Accendra Health Inc/Va/ Q1 FY2026 Earnings Call

Hello. Good morning, and thank you for standing by. Welcome to Accendra Health's First Quarter 2026 Earnings Conference Call. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Will Parrish, Vice President, Strategy, Corporate Development and Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I'd like to welcome you to Accendra Health's First Quarter Earnings Call. Our comments on the call will be focused on the financial results of the first quarter of 2026, all of which are included in today's press release. The press release, along with the first quarter 2026 supplemental slides, which we will refer to throughout the call, are posted in the Investor Relations section of our website. Please note that during the call, we will make forward-looking statements that reflect the current views of Accendra Health about our business, financial performance and future events. 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 them. 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, in our earnings press release or in our supplemental slides 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'm joined by Ed Pesicka, Accendra Health's President and Chief Executive Officer; Jon Leon, the company's Chief Financial Officer; and Perry Bernocchi, the company's Chief Operating Officer. I will now turn the call over to Ed.

Thank you, Will. Good morning, everyone, and thank you for joining us on the call today. It is great to be reporting our first full quarter as a stand-alone pure-play home-based care company. Accendra Health's first quarter results were in line with our expectations and included key accomplishments in our transformation into a leaner, nimbler and higher-margin business, and we are excited about where we will go from here. First, I am pleased to report that the transition services and separation activities from Owens & Minor are on track and going according to schedule, allowing Accendra Health to fully function as a completely independent company from Owens & Minor. We are excited to be devoting all of our focus and energy to growing our leading position and capabilities in the home-based care space. Another update that I want to highlight is that as of the end of the first quarter, we have substantially completed the exit stemming from our previously disclosed transition away from a large commercial payor and the handover has gone as expected. Our team ensured continuity of care for the patients, while also minimizing our cost to transition the business. To secure this smooth transition for patients, we engaged with another industry player to sell them a substantial amount of Accendra-owned equipment that was dedicated to the large commercial payor's patients. At the same time, we facilitated the transition of personnel, along with other variable and certain fixed costs from Accendra to that same industry player. This solution provided the best outcome for all stakeholders, particularly patients, and also allowed us to quickly begin the rationalization of our corporate infrastructure as we pivot away from this large commercial payor. Again, while we never want to exit a customer relationship, we maintained our financial discipline throughout the contracting and transition process, and we are excited to have the vast majority of this exit behind us. I'd also like to remind everyone that while we have exited our largest capitated agreement with this transition, we still have other smaller capitation agreements which are very attractive. Going forward, we will continue to be excited about pursuing both fee-for-service agreements as well as capitated agreements, which still can be very compelling under the right circumstances. Staying with our payors, I am happy to announce that we recently reached an agreement for an exclusive multiyear extension with our largest commercial payor for soft goods, such as ostomy, urology, diabetes, incontinence and others. This extension of the long-standing partnership provides certainty for our business in the years ahead. In order to provide more clarity around our payor mix, we have provided you with Slide 5 that clearly shows the diversification of our commercial payor portfolio. As a reminder, with the notable exception of a large commercial payor discussed a moment ago, the vast majority of our commercial payor relationships are contracted at the individual state level and are then aggregated under the national parent organization in this slide for presentation purposes. Accordingly, we are well positioned with a diversified commercial payor portfolio with no major renewals on the horizon. In addition to the commercial payors just noted, approximately 20% of our revenue is from traditional Medicare. We are supportive of the government's recent efforts to eliminate fraud, waste and abuse, including the upcoming competitive bidding program. As one of the large national players in the market, we are proud of our ability to operate at scale as well as our track record of rigid compliance with government requirements while providing the highest quality of service to patients. Thus, we expect to continue to thrive in this new era. Next, I would like to provide an update on several of our strategic initiatives which are streamlining our business through centralization, standardization and automation with the goal of driving top-line growth and reducing our overall cost profile, all while providing an industry-leading experience for patients. I'd like to start by highlighting our focus on sleep therapy. I'm pleased to report that our Sleep Journey program continues to deliver anticipated results with the sleep supplies portion of our sleep therapy category delivering strong year-over-year growth. We are particularly proud of this initiative as it helps drive stronger fundamentals in the sleep supply category in the form of higher revenue per order, lower patient attrition and better patient outcomes through higher therapy adherence rates. We expect this initiative to continue to drive higher patient therapy adherence through the efforts of our dedicated sleep coaches and other clinical initiatives. Building on the success of our Sleep Journey as well as our proven track record with our existing centers of excellence for other categories, we recently formed our Sleep Center of Excellence, which serves as a centralized and standardized expert-led team responsible for the patient's first interaction with Accendra and the initiation of their PAP therapy. This program is building a trusted patient-first ecosystem that balances operational efficiency with compassionate care. Our dedicated team manages order processing, scheduling and patient onboarding to ensure a consistent, high-quality start to each patient's therapy journey. Our Sleep Center of Excellence is designed to cultivate patient satisfaction and loyalty by ensuring a consistent, high-quality patient experience that we expect will enhance provider confidence in our already strong brand by driving growth in our referral pipeline. This initiative has already seen a successful pilot in select markets during the first quarter, with a nationwide launch continuing in the second quarter. The combination of the Sleep Journey and our new Sleep Center of Excellence will enable us to improve patient capture and patient adherence and to enhance the experience for all stakeholders — patients, providers and payors — which should result in improved growth in the sleep category. Finally, I would like to provide an update on our capital structure. In our press release this morning, we announced a comprehensive balance sheet optimization transaction, which will strengthen Accendra's balance sheet by paying off our 2027 maturities, significantly reducing total debt and meaningfully extending maturities, while also affording the company financial and strategic flexibility with ample liquidity. Jon will walk you through the details in a moment, but we believe that this comprehensive balance sheet optimization transaction lays the foundation for Accendra's long-term trajectory as a stand-alone business. With this behind us, it will enable us to devote 100% of our focus on the business. We are excited to remove any uncertainty about our 2027 maturity and any pressure it may have put on our overall valuation. Before I turn the call over to Jon, I would like to reiterate how transformative the last several months have been for Accendra and how excited we are for the future. Our business today is dramatically different than it was prior to the divestiture from Owens & Minor. If you look at Slide 6 of the supplemental slides, you can see how we have transformed a company with gross margins in the 19% range and EBITDA margins of approximately 4% to a stand-alone home-based care business with nearly 50% gross margins and double-digit EBITDA margins. Additionally, if you move ahead to Slide 7, you can see how much of the earnings and consistent cash flow of what is now Accendra Health backstop the P&HS business consumption of cash in recent periods. With the divestiture behind us, we look forward to enjoying a much cleaner and less volatile cash flow profile. In closing, we couldn't be more pleased with the transformation we have delivered over the past several months. While we have much work ahead of us, we are excited about where Accendra Health is taking home-based care into the future. With that, I will hand the call over to Jon to discuss the financials.

Thanks, Ed, and good morning. My comments today will cover our first quarter results and outlook for the remainder of the year as well as the expected outcome of our current financing activity which will lead to a much improved, simpler and longer-dated capital structure with plenty of liquidity for the business. I will specifically speak to the balance sheet optimization transaction that we announced in this morning's press release. Like recent quarters, unless otherwise stated, my remarks today will focus on the continuing operations. The continuing operations financial statements represent the total of Accendra Health. Also, please note that any discussion about the financial results and outlook for the company will cover only non-GAAP financial measures. You can find GAAP to non-GAAP financial reconciliations in the press release filed a short time ago and residing on our website at accendrahealth.com. The first quarter of 2026 was notable for the completion of a previously discussed large commercial payor exit and the initiation of our comprehensive balance sheet optimization activity. Operationally, the business performed to expectations, and as usually occurs, the third month of the quarter proved the strongest. Cash flow and debt levels also reflected what we expected and typically see in Q1, which is early in the year softness leading to greater strength in the back half of the year. Turning to Slide 10 of the supplemental slides, you can see that we reported a revenue decline of 6.8% in the quarter, but excluding the impact of the aforementioned large commercial payor, growth would have been about 1%. The leading growth categories were sleep, excluding repair impact, and urology and ostomy. A large sleeve category grew over 4%, and home respiratory sold about 4%. While the impact of a large commercial payor change is excluded, diabetes was off slightly versus the prior year as growth in insulin pumps did not quite offset a drop in CGM. Overall, growth rates were not where they need to be, but we expect improvement throughout the year and are seeing positive signs across a number of categories. To facilitate the transition of the large commercial payor, we sold patient service equipment for cash proceeds of $82 million, resulting in a book gain of $52 million. The positive income statement impact of this one-time transaction is not included in our adjusted EBITDA for the quarter, as I'll discuss further on this call. If you look at Slide 11 you can see that Q1 adjusted EBITDA was $58 million, again, in line with expectations. We continue to see a lower year-over-year collection rate, inflationary product cost increases and higher health benefit expenses, all of which were partially offset by our cost savings efforts. Of course, pre-divestiture stranded costs and elevated selling, general and administrative expenses lowered adjusted EBITDA. Cost reduction will continue to be a point of emphasis throughout the year. Cash flow demonstrates the typical seasonal softness; free cash flow is slightly negative in the quarter, following normal profitability, collection rate and working capital sequencing. Also, it should be recognized that we had extraordinary payments in the quarter of $19 million to the IRS to conclude tax matters related to international transfer pricing activity between 2015 and 2018, and $22 million of previously accrued expenses related to the P&HS divestiture. All this activity is detailed on Slide 12 of the supplemental slides. When looking at the cash flow statement, it's also important to note that, as I mentioned, the gains from the one-time sale of patient equipment related to the large commercial payor is an adjustment to income in the operating activity section of the cash flow statement. It is not included in adjusted EBITDA due to its one-time nature. And the cash received from these sales sits in the investing activity section of the cash flow statement. The vast majority of this activity occurred in Q1, and there will only be nominal amounts recorded in Q2. Net debt was essentially flat compared to where we ended 2025 at $1.77 billion, and the entire organization remains focused on debt reduction. At the end of the quarter, we had $337 million of cash on the balance sheet and $195 million of available capacity under our committed revolving credit facility, continuing our pattern of maintaining very comfortable liquidity levels. And once again, we ended the quarter well in compliance with our debt covenants. Now, as Ed mentioned, I want to discuss very exciting news on our capital structure. Pages 13 through 15 of the supplemental slides filed earlier this morning further detail the balance sheet optimization process. We have received commitments from existing creditors that will allow us to conduct a holistic reset of our capital structure and lay a long-term foundation for Accendra. Key benefits include a multi-year extension of our revolving credit facility, paying off our 2027 maturities, extensions of our 2029 and 2030 notes through exchange offers for longer-dated new notes and meaningful debt reduction. This comprehensive solution will provide the business with the appropriate level of liquidity and offer financial flexibility for our future. We have received commitments from our revolver lenders, Term Loan B lenders and note holders for the balance sheet optimization transaction. Of course, such commitments will be subject to customary closing conditions for agreements of this type. As detailed on Slide 13, we will offer to all eligible holders of our existing notes the ability to exchange all notes for new secured notes. The exchanges will include first and second lien notes that will mature in 2032 and 2033, respectively. The offer for each series of existing notes will be further described in the offering document that will be available to all eligible holders of the existing notes. These exchanges are expected to result in meaningful de-leveraging of up to about $115 million. Staying on Slide 13, in connection with the exchange process, we plan to retire our Term Loan A due in 2027 with the issuance of the new first lien notes. Additionally, we plan to pay off our current revolving credit facility with cash and will be entering into a new $300 million committed revolving facility due in 2030. The consummation of all these financing transactions will remove concerns about near-term maturities by extending our maturity runway and doubling the weighted average life of the debt capital structure to approximately 5.5 years while ensuring plenty of liquidity for a business that has over 80% recurring revenue, all while advancing our commitment to de-leveraging. We look forward to the completion of these transactions in the coming weeks. This will be an enormously positive change in having a better capital structure suited for Accendra's strength. In conjunction with the announcement of the balance sheet optimization transaction, we would expect to file an omnibus shelf registration. The company does not have a shelf registration presently and in relation to the financing activity it would be the most logical timing; it's simply a matter of prudent financial management and good corporate hygiene. We are affirming our 2026 outlook for revenue and adjusted EBITDA. The financing activity I just discussed will impact interest expense and obviously free cash flow. We will be refinancing our existing lower-coupon notes and while we're satisfied with the anticipated pricing of the new debt described above, we are estimating that annualized cash interest will be higher by about $40 million. We expect that approximately half of this incremental impact will occur starting in the second half of 2026. Finally, as we look ahead quarter-by-quarter, we see greater revenue growth in the latter months of the year, resulting in at least 65% of adjusted EBITDA coming in the third and fourth quarters. Following what we see as a decent in-line quarter, we remain confident in the revenue growth ramping in the months ahead, better collection rates, cost savings and consistently improving cash flow, and we will remain ever diligent on de-levering the balance sheet as quickly as possible. With that, I'll now turn the call back to the operator for Q&A.

Thank you. Your first question comes from the line of Kevin Caliendo with UBS.

Sorry, I was on mute. I apologize. Congrats on getting this all done, guys. It's quite laborious and really impressive that you got it over the finish line, so congratulations. My question really is around free cash flow and how to think about it now post all this. Obviously, the higher interest expense and everything else. But when we talk about sort of operating cash flow and then free cash flow back to the entity, what are the expectations now for '26 and beyond and how to think about it? And I'm assuming we should just put it all to use in terms of paying down debt?

Absolutely, Kevin, it's Jon. Anything we do generate will be used for debt reduction. Getting the exact number is going to be a little bit uncertain until we get through this financing, probably sometime next month. We know what we have ahead of us. Obviously, we have to pay for this transaction. We have scheduled money going out for the P&HS separation, all of which was planned. As I said in my remarks, about half of the $40 million of increased interest expense will hit us this year. Still, good cash flow will go toward debt reduction, but to provide the exact number, we'll probably need another month or two before we can actually peg the forecast number for you.

Got it. That's helpful. If I can just ask a fundamental question: in terms of diabetes, what you're seeing there, how the market is continuing to evolve and how you feel like you're positioned there? I'd love to get an update specifically on that, and I'll let others jump in after me.

Yes, thanks, Kevin. If I think about diabetes, in the quarter we saw nice growth in insulin pumps. We actually saw unit volume grow in CGM. We did see some price compression when you look at the mix between DME and pharmacy. Let me talk a little more about DME versus pharmacy. The pharmacy option has been in place for several years now. We're starting to get some empirical data that shows that when a patient uses the DME channel versus the pharmacy channel, we see adherence at much higher rates than what we see through a pharmacy channel. I think that is an opportunity for us to make sure that we're educating patients and educating providers about the benefit of the DME channel. That's really because of the follow-up that we provide as a company, in addition to the follow-up with the provider that the patient has. So what we see when we see this trending out is it somewhat stabilizes the mix between DME and pharmacy and creates the opportunity to actually see the benefits of patients and physicians using a DME channel versus the pharmacy channel.

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

I'll add my congrats to getting this debt restructuring close to over the line here. A couple of questions on Slide 6 of the investor presentation that you filed with the restructuring. For 2027, it looks like you're projecting out 4% revenue growth and 5% EBITDA growth around there. Is this how we should think about the normalized growth rate of the company — kind of mid-single-digit revenue growth rate and a little bit of margin improvement each year? Or do you think that will accelerate in '28 and beyond? And it also looks like unlevered free cash flow is about $20 million or so lower in '27 versus '26 in the presentation. So I'm curious if you can just comment on that and how we should be thinking about some of the working capital investments perhaps you're making in '27?

Daniel, it's Jon. The '27 numbers that we provided this morning were the work product of a number of months of bottom-up modeling we performed a few months ago. So I would certainly caution everyone from relying too much on those specific figures. As we get into our normal budget cycle later this year, we'll update '27 in a more fulsome manner. But specific to your question, I would say the growth rates there are a decent proxy for what we would expect from the business on a run-rate basis going forward. Cash flow-wise, yes, we're putting some money back into the business in '27 for reinvestment. As we mentioned, the first commitment is always going to be debt reduction and investing in the business to grow. You're thinking about it correctly at a high level, but I would caution not to put too much weight on those numbers. We'll provide more detail as we finalize our planning later this year.

Okay, great. And then I just had one on the Sleep Journey and Sleep Center of Excellence, which is great to hear. Is that a joint effort? How many markets is that live in right now? And can you speak to any specific stats in the markets that are live in terms of adherence rates and conversion rates versus the markets that are not currently live?

Yes, I'll start and then I'll let Perry provide a little additional detail on it. The Sleep Journey has been implemented over the past year. The Center of Excellence focused on sleep starts is starting to be rolled out now. Perry, why don't you cover a little more detail?

From a Sleep Journey perspective, as Ed mentioned, it's been in process for well over a year. Every quarter we see improvement in our adherence rate by single-digit percentage points each quarter. That has proven highly successful. First is adherence improvement, and second, our average order basket has also increased with the Sleep Journey. From a Center of Excellence perspective, this has been initiated and is in three of our markets with full implementation across the entire network by the beginning of the fourth quarter. It's a rolling process and is intended to provide end-to-end optimization for the patient, the prescriber and the payor. The centralized expert team handles sleep patients and initiation of therapy. From the early markets that went live, we're seeing speed from referral to initiation of therapy improve as well as all the other indices of improved adherence and market basket size.

Your next question comes from the line of Michael Cherny with Leerink Partners.

I hope you guys are doing well. This is Ahmed Muhammad for Mike Cherny. As we think about the results in the quarter and the outlook for the year, appreciate all the color that you've given. Is there any further color you can give on what drove the results this quarter and what's durable for the rest of the year across the various product categories? And two quick modeling questions: is there anything to note on agents regarding the Optum onboarding? And when is the debt refinancing expected to be completed?

I'll unpack that a little bit. On the quarter, we've seen the same dynamics by category that we've seen for the last several quarters. Our growth was led by categories like ostomy and urology. The sleep business, absent the large commercial payor change, grew very nicely as well. On the other side, diabetes pumps did well; CGM did not perform as well as we would have hoped. Other categories like home respiratory underperformed our expectations as they have for the last few quarters. All in all, a similar trend to what we've seen in the past. In terms of Optum, preferred provider agreements take a while to ramp. We would expect that to continue to ramp throughout 2026, but it's not going to be a dramatic change in the performance of the business this year. Similar to other comparable agreements we've had recently, they take time to ramp and need a sales effort to scale into. Financing — we expect to be launching the actual exchange offer in the next week or so. Given the normal periods you need to let those offers run in the market, we should be closing that transaction around the third week, mid- to late third week of June.

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

One for Jon. SG&A in the quarter was better than we expected. You called out benefits from cost-saving efforts. As we think about the trajectory of SG&A over the course of the year, how should we think about the Q1 run rate and what's embedded in the guide for the rest of the year?

I'll start and let Ed finish. Cost reduction remains a significant focus for us and will be throughout the year. Keeping in mind that with the large commercial payor exit, we have been very rigid about taking those costs out. From a run-rate perspective, I'd like to see improvement beyond Q1 for the rest of the year, but Q1 is probably not a bad number to start with.

I think we would anticipate it will get better. If we think about the large customer exit, those costs came out toward the end of February and toward the end of March in a two-phase process. So we should be able to get additional benefit of those reductions for the remainder of the year as those costs were removed in late February through March.

Very helpful. Now that you've exited the largest capitated agreement, can you frame how big the smaller capitated arrangements are as a percent of the business? And is there any way to talk about the relative margin structure today, excluding the largest capitated arrangement but just between fee-for-service and the residual capitated agreements on the books?

If we think about it, we had the chart in the exhibits that showed some of our larger payors. None of those are, I would say, large capitated agreements. The remaining capitated agreements are very small in nature; nothing meaningful to fall into the top five or six payors. On margin, it depends on the nature of the agreement and the escalation terms. When we look at capitated agreements, we are not opposed to them. We have them and they can be a significant opportunity for us.

I think you've covered it. The remaining capitated agreements are small in nature. They're effective and efficient to run from an operational perspective, so they provide a very positive yield. We are pursuing capitated agreements in the marketplace today. The marketplace is dynamic and payors are continuing to look at opportunities to reduce their networks and align with providers like Accendra. So I think our opportunities to pursue smaller capitated agreements remain very positive.

That concludes our question-and-answer session. I will now turn the conference back over to Edward for closing comments.

Well, thank you, everyone, for the time today. If I reflect upon the last four to five months as a company, we've had a lot of accomplishments: one, we have had the ability to sell our P&HS business, and two, the balance sheet optimization we just completed today now leaves us in the position as a leaner, more efficient company as we proceed going forward. I look forward to the next several quarters to continue these dialogues and discuss the progress that the company is making. So thank you, everyone.

That concludes today's call. Thank you all for joining. You may now disconnect.