My name is Allen Lutz, Healthcare Tech and Distribution Analyst here at BofA. We are pleased to have Owens & Minor with us. We have CFO, Alex Bruni, and Corporate Treasurer, Jonathan Leon. Thank you both for joining us. We've been getting a lot of questions about the Biden tariff announcement yesterday. So, could you spend a few minutes just reminding us how you source gloves, and if you think you could see any impact from the tariffs on your business?
Sure. Thanks, Allen. Good afternoon, everybody. So, yeah, we've spent a good portion of the last day or so kind of taking a look at the tariff announcement. We think that it should have a net benefit to us, but we do have to further diligence the details. As a reminder, we do manufacture gloves in Thailand. We do not manufacture them in China. The rest of our manufacturing for our proprietary products is done in North America, so in Honduras, Mexico, and the United States. So, we do expect some benefit potentially in the facial category this year, where the tariffs will go in place, but we wanna see the list of SKUs over the comment period, the next 60 days-90 days.
And then, of course, we'll take a look at the details of the gloves as well.
Great. And then, one of your peers mentioned extended shipping lead times for certain sleep products. And one of the CPAP manufacturers also noted elevated freight costs. Just wondering if you're seeing any of these impacts to your business as of today?
Yeah, so the Red Sea situation, we've definitely been tracking, and the sleep supplier, we've gotten similar updates in terms of some constraints and back orders, related to some supply chain disruptions. We're hopeful that working with them, we can get through that here in the second quarter, so we're not calling out any particular risks on that yet.
Got it. And then switching gears to the quarter and the reaffirmed guidance. As we look at the model, the PD business came in a little bit below our expectations, but you obviously reaffirmed the guide. Just curious, how did the PD business perform versus your expectations, and what growth would you need to see in order to hit guidance into the last three quarters of the year?
Yeah, the Patient Direct top line growth in the first quarter was fairly in line with our internal expectations. We knew we had a tough comp last year. We have another tough comp here in the second quarter. We are pleased to see that sleep and diabetes continue to have high single digit growth rates, so better than the segment overall. We think that there's opportunity for us to do better in respiratory, so that's an area that we've been focused, and we've talked about broadly how we're investing in commercial resources within Patient Direct. You know, where Perry is working through continued commercial optimization broadly within the segment. He obviously did a fantastic job of growing Byram, and we're really pleased with what he's doing in charge of Patient Direct overall.
Can you talk about the commercial investments that you're making within the patient direct business? Obviously, it sounds like you're excited about the opportunity. You accelerated the hires, some of which were before January first. So, can you help us understand what are the goals, and what specific areas? Are they focused by region? Are they focused by disease? Just curious how these new hires are coming into the business, and what are the goals in terms of their contribution, you know, for the next year or, however, whatever timeline you're using?
Yeah. So we've made multiple investments in the commercial space, the first of which are the additional sales heads. And so, you know, first of all, what we're looking to do is to really, you know, double down on our areas of strength in terms of sleep and diabetes. So we're focused there in continuing to build that area of strength. Talked about respiratory and addressing that more aggressively. And then the other areas of investment that aren't hitting OpEx, but are part of the operating model realignment, are looking at our sleep journey and really making sure that we're maximizing everything we can within our patient census in sleep. And then we're also looking to build on our position of strength in terms of collections.
We think that we've got really excellent practices across both Apria and Byram, but if we can eke out another 100 basis points or 200 basis points of AR collections, that would obviously have material impact, so we're focused there as well.
As you think about those investments that you're making, I guess, how do we think about the timing between... Obviously, you're making the investments upfront, and then there's an expectation, obviously, that they become more efficient over some period of time. How would you expect the operating margin within the Patient Direct business to trend over the course of the year, maybe over an intermediate timeframe, around those investments that you're making?
Yeah. So I would say overall, the guidance that we provided for the year on adjusted EPS, with one-third in the first half and two-thirds in the back half, does reflect our expectation that, the normal seasonality in both segments, including Patient Direct, obviously, you know, will drive margin expansion, and those commercial investments should start to bear fruit there and, help to amplify that.
And then, as we think about the Patient Direct business, like I said, the growth was maybe a little bit lower than we expected, but you're obviously very confident in the investments that you're making. How do we think about the time to get back to that 8% growth CAGR, that you're expecting from that business, and that's contemplated in the long-term guide?
Yeah. We feel good about getting back, getting back to that range by the second half of the year.
Got it. Got it. I guess taking a step back and looking at the 2028 targets. You know, as we think about the revenue, the EBITDA, the adjusted earnings that you guys put forward, you know, what is sort of beyond your control as it comes to those targets? And what's the low-hanging fruit? And then, like I said, what are the things that may be beyond control? Is it the end market? Is it the timing of deals? Just trying to think about what may be beyond your control.
Yeah, that's a good one. I think we have deliberately laid out a thoughtful investment strategy, and that's gonna continue through 2025, and it is somewhat contingent on, obviously, our success in driving the operating model realignment. We think that we largely have control over that. So I think we tried to set up at Investor Day a set of expectations that we could largely control. There are, of course, you know, various factors, including inflation and commodities and, you know, geopolitical disruptions, things like that, that would be outside of our control. But I think we tried to outline a plan for both Patient Direct and PHS, which we could largely manage our own destiny.
I would just add, maybe you also have the reimbursement landscape in Patient Direct is something that not always in our control, but something we have a long history of navigating very well. We have the expertise in helping navigate through whatever that may look like ahead.
Got it. You know, on the operating realignment that you talked about a lot at the Investor Day, expected to deliver $200 million of run rate savings by 2025, and really good working capital improvements over the life of the program. I guess, can you talk about where we stand today, and what still needs to be done in order to hit those goals?
Sure. Maybe I'll take the $200 million of savings, and then, John, maybe you want to take working capital. So on the $200 million of savings, we feel good about achieving that by the end of 2025. We haven't given specific numbers for 2024, but we felt like we exited last year in a really good position, having delivered over $40 million of savings to the bottom line and having achieved over a $100 million run rate.
Yeah, the working capital is a little bit interesting. That we put out a $250 million-$400 million benefit by the time the program ended. We achieved that really in 2023. Gave a little bit back in the first quarter of 2024, but we think as we get through this year, moving to 2025, we'll be easy to get back to those numbers and exceed that by the time the program is over.
Got it. John, you mentioned the reimbursement side here. From a reimbursement perspective, what are the puts and takes that you've considered, or what are the internal expectations around some of the variability of reimbursements or pricing risks around diabetes and sleep that you can speak to?
Yeah, it's clearly. You know, the questions we get a lot that we can handle are obviously what's been a multi-year shift move between the diabetes being fulfilled with DME or versus pharmacy. It's nothing new to our space. We've seen it for a long time. It's gone back and forth. We're seeing a lot more employer benefit plans being dual options, where the employee can go to either the pharmacy or to the DME provider.
At the end of the day, where it's a very, very large market, and we see a plenty of opportunity for us to grow that space, whether no matter how that shift really shakes out in the years ahead, and believe that the supplier, the manufacturer, really understands the importance of both the pharmacy channel and the DME channel.
That's helpful. I think on your most recent earnings call, you talked about how Change Healthcare had sort of a small impact on the business. I'm just curious, is there any way to quantify exactly how large that impact was? And can you kind of talk about maybe what's embedded, if anything, into the guide for the rest of the year around Change?
Yeah, so you know, I think at one point, we'd characterized it as sort of a nuisance headwind. It introduced some gravity and friction in the first quarter, which is always a challenging time for us, just with, you know, patients changing insurance providers, and disproportionately collecting from the patient as they reset their deductibles in the new year. So there was gravity and friction broadly. We haven't quantified it in terms of the P&L or the working capital impact. There was a little impact, but it wasn't material. Anything you'd add, John?
No, I mean, the challenge is we would have had to know what we would have done absent the Change Healthcare dynamic, but we know it certainly slowed down the ability to onboard new patients, the ability to verify eligibility of existing patients. It made everything much more manual for a period of time, which just created that friction that Alex talked about.
Yeah, and in terms of, you know, impact on the rest of the year, we think that we're largely past it. We've kind of worked through it early in Q2, and so we don't think it's an issue as we move forward.
Okay, great. And then, M&A is obviously a key part of the strategy. As we think about where we are in 2024, I'm curious if there's an expectation, if there's any type of timing expectation, you know, as it relates to 2028. And as you're looking at these assets, I guess, a couple of things: Is there a specific size that you're looking at? What are some of the other key considerations? Is the end disease state the biggest focus there, is size important, culture fit? What are the things that you're looking at as most important as you think about M&A?
So in addition to being treasurer, John is also the head of M&A, so.
Yeah. Yeah, I think, you know, Al, we're very disciplined in what we look at, and, you know, we like the space we're in now, all the therapies that we're in now, and we think there's opportunity there. They're very large and very fragmented, so we think there's opportunity there as well. The approach that the nomenclature I like to use, we look for the best available athlete, so it doesn't really need to be in any particular space, nor do we have to necessarily do a deal. So as we think about timing, we are very much involved in the deal pipeline. We look at a lot of things that come across our desk. We make a lot of inquiries. But we'll remain very disciplined. If a deal doesn't happen for all the right reasons, that's fine with us.
But if there's opportunities out there, we'll take a look at it. If it makes sense for us strategically from an integration perspective, either it fits our current group of therapies or something that's somewhat adjacent to that or complementary to it, we'll take a look, and as long as the valuation makes sense and the synergy fit and the cultural fit works for us, we're not shy about doing a deal, but we don't have to do a deal.
Okay, that's very helpful. And switching gears to talk about the core distribution business, you had a really nice quarter that's that's showing some good growth. As we think about the drivers of that, you mentioned some new business, but I'm curious, what are the underlying trends that you're seeing in that core distribution business? Obviously, there's been a lot of costs that have been taking out taken out of that business, but on that top line, you know, how do we think about you know, what's embedded in the guide? What is your expectation for new customer growth? And what are you seeing in the end market in that part of the business?
Yeah, so we're seeing pretty solid. We've talked about the same-store sales growth, excluding PPE, trying to take out some of the normalization post-COVID, and we continue to see strength there, and we see it across geographies. We also think that we're positive from a net new win standpoint. We've had some solid wins, including the sizable one that we talked about, starting to onboard in the first quarter. You know, there's definitely some trading in the paint with both Cardinal and Medline, but we're pleased with the top-line growth broadly. Anything you'd add to that, John?
Well, I think I pretty much covered it all, but yeah.
Can you speak to the overall health of that customer? Obviously, utilization has started to really improve pretty nicely, you know, over the past 6 months-12 months. Curious if you could opine on the health of your average customer, what is sort of like for like growth there? And has that changed over the past 6 months? Has it improved? Is it stable? Is it getting worse? Curious if there's really anything you can call out there.
You want to take it?
Yeah, I think we're clearly seeing the hospital sector overall getting stronger, getting healthier. That's—I think that's part of the utilization being up as part of the demand for our largely consumable products growing at the same time. We follow the publics, many of which are measured here this week, and it seems like overall, what they're reporting and their prints, and we hear from customers, it seems like hospitals are in a better spot than they were certainly 12 months, 15 months, 18 months ago.
As you think about, you know, hospitals being in a better position and you think about the competitive landscape, you know, obviously during COVID, it was a much more challenging environment for your customers. You know, as you think about, you know, really the major players in this space, I would compare medical distribution to drug distribution, PBMs. There's really only a few players of major scale here. As you think about the pricing environment for your services, has there been any change at all over the past few years? Do you think the market's getting more competitive, less competitive? Is there anything specific that you would call out there?
Yeah, I think broadly within Products and Healthcare Services, we would say that it remains very competitive. I'm not sure that there's anything changed, you know, substantially recently, other than just sort of normalization of both price and volume from a product standpoint. So that continues to be a focus area, but, you know, it's a concentrated market, obviously, and it's competitive.
Yeah. Yeah, that makes sense. You know, switching gears to capital allocation, you know, we talked about M&A being a big piece here, but can you talk about debt paydown, share repurchases? What are the other parts of the algorithm here as you think about OMI, I guess, for 2024, and then what's embedded in the 2028 guidance? Is there any evolution of the capital deployment strategy over that, the next three and a half years or so?
Yeah. So I would say we can... You know, overall, we continue to target leverage south of 3x, and that continues to be a core focus area. During the Q1 earnings call recently, we did talk about reinvesting some of the $740 million of operating cash flow that we had last year into inventory to address service levels. We've had some inbound supplier challenges at the end of the fourth quarter and in the first quarter. So we've invested in some inventory levels. We'll continue to monitor that to see how we can optimize. And then we've invested in inventory to onboard this large new customer. But overall, while we continue to monitor for attractive M&A targets, we continue to focus on paying down debt to get to south of that 3x.
You know, the 2028 targets were built really without any consideration for M&A or return of capital to shareholders. That said, I'd be surprised personally, if we got to that point and weren't active in M&A.
Got it. And then as we think about 2024, you mentioned on the last earnings call to expect more limited cash flow generation over the course of this year. Can you talk about the, the specific factors that are driving the cash flow this year and, you know, kind of how that may evolve, as you exit 2024?
Sure. So within the first quarter, we had a couple of things happen. We talked about the inventory build. We also had an increase in AR within the quarter. Part of that was driven by some, you know, sort of timing changes within our AR sale program, about $20 million, and the remaining $50 million of AR increase was sort of half driven by Patient Direct, partially because of Change and just seasonality, Change being Change Healthcare, and then the other half really being related to onboarding new customers in PHS, which has a tendency to stretch AR in the short term. So that was what's driving Q1. As we look ahead to the rest of the year, we think there's an opportunity to optimize the AR, kind of get that back in line with historical trends.
But we have left ourselves some wiggle room on inventory broadly within Products and Healthcare Services, as well as to make sure that we've got, we've adequately contemplated the investments for the operating model realignment. We've still got some, you know, fairly chunky investments there in terms of network optimization and other things for the remainder of the year.
I think that you said the Patient Direct market as a whole is growing about 6%. And I guess as you think about, you know, the core distribution business, three major players, how do you think about the competitive landscape within the Patient Direct business? It's obviously a faster-growing market, and sort of with longer-tailed growth opportunities. How do you think about the competitive evolution of Patient Direct? And do you see a few players winning, or is there room for a kind of broader environment for multiple players to win?
Yeah, you're talking about a really enormous market with thousands of players in it today. And if it has consolidated down from maybe 6,000 players- 5,000 players in the recent years, I think it will consolidate down a few more. But these are very large markets with many, many players. I think that will continue for the foreseeable future. I think there's plenty of room for those of us that are slightly larger in the space, and with the growing market, to continue to compete effectively. I mean, we do butt heads with some of the same names from time to time, but there are also many, many local players in that same space that we're butting heads with every day.
As we look around, even the therapies that we're in today, which is, you know, most of your larger categories, plenty of room for growth for us, our larger peers than the smaller players. And as we look farther abroad and start branching out, concentrically, if you will, I think there's other categories we can get into that are equally as large or if not larger, and there's plenty of room for all of us to play in. These are really, really large markets, and the demographic tailwinds we see with the aging population, unfortunately, an increasingly unhealthy population, bodes pretty well for the future of the market.
Is there anything you can say about the valuation of private assets in that space? Has it changed? I would assume that during COVID, maybe the multiples expanded, and since COVID, maybe they've come down a little bit, but the opportunity really hasn't changed. I'm just curious, from your perspective, have private valuations for these assets changed at all over the past... I'll call it since the middle of COVID?
I think your thesis is largely correct, but there are so many small players in this space. Those looking to exit have a variety of reasons why they exit. It could just be a lot of family-owned business where it's run its course within the family. Some just sort of wanna go a different direction. Some just get tired of the markets or just see more competition coming into the market and just want to leave. So at the smaller end, valuations have come down a little bit. They're still below what we would trade at or what we had bought at, if we're as an example.
In the larger space and the higher quality assets, I think they're stabilized, but I think your thesis that they're probably a little lower than they were during the COVID days is correct.
Going back to the Patient Direct portfolio, sleep's about a quarter of that part of the business. How do you think about the risks around GLP-1 growth and the potential risk to that business? You know, BofA did a survey that said that weight loss drugs improves obstructive sleep apnea, but it's not a cure, so maybe it would reduce the amount of days that they're, you know, using those products. But I'm curious, how have you kind of thought about the risks of that business?
Yeah, I mean, we've obviously been tracking all the different studies that have sort of been in the news recently and tracking the space broadly. As we look at our internal data, both operational metrics, you know, regarding sleep census, starts, things like that, as well as our financial ones, we don't see any evidence of material impact right now, which I don't think is terribly surprising. I mean, if you think about it on an individual patient level right now, even if you're fortunate enough to have insurance coverage or can pay out of pocket, right? Even getting continuity of supply, and ramping through the dose escalation is not an insignificant hurdle right now. So I think it's pretty early days to kind of see it play it out in the market. We also think that there's...
You know, we've talked about the demographic tailwinds. There's also just a huge population of patients out there that are undiagnosed, and some of these therapies, you know, may actually sort of expand the market in terms of education and other things. So I think we'll continue to monitor it very closely, but no impact right now, and we don't anticipate anything, at least in the short to medium term.
Yeah. And then one other question we continue to get, and I know you've addressed it before, but on the diabetes side, obviously some reimbursement risk around CGMs. Just curious, what % of your portfolio would be at risk there? And just trying to think about, you know, how that could impact the business.
Yeah, so the reimbursement risk that most folks have specifically asked about is the HHS OIG investigation into CGM reimbursement rates. We don't expect sort of an outcome of that until 2026. Of course, we'll monitor that closely. So I think, you know, broadly, we feel good about CGM. What else am I missing on this subject, John?
... Yeah, I think overall, I think it's something that I would view that as navigable for us. It wouldn't be the, you know, we'll see where that lands, but at the end of the day, we remain just as bullish on diabetes and CGM reimbursement over time.
Yeah, and I would say, you know, I think it's important to note that within that space, our CGM patient population is disproportionately type one diabetics. And so as that market continues to evolve, it's important to think about it largely through that patient population.
Going back to the Patient Direct growth rate for a little bit, 8% long-term growth. As we think about your largest businesses in there, diabetes, sleep, respiratory, is there any way for you to rank order growth contribution that you're expecting? Or just sort of how do you think about those growth markets or maybe some of your smaller businesses contributing to that 8%, in terms of which are the ones that are likely to contribute the most, and then kinda down to less?
Yeah, I don't think we can necessarily force rank them, but I think we've talked about consistently being pleased with sleep and diabetes, which are big categories for us and growing faster than the average. But, you know, wound care and ostomy and some of the smaller categories-
Yeah
... have definitely performed very, very well, and over the long term, could significantly contribute to the strong growth we expect north of the market.
Yeah, and respiratory is an area where we think we can get better growth than we have in the past. We need to ramp up our respiratory growth rate. It's been a bit of a slight underperformer for us the last few quarters. But I think Alex is right. There's all the categories are growing well. As we've mentioned before, the demographics of sleep and diabetes are gonna be hard for everything else to catch up with it. But I think I think there's really good growth prospects for all the categories that we're in right now.
And then with the last couple of minutes here, what do you think is most misunderstood about your story, or what are you most excited about, you know, over the next year, with regard to the business?
I'll start. We can think about it.
Yeah.
Yeah, we talked about the operating model realignment and the products we have around Patient Direct right now. What I like about that is that we're focused on things we do well today, and I think are maybe best of breed and looking to get better at it. So whereas understanding what we call the patient sleep journey and managing adherence rates and getting making it stickier and making sure we're talking to the right folks, to improving our ability to collect and manage our contractual allowances, we're really good at that now, and to really the fact that we're investing to stay ahead of the pack on that and be really to become great at that, and we'll continue to invest in not resting on our laurels, I think is pretty exciting for the Patient Direct future.
Yeah, and I think along the same lines, I think we've built a lot of really good muscle over the past couple of years in integrating Apria and Byram, and now going through the operating model realignment, which worked really effectively in PHS, and we've got some really promising programs in Patient Direct. And I think that really should position us very well to continue to do some M&A. We think Apria and Byram were, you know, very complementary, both largely grew organically, pretty clean platform. Each of them were investing in making sure that we harmonize them in a way that really lends itself to, you know, doing M&A in a clean fashion, where we can take some of our strengths and quickly translate it to a target.
So I think, you know, we've got a lot of really good opportunities organically, but I think if we can do some targeted M&A, it can be a really powerful combination moving forward.
Great! We'll leave it there. Thank you, everyone, for joining us today, and thank you both for the time.