Accendra Health, Inc. (ACH) Q2 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Owens & Minor's Second Quarter 2019 Financial Results Conference Call. My name is Brian, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Chuck Graves. Please proceed, Mr. Graves.

Thank you, operator. Good morning, everyone, and welcome to the Owens & Minor second quarter 2019 earnings call. I'm Chuck Graves, and on behalf of the team, I'd like to read a Safe Harbor statement before we begin. Our comments on the call today will be focused on financial results for the second quarter of 2019, which are included in our press release and quarterly report on Form 10-Q. Please note that certain statements made on this call are forward looking statements which are subject to risk and uncertainty. These forward looking statements are intended to quality for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today other than statements of historical facts are forward looking statements and include statements regarding our anticipated financial and operational performance. Forward looking statements made on this call represents management's current expectation and is based on information available at the time such statements are made. Forward looking statements involved numerous known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any results predicated, assumed or implied by the forward looking statements. The company has explained some of these risks and uncertainties in its SEC filing, including in the risk factor section of its annual report on Form 10-K and quarterly report on Form 10-Q. Except as required by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intend or obligation to update any forward looking statements. Additionally, 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 and our quarterly report on Form 10-Q. Participating on our call this morning are; Ed Pesicka, our President and CEO, who will provide commentary on the business through the first half of the year. And Robert Snead, EVP and Chief Financial Officer, who will provide details on the second quarter results and additional insight into our business performance. Now, I would like to turn the call over to Ed, who will start things off this morning. Ed?

Thank you, Chuck and good morning, everyone. Thank you for joining us on the call today. Robert will discuss our financial results in a few minutes. But before that I would like to take some time to discuss my thoughts on our key strategic, operational and commercial aspects of the company after my first full quarter at Owens & Minor. Since I spoke with you last quarter, I have continued to focus on our customers by placing rigor on our service levels, while also dedicating time to structure and strategy. Leading with our current and prospective customers remains a top priority and this is beginning to pay off. As I discussed last quarter, my initial impressions continue to be validated that our customers value; one, our ability to be flexible, to adapt quickly and to customize solutions to solve their challenges. Two, our integrated solutions and services across the continuum of care that helps our customers mitigate risk, increase value and improve the Commission's experience. Three, our ability to move at a speed equal to the pace of an industry that continues to evolve. And fourth, a high level of service. Regarding these areas, we continue to improve our operating metrics around safety, service and productivity due to an intense focus, training and improved analytics. Let me share a simple example around just one of these. That being safety. Through focus and training we have reduced the distribution center workers compensation claims by approximately 40% in the first half of 2019, compared to prior years. This reduction in workers compensation claims has not only reduced operating expenses, but it has also allowed us to keep well-trained and healthy teammates on the job, thereby resulting in improved service, productivity and quality. In addition to the safety example, we are executing on numerous other initiatives to enhance our operational performance, which have and will improve our financial performance. I've only mentioned the safety example to show how we are managing and operating the business with a much greater intensity and focus. The combination of customer focus, service improvement, productivity and enhance teammate engagement has resulted in improved results for the second quarter when compared to the first quarter. And we are working diligently to continue that progress in the third quarter and beyond. Let me share some of the positive items from the second quarter. Sequentially from the first quarter of 2019 to the second quarter of 2019, we saw growth in both revenue and adjusted operating income. We achieve revenue growth of 1% and adjusted operating income growth of more than 20%. Secondly, we generated $90 million of operating cash flow in the second quarter. This cash flow was driven by improvements in operating income and working capital management, specifically we were able to improve all major working capital metrics, while maintaining and improving service levels. Third, we reduced our debt in the second quarter by $60 million as compared to the end of the first quarter, as we remain committed to continue to deleverage the balance sheet. Fourth, as discussed last quarter, we renewed the Vizient contract through August 2020. I'm pleased to inform you that we have extended this agreement for yet another year through August 2021. Fifth, our Byram business continues to be a strong performer exceeding internal expectations both sequentially and compared to prior year. This business is well positioned in one of the fastest growing segments of healthcare, home healthcare. And finally, we continue to exceed our internal operating plan on a year-to-date basis. And while this quarter had many positive results, there are still some challenges and headwinds ahead of us related to the impact of previously disclosed customer non-renewals, Fusion5 and currency. I will discuss the impact of customer non-renewals and Robert will comment on Fusion5 and the impact of currency. The customer non-renewals we experienced in 2018 and in the first half of 2019 including the large customer discussed in Q1 will continue to affect our revenue growth in the second half of 2019 and into 2020. It is important to understand the selling cycle and the impact into 2020. Here's the way the sales cycle works. When a customer comes on board or makes a decision to move business away, it can take up to 180 days or more before the business begins to transition. Once the revenue change begins, it will impact our comparable results for the next 12 plus months. However, I'd like to note several positive things. One; we have begun to neutralize the net customer non-renewals due to material service level improvements in our distribution centers. A high level of customer focused and selling of our value proposition. And now we are also playing offense. Secondly; from an operating income standpoint, we are working to mitigate the 2019 impact of the previously mentioned customer non-renewals. We are doing this through productivity improvement and revenue mix shift to faster growing and more profitable business, in addition to many other mitigating actions that we are taking. While the headwinds exist, we continue to identify levers that have driven and that we believe will continue to drive improve performance of our acute care distribution channel and solution businesses. This improved performance coupled with a strong performance in our Byram business creates a path to mitigate headwinds and allows us to confirm our narrowed range of $0.60 to $0.70 for the full year. You may recall that I mentioned in the last earnings call four areas that we need to prioritize to stabilize our business. So let me provide an update on our progress. First, I challenged our team to drastically increase our intensity, while maintaining a high level of attention on serving our customers. As previously noted, in the second quarter of 2019, the continued customer focus along with improved service and emphasis on productivity and improved teammate engagement has resulted in improved operating results. Secondly, I recognize the need of our organization to develop, improve and upgrade. As noted in our recent announcement of leadership changes, we have been upgrading talent in key areas. And we have been successful in bringing in world-class talents to the organization, as well as promoting from within. These teammates have a deep healthcare experience, and a history of delivering on commitments, developing teams and demonstrating a high level of accountability. Third, we collect a vast amount of data to serve our customers. This date is now being used while being combined with firsthand customer feedback to prepare a strategy that is focused on providing efficiency to our traditional customer base, while focusing on growth segments of healthcare. And finally, we are instilling a high level of accountability and authority to honor our commitments to our customers, stakeholders and teammates. The initial steps are currently being taken around a process that enables enhanced ownership of our customer relationship to leverage the entire enterprise. I will provide additional color on these initiatives in the coming quarters. Thank you for your time today and now I will turn the call over to Robert for discussion of our second quarter results. Robert?

Thank you, Ed and good morning, everyone. Today, I will begin with review of our second quarter results including a discussion of segment results, and then share additional details regarding our outlook for the second half of the year. For the second quarter, consolidated revenues were $2.5 billion, an increase of 1.1% compared to prior year. For the first six months, consolidated revenues were $4.9 billion, 2.4% increase compared to last year. On a constant currency basis, quarterly and year-to-date revenues grew 1.4% and 2.7% compared to prior year. The increases in revenue included higher contributions and continued strong growth from Byram. As with last quarter, these were partially offset by lower distribution revenue from customer non-renewals largely caused by service issues that occurred prior to 2019. As a reminder, we acquired Halyard on April 30th, 2018. Halyard sales from January through April of 2019 were $255 million, net of $71 million of intercompany sales. The net loss for the second quarter was $10.5 million, or $0.18 per share and adjusted net income for the quarter was $6.2 million, or $0.10 per share. On a constant currency basis, adjusted net income per share was and $0.11 and $0.13 for the second quarter and year-to-date respectively. As we mentioned last quarter, our expectation for the second quarter adjusted earnings per share to be in the mid to high single digits, so these results were above our expectations. Now let's turn to our segment performance for the quarter. Global Solution segment revenues for the quarter were $2.2 billion compared to $2.3 billion in the prior year. Revenues improved slightly compared to the first quarter. Year-over-year revenue growth in Byram and manufacturer solutions continued to have a positive impact, which has been offset by revenue decreases and our distribution business. Segment operating income for the quarter was $19 million compared to $24 million last year. The decline resulted from lower revenues, ongoing distribution margin pressure, and higher transportation expenses and increased expenses to develop new customer solutions, namely Fusion5. These headwinds were partially offset by growth from Byram and our manufacturer solutions business. Turning to the Global Product segment. For the quarter, revenues were $364 million compared to $280 million last year and operating income was $18 million compared to $22 million last year. Results were negatively affected by softness in organic sales and margin pressure, partially offset by expense control and favorable commodity price trend. Now let's turn to cash flow and the balance sheet. As we mentioned last quarter, we expect working capital management to be a positive contributor to cash flow for the full year. In the second quarter, we generated $90 million of operating cash flow driven primarily by working capital management and increased operating income, compared to the first quarter. Consolidated long-term debt was $1.6 billion at June 30th and this represents a $60 million reduction compared to the first quarter. As we've mentioned previously, deleveraging the balance sheet is a top priority for the company. Last quarter, we highlighted one of our investments in new solutions called Fusion5. Today I'll provide a bit more detail on this business including an update on how it's progressing and how it's factoring into our guidance for 2019. Fusion5 is principally focused on helping providers navigate the new world of value-based care. And we have been successful in attracting an initial base of customers. We believe this is due to Fusion5's experience management team, proprietary technology platform, care pathway protocols and prior experience with CMS' value-based bundled payment program. A large portion of Fusion5 expected revenues for 2019 and beyond is expected to come from savings achieved under the new CMS bundled care program referred to as BPCI advanced. We expect to receive program results from CMS in the fourth quarter for the initial six-month period of the program, which ended in March of 2019. Due to the newness of this business and the structure of the program, the initial revenues are difficult to predict. We expect their ability to forecast this business to improve over time as the program matures. During this year, CMS allowed a second round of customer signups to the program, which is currently underway. Our degree of success and adding new customers will both expand the potential of this business and require additional onboarding expenses in 2019. Now let me share some additional details regarding our outlook for the year. For 2019, the company is narrowing its adjusted net income per share range to $0.60 to $0.70 which excludes the impact of currency. As I mentioned last quarter, we expect improvement over the course of 2019 with the bulk of earnings late in the year. For the third quarter, we expect adjusted EPS in the upper teen. Overall, we are pleased with our second quarter results and the progress we are making. Thank you and with that I'll turn the call back over to the operator to begin the Q&A session. Operator?

[Operator Instructions] And our first question will come from the line of Erin Wright with Credit Suisse. Your line is now open.

Great, thanks. I guess can you discuss some of the primary factors attributable to the narrowed guidance range given what was, I guess performance that was seemingly better than anticipated? And some of the factors that are contributing to the ramp up into the fourth quarter. Thanks.

Sure. So a couple factors that are mirroring the range. I think the first thing is the effective tax rate. That's have an implication on why we narrowed the range. So we just looked at what we had anticipated, the tax rate to be to where it is. That alone is about a nickel on the EPS range. I think the second thing really as we talked about Fusion5. So the Fusion5 is having an impact also versus what we originally planned. Now that's really related to timing of getting data from the government, as well as making sure being in a relatively new business for us being somewhat conservative on how we're recognizing that. And then but the positive I really want to think about here and talk about is the over performance in the rest of the business that's going to far offset that or partial offset that I should say. That being in our core distribution business; that being in our products business and that being in Byram home healthcare business, being able to continue to offset any of the timing issues related to Fusion5. So that's the way we're thinking about it going forward. Regarding why I guess there's a ramp. A couple different things. One is we're looking at the continued performance and strong performance in our Byram home healthcare business. Secondly, just the normal seasonality of our business in the fourth quarter typically is our strongest quarter due to that seasonality. You got healthcare plan deductibles which once they're achieved yet you see an increase in utilization of the products. Flu typically has creates a tailwind in the third and fourth quarter. And the other thing which we're probably understanding a little bit is the strong improvement in our operating performance just focused around productivity improvement and operational improvements. That's why -- that's how we're thinking about it going forward. I don't know, Robert, do you want to add anything?

The one thing I'd add is just to echo the comment on Fusion5. That business also has a significant ramp particularly on the fourth quarter even though our, as I'd mentioned our overall outlook for the business is lower than what we anticipated, it's for a good reason and that business will continue to have run after I think about the year.

And I'll add one last thing too, and that's we don't talk about it is really our European and US business that being the solutions businesses in Europe continues to improve. We see sequential improvement in that business. And we expect that to continue to drive sequential improvement also to the operating profit level.

Okay. That's helpful. And then thinking about Halyard, can you discuss some of the underlying performance there? Some of the dynamics around commodity pricing trends and TSAs and where we kind of stand today with Halyard? Thanks.

I'll let Robert talk about the TSA as well as commodity pricing. And I'll make comment at the end on the general business performance.

Sure. From a TSA I'll take that part first. We continue to either achieve or exceed the timing that we originally set out in terms of the transition. So we're on track with or even slightly ahead of the expectations that we've had relative to that process. So tremendous effort from our teammates on the global product side end and here at corporate as well to support that process. In terms of the commodity, when you think about last year and when you think about this on a year-over-year basis, commodities took a pretty big uptick in the first half of the year last year, and were sustained through the third quarter and then came down some towards the end of the fourth quarter. What we saw in the first quarter was from a year-over-year perspective of a minimal but slightly --slight benefit and we noted that. That was a little bit better this quarter than it was last quarter. And depending on where things go the back half of the year, we're hoping to have favorable comparables for the third and the fourth quarter, but obviously it remains to be seen where things fully shakeout.

And then just from a general business perspective, we're seeing more and more closely working between the classic distribution channel, as well as the global products business. We are continuing to drive the initiatives of driving that growth of our self manufactured products through our own channels, as well as outside of the channels.

Our next question will come from the line of Robert Jones with Goldman Sachs. Your line is now open.

Great. Thanks for taking my questions. This is Jack Rogoff on for Bob. Can you guys talk about the process of renewing Vizient through 2021 after recently extending it through 2020? And then did the contract terms of any meaningful changes worth highlighting?

Yes. So the contract terms didn't change; they're consistent with where they are. And I think the philosophy I have always is if there's an opportunity to continue to extend relationships and agreements you do that proactively not necessarily always reactively. So it's consistent terms and we have another year during this quarter. We negotiated another year out into 2021.

Got it. That's helpful. And then on Fusion5 I just wanted to ask about the competitive landscape. Have you seen any uptick in competition? Specifically thinking about Cerner's partnership with [Nada] health going after the same target market.

Talk about a couple things. So the kind of landscape you think is relatively consistent. One of the things we've seen though which is very, very encouraging is the fact that we are in the second round of signups, we actually were able to sign up multiples of what we had in the first round. So we've seen increased interest in our Fusion5 business as we went through this past -- in the past few months, the second round of sign ups. So that's where we are right now with that business.

Yes. That's interest in it. We still need to work through that and establish contracts with customers. So what we ultimately win and secure is still not yet known. But at least the interest level of, as Ed mentioned improved from the first round to the second round. So we're encouraged by and I'll accomplish in a fairly short period of time with the team that we have.

Our next question will come from the line of Lisa Gill with J.P. Morgan. Your line is now open.

Hi. It's [Eddi Samuel] on for Lisa. I was wondering maybe you could give us an update on where you stand on your private label mix versus your target? And then how we should just think about the margin impact as you increase that mix? Thanks.

I'll give you a little bit of the context from a mix perspective then Ed can talk about as you mentioned a minute ago some of our efforts there. If you look at just as a rough proxy our global products as a percent of our business pre eliminations, it's around 15%, post eliminations that's around 10% and that has from a year-over-year basis improved. So I'll let Ed comment on sort of --

And I think where we think about our products is not necessarily private label, but all the brands that we manage. Whether that's medi choice, whether that is how your -- and our other brands. We kind of look at it not as private label but what are the brands that we have managed. The other thing we're looking at is to continue evolve to grow that also continue to partner with key external suppliers. And we brought in a new person to run our supplier management side of a business to make sure that category by category with category management we have the best possible products to offer to our customer base. Whether that's our own manufacturer product or key external manufactured products. And that's really the way we're looking at it both leveraging our ability to manufacture or private label products and marrying that up with leading external brands to take to the market to the best fulfill what the customer needs.

Very helpful. Thanks. And then maybe just one more kind of piggybacking on the guidance question. As we think about the ramp in 2019 earnings to the back half how should we think about just the cadence of revenue growth within that particularly kind of relative for the first half?

Yes. So revenue growth, I think we talked about, so one of the things I talked about in my comments up front was we did have a large customer loss in the first half of the year. We do recognize that the sales cycle and the removal cycle I guess is long. So we're going to start to see the impact that here in the fourth quarter. Where we're at work, where I really focus on is we recognize we're going to have some of those revenue headwinds, but what we're seeing right now in our ability to do some of the operational effectiveness and driving productivity in our operations to offset that revenue loss. And the revenue loss it wasn't -- I'll be direct, it wasn't the highest margin business that we lost. And the ability to drive variable cost drive productivity grow faster in those higher margin growth segments are enabling us and have us-- have a path forward to offset that revenue growth of the top line. So the short answer is, yes, we're going to have revenue headwinds. But we have various leverage that we have pulled and then continue to pull it to offset that at the bottom line and continue to execute in our strategy of the business.

Our next question will come from line of Kevin Caliendo with UBS. Your line is now open.

Hey, guys. This is [Brette Gaston] on for Kevin Caliendo. Thanks for taking my question. Just wanted to follow up on the securitization that you have in your credit agreement. Any update there you can provide it to sort of cash flow perspective?

No update at this time. That is something is that we've mentioned before we are looking adding and considering as we think about our capital structure were actively working on different options to both manage it as we go forward and to manage our interest rates. And so that is a factor I think but with no specific update at this time.

Okay, fair. And then just to follow up there's a press release you had a few board exits this morning and then one addition. Anything you could comment on there as to why they left or what we should be thinking about around that?

No, yes. So a couple different things. One is we added Mark back to the Board and Mark has strong operational and manufacturing and healthcare experience which really helps us add that aspect to the board. And the reality is both Stewart and Barbara were at that point where they ready to do some different things. And they've been a great help to us and the board through here. And it was actually a planned departure. So we knew in advance that that was planned which enabled us to bring in Mark. And we'll continue to look at opportunities to strengthen our Board too. End of Q&A

Thank you. This concludes our question-answer-session for today. I would now turn the call back over to Mr. Pesicka for his closing remarks.

So thanks everyone for joining the call. I really wanted to talk to or close with a couple different comments. And one of the things I see is how much I'm excited to where we are in the progress we had in the second quarter. And I talked about this in the opening comments, but there were a lot of positives that we saw in this quarter just going through them. And the fact that sequentially as a company we saw revenue growth of 1% but more importantly we were able to drive adjusted operating income growth of more than 20%. And again that goes back to the levers we were being able to pull, faster growth in our higher margin high growth business, enabling us to obviously get the top-line growth sequentially. But more importantly, the bottom line growth of over 20%. Secondly, what we did and I thought we did extremely effectively which we generated $90 million of cash flow in the second quarter. That is being specifically operating cash flow. Third, we talked about debt. We were able to pay down in the second quarter $60 million of debt compared to where we ended the first quarter at. And that's again continued to focus on working capital, continue to focus on deleveraging the balance sheet and continuing to focus on improved operating results. We talked about the Vizient contract. I think that says we want to continue to proactively work on renegotiating deals where at all possible. And then lastly our Byram business. Our Byram business had a strong quarter, continue to have strong quarters and it is over achieving their internal operating plan, which really leads me to the last point which is our internal operating plan. I think about where we expected to be from an operating standpoint at this point in time, we're ahead of that and the expectation is continue to look at leverage we can pull to maintain the performance of the business. So I look forward to catching up with everyone again, as well as in the next quarter. And I like to wish everybody a great day. Thank you.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program. You may all disconnect.