Accendra Health Inc/Va/ Q2 FY2025 Earnings Call

Thank you for your patience. My name is Kate, and I will be your conference operator today. I would like to welcome everyone to Owens & Minor's Second Quarter 2025 Financial Results. I will now hand the call over to Jackie Marcus from Investor Relations. Please proceed.

Thank you, operator. Hello, everyone, and welcome to the Owens & Minor Second Quarter Earnings Call. Our comments on the call will be focused on the financial results for the second quarter of 2025 as well as our outlook for 2025, all of which are included in today's press release. The press release, along with the supplemental slides, are posted in the Investor Relations section of our website. Please note that during this call, we will make forward-looking statements that reflect the current views of Owens & Minor about our business, financial performance and future events. 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. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for that. However, there can be no assurance that our expectations, beliefs and projections will result or be achieved. 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. Any forward-looking statements that we make on this call or in our earnings press release are as of today, and we undertake no obligation to update these statements as a result of new information or future events, except to the extent required by applicable law. In our discussion today, we will refer to non-GAAP financial measures and believe they might help investors to better understand our performance or business trends. Information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release. Today, I am joined by Ed Pesicka, Owens & Minor's President and Chief Executive Officer; Jon Leon, the company's Chief Financial Officer; and Perry Bernocchi, the company's Executive Vice President and CEO of Patient Direct. I will now turn the call over to Ed.

Thank you, Jackie. Good morning, everyone, and thank you for joining us on the call today. We are in the final stages of our robust process for the divestiture of the Products & Healthcare Services segment and as a result, have classified this segment as discontinued operations. We are looking forward to concluding the sale of the business and working with a buyer who has the vision and greater flexibility to better support our customers and long-term growth. I'm excited about the opportunities ahead as we transition into a focused pure-play Patient Direct business, building on the momentum gained since we entered the Patient Direct space 8 years ago and supported by favorable demographic trends and meaningful scale, we are confident in our ability to lead as the market continues to evolve. For more than 140 years, Owens & Minor has continuously evolved organically and through strategic acquisitions and divestitures. From its origins as a pharmacy to expanding into pharmaceutical distribution, then shifting into medical surgical distribution and manufacturing, and eventually developing a small Patient Direct segment. The planned divestiture of our Products & Healthcare Services segment represents the next evolution in Owens & Minor, enabling us to concentrate exclusively on the higher-margin, higher-growth Patient Direct segment. This transition positions Owens & Minor to capitalize on strong sustainable tailwinds in the home-based care market. Demographic shifts and macroeconomic trends are driving increased demand for home-based health care to treat chronic conditions. According to the CDC, as of 2024, approximately 40% of American adults live with at least one chronic condition, while 12% manage 5 or more. Furthermore, 5 of the top 10 leading causes of death in the United States are linked to preventable or treatable chronic diseases. As health care providers seek more effective models, the home has become an essential care setting, supporting longer, healthier lives for patients and unlocking greater efficiency. Let me now discuss a little more about our continuing operations, Patient Direct. I'm excited about the opportunity ahead as we transition into a focused pure-play patient direct business. This is a business that delivers essential supplies for home-based care, a business that is a proven trusted partner to providers, payers, and patients alike. Since our acquisition in 2017, it has grown from approximately $450 million in annual revenue and approximately $38 million in EBITDA to a projected revenue between $2.76 billion and $2.82 billion, and adjusted EBITDA range of $376 million to $382 million in 2025. Our Patient Direct business is built on a strong culture of disciplined growth, one that never sacrifices returns or patient care standards in the pursuit of expansion. With favorable demographic trends, meaningful scale, and leadership position, we are poised for profitable growth as the home-based care market continues to evolve. At a high level, our long-term strategy for Patient Direct remains firmly intact. We are committed to delivering disciplined growth through both organic initiatives and strategic acquisitions while continuing to expand our EBITDA dollars. In the near term, our priorities include completing the divestiture and focusing on our continuing operations, which includes mitigating stranded costs, reducing debt, advancing IT infrastructure and automation, and executing on initiatives aimed at driving revenue and EBITDA growth. We will build on the momentum and successful efforts over the past year, including improvements in revenue cycle, the Sleep Journey program, category expansion and addition of the sales force to support both new and existing markets. On the inorganic front, in June, we announced the termination of our agreement to acquire Rotech. While the outcome was disappointing, the path to obtain regulatory clearance for this merger proved unviable in terms of time, expense, and opportunity. Looking ahead, we will continue to evaluate selective acquisition opportunities that are additive to Patient Direct's capabilities, align with our strategic vision, and help us maintain our leadership position in this evolving market. Finally, I am pleased to have Perry Bernocchi, our long-term Patient Direct leader, join us on the call today. Perry has been the architect and operational leader of the success and growth of Patient Direct since Owens & Minor acquired Byram in 2017, a company that Perry has led for over the past 20 years. I would also like to thank our teammates who have done a great job in staying focused on serving our customers. With that, I will now turn the call over to Jon to discuss our financial performance in the second quarter and our outlook for the rest of the year. Jon?

Thanks, Ed, and good morning, everyone. As I'm sure you saw in our press release this morning and as Ed mentioned, the divestiture of the Products & Healthcare Services segment is far enough along that we are now reporting that segment as discontinued operations. As a result, our reported financials and most of my comments today will speak only to continuing operations, which is made up of our Patient Direct business, certain functional operations and stranded costs stemming from the planned separation of P&HS. Details around the quarter and any discussion of the outlook for the business on this call will cover only non-GAAP financial measures. But I also want to point you to the $80 million in expenses from the termination of the Rotech acquisition and the related $18 million in Rotech-related financing costs, which both occurred in the second quarter. Each of these items has its own line in our GAAP results, but are not included in our non-GAAP adjusted results. Cash costs for these items are included in the GAAP net loss on the statement of cash flows. Importantly, please note that all GAAP to non-GAAP financial reconciliations can be found in the press release filed earlier this morning. With the planned P&HS divestiture, our financial results will take some explanation and getting used to and requires a reset of expectations. So let's begin to unpack the second quarter results. Revenue for the quarter was $682 million, an increase of 3.3% versus the second quarter of 2024. While that is a lower growth rate than we had expected, it is important to note that in order to not disrupt our customers' critical needs during supplier disruptions, we modified customer ordering quantities and our delivery frequency for diabetes supplies throughout the quarter. Absent this headwind, our growth rate in the quarter would have been approximately 4%. Once again, the sleep category, in particular, sleep supplies, led the overall growth rate, and urology and ostomy showed very strong growth. Diabetes was lower than planned in the quarter, as I alluded to, but we expect to see some rebound in the back half of the year, but it will remain below prior year due to the shift from DME to pharmacy. Smaller categories, including the new chest wall oscillation line performed very well. As we've previously discussed, the investment we made in 2024 and early '25 in what we refer to as the Sleep Journey is showing a strong return. For the 6 months ended June 30, revenue was $1.36 billion, a nearly 4.5% increase over the $1.3 billion earned in the first 6 months of 2024. Again, sleep, ostomy, and urology showed the strongest year-over-year growth. For the second quarter, adjusted EBITDA was $96.6 million or 14.2% margin rate compared to $91.1 million or 13.8% margin rate in the second quarter of 2024. The growth in adjusted EBITDA was driven by volume growth and improved collection rate, a margin favorable product mix, productivity gains, and lower benefit costs. For the year-to-date period, adjusted EBITDA was $192.7 million or 14.2% of revenue compared to $160.3 million or 12.3% of revenue in the prior year, driven by the same factors I just described for the second quarter, although volume growth and margin favorable product mix were significantly more impactful for the year-to-date comparison. Stranded costs impacting adjusted EBITDA include approximately $11 million in the second quarter of 2025 and $14 million for the year-to-date period of former corporate costs that will now be absorbed by the Patient Direct business. That compares to stranded costs of $17 million in last year's second quarter and about $28 million in the year-to-date June 2024 period. The year-over-year change is largely due to lower compensation and benefit costs in 2025. These stranded costs include a number of functional area costs, including teammate expenses and previously shared third-party agreements, for example. Please recognize that should the sale of P&HS be announced shortly, we would expect these stranded costs to rise before falling due to some lost economies of scale and short-term spending on programs to build the proper cost structure for the optimal long-term outcome. Of course, over time, we expect these expenses to decline as a percentage of the overall Patient Direct business and plans are being established to relentlessly focus on reducing these expenses, thereby improving profitability. Interest expense requires a little explanation. In accordance with GAAP, certain qualifying interest expense is reflected in discontinued operations. As a result, interest expense for continuing operations for the second quarter was $26 million compared to $25.6 million in the second quarter of 2024. Despite this presentation, Owens & Minor is responsible for the cash interest obligations of both the continuing and discontinued operations. Our adjusted effective tax rate for the continuing operations was 32.5% in the second quarter as compared to 28% in the second quarter last year. We now expect our annual adjusted effective tax rate to run between 40 to 45 basis points higher than it previously did due to the impact of permanent differences between book and tax income on an overall lower amount of earnings. Adjusted net income for the quarter was $20.5 million or $0.26 per share compared to $19.3 million or $0.25 per share last year. For the 6 months ended June 30, adjusted net income was $43.7 million or $0.55 per share versus $21.9 million or $0.28 per share in the year-ago period. Now let me turn to the balance sheet. First, I want to again unequivocally state that when we sell the P&HS business, 100% of the net proceeds will be applied to debt reduction. Further, nothing about the recent strategic announcements changes our target leverage range of 2x to 3x EBITDA. At June 30, net debt was $1.9 billion. That's an increase of about $126 million since the end of 2024 and an increase of $31 million in the second quarter. That means that absent the unanticipated $100 million in cash paid to terminate the Rotech acquisition, net debt would have only been up about $25 million compared to year-end 2024 and down about $70 million in the second quarter. I'm explaining the net debt change this way to highlight what was a very good cash flow quarter. So moving to cash flow. Please note that the statement of cash flow remains on a consolidated basis. I'm pleased that cash provided from operating activity in Q2 was $38 million, completely reversing the cash used in operating activity in Q1. Again, remember that the $100 million of Rotech-related outlays is included in the $38 million of cash provided from operating activity, which obviously would have been significantly higher absent the termination of the Rotech acquisition. This improvement in cash flow was due to a significant working capital reduction of nearly $94 million in the quarter, driven by lower P&HS inventory levels compared to the first quarter and improved collection rates as a result of our enhanced revenue cycle operations in Patient Direct. Similar to the Sleep Journey, past and ongoing investments in our already best-in-class patient direct collection rate continue to pay off. The team has been very focused on working to sell the P&HS business and have also been developing our outlook for the newly defined continuing operations for the remainder of 2025. As we think about the performance of continuing operations for the full year of 2025, we expect revenue of between $2.76 billion and $2.82 billion, adjusted net income per share ranging from $1.02 to $1.07 and adjusted EBITDA range of $376 million to $382 million. To assist with modeling, that would mean that through the back half of 2025, revenue is expected to range from $1.40 billion to $1.46 billion, adjusted net income from $0.47 to $0.52 per share, and adjusted EBITDA from $183 million to $189 million. Also, with the assumption that a sale of the P&H business is announced shortly, we would expect the profit path for the back half of the year to not reflect the typical seasonality of the Patient Direct business. This is due to an anticipated increase in stranded costs as we get closer to the expected close of the divestiture. Essentially, we would expect to have to spend money early to save more money later. Again, this assumes a near-term sale announcement and would only be expected to be a back half of 2025 issue. Please also refer to the guidance presentation with related assumptions that we filed this morning and resides in the Investor Relations section of our website. We do remain very excited about the future of the Patient Direct business and the future opportunity to be a focused pure-play home-based care business. With that, I'll now turn the call back to Kate for Q&A.

Your first question comes from Michael Cherny with Leerink Partners.

Maybe, Jon, first, on the dynamics of the transaction. Obviously, we don't know exactly the timing, even though it seems like it's moving along. But as you think about the dynamics of the stranded cost, how long do you think that the elevated level stranded costs will take throughout the closure of the transaction? And how quickly can you flip that to some level of leverage on the back end?

Yes, Mike, I think the first way to consider it is that the $11 million I mentioned for Q2 represents a solid near-term annualized run rate. I would anticipate that if the deal were to close before the end of the year, by the second half of '26, we would begin to see those numbers start to decline.

Okay. That's helpful. Regarding the broader business, specifically in diabetes, you mentioned some changes in the channel. How should we view the medium-term trajectory of the diabetes business? What are your considerations regarding any potential changes related to competitive bidding for various diabetes products, including CGM?

Yes, there are a few key points to consider. The transition from DME to pharma has been underway for a while and will likely continue, though possibly at a slower pace. We have a fully operational pharmacy capability and are seeing growth in that area, so it remains a priority for us to increase activity through our pharmacy channel over time. Regarding competitive bidding, it's still early, and we are not certain about the outlook. Currently, as proposed, it doesn't seem to pose a significant concern for us, as Medicare rates account for less than 20% of our total revenue. While it’s premature to draw conclusions, not all aspects of the competitive bidding proposal are negative. However, there may be some pressure in the future, but it’s too soon to predict that accurately.

Yes. We believe that the implications of competitive bidding on pricing will not become clear until 2028 or even 2029. Additionally, as Jon mentioned, if we consider our Byram and Apria businesses combined, the portion of our business that might be affected is probably under 13%. Lastly, our scale may provide us with an advantage as we navigate competitive bidding in the future.

Your next question comes from the line of Kevin Caliendo with UBS.

I have 100. I don't know where to start. If we think about this transaction that's happening, right, we're trying to look through the balance sheet at some of the items there. The current assets versus current liabilities held for sale is $430 million. You have this classification of a write-down versus classification of $639 million. Is there anything there that we can read through that tells us sort of what the price of this asset might end up looking like? Or if you can help us think about what kind of multiple you got for this business, either on adjusted EBITDA or adjusted EBIT?

The first part of that question, Kevin, is probably not. No, you can't read through. It's pretty hard. We're kind of happy with that. And I would tell you, we're still very actively engaged. And what you saw there is a best estimate of the bidding process that we've been through thus far. But we are still in a very active process at this point.

We're just trying to remain diligent and thorough as we work with the parties in this process right now.

Okay. I appreciate that. And then secondly, one topic that's been driving your stock was sort of perceived loss of a contract for next year at Kaiser. And when we think about the run rate of Patient Direct in the second half of the year, what we're looking at here, should we sort of annualize that in terms of adjusted EBITDA try to make an assumption around what happens with Kaiser, can you still grow, do you think, in 2026 in this business?

Let's discuss this further. We believe that there will be minimal impact in 2025 due to this situation, with most of the transition occurring in 2026. When considering growth, the important distinction is whether it pertains to top line or bottom line growth. Each capitated contract is unique, and the majority of our contracts fall into this category, with very few outside of it. Our strategy involves leveraging our existing assets and equipment, which presents an opportunity to pursue additional business. While top line growth may not reach previous levels, we anticipate a stronger bottom line as we progress.

Your next question comes from the line of John Stansel with JPMorgan.

Great. Can you spend a little bit more time talking through the factors on Patient Direct revenue growth in the quarter. I think even backing out the diabetes contribution, 4% will be a bit of a deceleration from recent quarters. Anything just to think about that as we then kind of progress into the second half? I appreciate it will grow second half or first half, but still kind of in that 4% range for full year growth. Just anything to think about on the growth side?

Yes, John, it's Jon Leon. I think it's fair to say we expect decent growth in the second half, similar to what we experienced in the first half. Regarding diabetes, we anticipate a rebound while managing the supplier disruption effectively in a customer-focused manner during the second quarter, even though it impacted our revenue. Sleep performance continues to be strong in both sleep starts and sleep supplies, and we expect this trend to continue for the rest of the year. We believe home respiratory will perform adequately, though NIV will remain a laggard like in previous quarters, while oxygen is expected to recover gradually. Additionally, ostomy and urology segments will remain robust, with strong double-digit growth. Overall, we're optimistic. We foresee a slight rebound in diabetes, but it won't be significant. If you consider our performance in the first half, around 4.5%, that's likely what to expect in the second half as well.

We will provide more detailed information on the categories when the market data is released, offering greater visibility. Year-to-date, we are experiencing single-digit growth in diabetes, and as Jon mentioned, we are seeing strong growth in sleep and other categories. Regarding diabetes, Jon noted in his remarks that we are transitioning from durable medical equipment to pharmacy, which allows us to maintain that business. Although this shift results in lower top-line revenue, we still achieve similar pull-through rates in the diabetes segment.

Got it. And then just looking at the quarter, $11 million of stranded costs in 2Q '25, $17 million in 2Q '24. So most of the delta between the quarters on an adjusted EBITDA basis seems like it's coming from lower stranded costs. Is anything just to think about there, kind of core growth, kind of diabetes was kind of weighing down kind of core performance ex stranded costs or anything else you'd just highlight?

Yes. It was not a great growth quarter on a stand-alone basis. We expect better in the second half. But you're right, you analyze the stranded costs correctly. When you get to continuing ops analysis, there's also a change in allocation of functional costs as well. It's a little hard. We appreciate it's hard for you guys to cut through all that. But the overall growth rate at an EBITDA level on the, call it, the legacy Patient Direct business before the stranded cost and functional expenses change was still in the mid-single digits, and we would expect something comparable in the back half of the year.

Your next question comes from the line of Daniel Grosslight with Citi.

Just looking at guidance, I don't know if there's a way for you to help bridge new guidance versus old guidance, particularly really I'm looking at bottom line or EBITDA, it's being reduced by $196 million. Can you just bridge to us that reduction? How much is from just no longer including P&HS versus stranded costs versus some of these other more fundamental items like the shift from DME to pharmacy and diabetes?

Yes. I would say that the shift from DME to pharmacy is not going to significantly impact the change. We previously discussed stranded costs, and the estimate of approximately $11 million annualized remains a solid figure, although it could rise with the announced sale in the latter part of the year. Beyond that, I can't provide too much detail about what P&HS would have represented or what is now classified under discontinued operations due to accounting regulations, and we're actively involved in the divestiture process.

Okay. To clarify regarding one of Kevin's questions on the discontinued operations, is the $430 million your best estimate of what you believe you can achieve from the sale process?

No, that's not what we believe we can achieve in the sale process. That figure is not related to our projected valuation of the asset. Yes, it is unrelated to what we think we can obtain for the asset.

Okay. And sorry, last question from me, could you break down the free cash flow conversion for this business once we adjust for everything related to P&HS? It's a bit challenging to assess cash flow when considering all items in the income statement, particularly in continuing operations PD. Could you assist us in understanding the free cash flow conversion and how much of the current CapEx on the cash flow statement will remain after this deal closes?

Yes. Based on our assumptions this morning, we are projecting an annual EBITDA for the Patient Direct business in the range of $376 million to $382 million, which accounts for the stranded functional costs. We expect net capital expenditures of $135 million to $140 million and interest expenses from the income statement between $97 million and $100 million, along with an additional cash basis interest expense of around $30 million to $35 million related to discontinued operations. Those are the key components to consider. So, when it comes to free cash flow, I estimate it will be in the $60 million to $70 million range.

Your next question comes from the line of Jay Lewis with Baird.

I was wondering if you could just hit a little bit on the One Big Beautiful Bill and any expectations you have around the impact that could have on your cash flow or your cash taxes paid in 2025 and 2026?

Yes, Jay, it's Jon Leon. The One Big Beautiful Bill is a net positive for us. It's a continuation of the tax legislation that was implemented in 2017, which was beneficial for the business at that time. The ongoing nature of that legislation will continue to support the company from a tax perspective, particularly regarding cash taxes. We have a significant amount of debt on the balance sheet, so the deductibility of interest under 163J is advantageous for us, along with other attributes. Therefore, I consider the Big Beautiful Bill to be a net positive for the company's financial situation.

Your next question comes from Allen Lutz with Bank of America.

One for Ed. You talked a little bit about strategic acquisitions and some of the learnings from Rotech, a little bit of excess time and expenses on that deal. As we think about your pursuit of future acquisitions, I guess it makes sense for us to think that they're likely to be smaller in scope. But as you think about the learnings from Rotech, is there any other considerations or thoughts that you think are important as you look at future potential deals?

Yes. I believe the key point you mentioned is that we will continue to prioritize paying down debt. If smaller acquisitions align with our business strategy, we will consider and pursue those opportunities. We conducted a review after the Rotech experience, and timing was a significant factor along with other considerations. Moving forward, our focus will shift more towards smaller acquisitions as we aim to reduce stranded costs, enhance free cash flow, and pay down debt, which will enable us to pursue more opportunities in the future. Additionally, regarding cash flow, Jon mentioned free cash flow earlier. We anticipate potentially lower capital expenditures on equipment for patients in the future, as the capitated contract concludes and we can utilize existing equipment instead of acquiring new equipment for new startups. This should also provide a short-term advantage from a cash flow perspective.

And then one question for Jonathan. It looks like EBITDA margins are expected to step down a little bit in the second half of the year. Are there any stranded costs embedded in there? And then how should we think about if they're not, what is embedded in that step down in 2H?

Allen, that's 100% related to expected increase in stranded costs, assuming that there's an announced P&NH divestiture fairly soon.

Perfect. So if that doesn't happen in 2025, it's reasonable to assume that the first half run rate is a good estimate for where things could be excluding those potential stranded costs?

That's correct.

First of all, I want to thank all of our teammates, obviously, for continuing to support our customers, supporting the patients and everything we do. And really, we look forward to continuing to move forward with a singular focus on our Patient Direct business, closing out this transaction and having the business laser-focused as a pure-play Patient Direct business. So thank you, everyone.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.