2 pro forma growth rate was approximately 10% and Q3 pro forma growth rate is 11.4%. So just think about that, the ability to cross-sell, the ability to identify opportunities. I would say there's synergies on both sides and the fact that we've embraced the fact that Byram has learned from Apria and Apria has learned from Byram. Byram has effectively done some of the things that have made Apria successful and Apria has done many of the things that has made Byram successful. Again, you're seeing that in growth, again pro forma last quarter, this quarter was 10%, up to 11.4%, you're seeing that in operating income overall, I believe we went from 9.1% to 10%, adjusted operating income as percentage. So you're seeing margin expansion. And again, that is driven by cost elimination that has been driven by better operational effectiveness, that is driven by a top-line growth. And I think it's also important with the synergies, we're seeing growth not just in one category two categories, but virtually all major categories grew at double digits. So those are the quantitative examples that are validating the synergies and continuing to drive the adjusted operating income margin expansion as well as accelerated top-line growth.

John Stansel

Analyst

Great, thank you.

Operator

Operator

Thank you. And I show our next question comes from the line of Charlotte Kolb from Bank of America. Please go ahead.

Charlotte Kolb

Analyst

Hi, this is Charlotte on for Mike. Thanks for taking my question. Can you talk a little bit about the competitive environment and any impacts that you're seeing from a share perspective versus peers?

Ed Pesicka

Management

Yes, from a competitive environment, I mean all the businesses are different obviously, we've got a manufacturing business, we got a distribution business, we got a Patient Direct business. I would like to -- I believe that if I take those in the other order our product, our Patient Direct business continues to grow again I said at 11.4%, of pro forma and really in the high teens are double digits across the Board, I should say within all major categories. So I like to believe that in those markets we're playing, we are continuing to grow at or above market. I would say also within our medical distribution, we continue to see new meaningful wins come into our business. But I'll also qualify that as in the fact that we're continuing to look at the right wins and retaining the right business. We look at it as is there meaningful losses, and can we gain meaningful wins? And across the Board I would say we're gaining some very meaningful wins with the opportunities for those to continue to grow. We're also doing putting together programs with our medical distribution business that when we win customers -- a great example of that is one of the recent announcements we had in WVU. That's not just an opportunity to win, there it's to grow in the entire state with the footprint we're adding and then the geographic states around that. So that's where I say, there's great success on that. I would say in the PPE space, we’re in our proprietary products, I think the destocking isn't just affecting us, it's affecting many others in the market too that are in this space. And as we look at our contracts across our customer base, we continue to maintain those we continue to have expansions of new customers coming onto our PPE -- coming onto our contracts are PPE. So I think across the Board we're doing extremely well.

Charlotte Kolb

Analyst

Great. Thank you.

Operator

Operator

Thank you. I'm showing no further questions in the queue. At this time, I'd like to turn the call back over to Mr. Pesicka for closing remarks.

Ed Pesicka

Management

Thank you. Well, first, I just want to thank everyone for joining us on the call today, but before I end the call, I want to reiterate a few key points that I want to make sure we all take away from today's conversation. First, at Owens & Minor, we are completely committed to our customers and continuing to provide leading industry or industry leading services. That service level we're providing continues to deliver on new wins for us and we're going to continue to focus and as I just stated in the previous question, the right growth going forward. Second really the stockpile issue, we've got customers that have a tremendous amount of product stockpile. We're seeing customers utilize that stockpile. I met with a customer most recently that had been burning through their stockpile and now was completely through it, met with other customers that validated it, yes, we're utilizing some of our stockpiles offset some of the financial woes. As that stockpile is depleted and it's not going to last forever, that demand for our product exists, it still exists, and they're using those products today. Next, you're going to see really an increased intensity around the Owens & Minor business system and our product and healthcare services segment. Finally, we've talked about this back in Q1, Q2 and in various open communications. You're going to continue to see a mix shift at Owens & Minor, where more and more of our earnings and EBITDA are going to come from the Patient Direct segments and I really believe as people understand that segment, it has tremendous recurring revenue nature as well as it has higher growth and it's a more profitable segment than our patient, our product and healthcare services segment and you're going to continue to see that mix shift as we go forward. And finally, over the long-term, I am completely confident that our core business fundamentals remain strong, and we have the correct strategies across both segments. So I want to thank everyone, and I look forward to sharing our progress when we report out our fourth quarter results in early 2023. Thank you.

Operator

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.