...Greetings. Welcome to Owens & Minor Special Conference Call to discuss its proposed acquisition of Rotech Healthcare Holdings, Inc. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jackie Marcus, Investor Relations. Mrs. Marcus, you may begin.
Thank you, operator. Hello, everyone, and welcome to Owens & Minor Special Call to discuss our intention to acquire Rotech Healthcare Holdings, Inc. I'd like to call your attention to the supplemental slides related to the transaction posted on our website in the Investor Relations section. Please note that certain statements made on this call are forward-looking statements which are subject to risks and uncertainties. These forward-looking statements are intended to qualify 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 represent management's current expectations and are based on information available at the time such statements are made.
These statements include, but are not limited to, the statements in this release regarding the proposed transaction and opportunities related thereto, and our expectations with respect to our financial performance. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from any results predicted, assumed, or implied by the forward-looking statements, including that the proposed transaction will not be completed on a timely basis or at all, and the risk that problems may arise in successfully integrating the businesses of the companies and the realization of synergies therefrom. The company has explained some of these risks and uncertainties in the SEC filings, including in the Risk Factors section of its annual report on the Form 10-K and quarterly reports on Form 10-Q.
Except as required by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements. Additionally, in our discussion today, we may reference certain non-GAAP financial measures, and information about these measures and reconciliations to the most comparable GAAP financial measures are included in our annual report on Form 10-K. Today, I am joined by Ed Pesicka, Owens & Minor's President and Chief Executive Officer, and Jon Leon, the Interim Chief Financial Officer and Senior Vice President of Finance and Corporate Treasurer. I would now like to turn the call over to Ed.
Thank you, Jackie. Good morning, everyone, and thank you for joining us on the call today. I'm happy to be here to discuss our definitive agreement to acquire Rotech. At our Investor Day last December, we outlined our Vision 2028 plan to grow, optimize, and invest in our success. A critical component of that plan is to accelerate the growth of our existing Patient Direct segment through the combination of organic and inorganic initiatives, to achieve $5 billion in annual revenue by 2028. The acquisition of Rotech fits squarely into our existing Patient Direct segment and directly aligns with the long-term strategy we outlined. Furthermore, the acquisition supports our expansion in the very large and fast-growing home-based care space. We are excited to acquire a high-quality company like Rotech, an opportunity that doesn't come along very often.
This transaction also highlights our disciplined approach towards inorganic growth, with a focus on strategic fit, value creation for shareholders, prudent capital allocation, and, most importantly, providing improved service and an enhanced experience for patients, providers, and payers. As Jackie mentioned, we posted supplementary slides to our IR website in our 8-K filed this morning with the SEC. These slides, along with our comments, will provide an overview of Rotech's business, the strategic rationale for the transaction, and the opportunity it affords us to drive value creation for our shareholders, along with the enhanced benefits for patients, providers, and payers.
Our interim Chief Financial Officer, Jon Leon, is here with me today to discuss the financial highlights of this transaction. Jon will also discuss our preliminary second quarter financials and reaffirmation of our full year guidance released in a separate 8-K this morning.
Let's begin with a summary of the transaction on slide three. Our purchase price for Rotech is $1.36 billion in an all-cash transaction, or $1.32 billion net of the $40 million in anticipated tax benefits. We have fully committed financing in place and expect to use a combination of our cash on hand and incremental borrowings to fund the purchase price. We expect the transaction to close by the end of 2024 and is subject to standard closing conditions and customary approvals. As I mentioned earlier, the acquisition of Rotech aligns with our strategy to strengthen and expand our existing Patient Direct business as one of the premier suppliers to support home-based care. Combining our organization allows us to improve our capabilities, broaden our reach, and ultimately improve our service levels to patients, providers, and payers....
Furthermore, it accelerates our pace to achieving our long-term Patient Direct revenue target of $5 billion by 2028, demonstrating our commitment to sustainable growth and drive long-term shareholder value. On slide four, I wanna take a few moments to share with you why I'm so excited about the opportunity, and walk through the compelling strategic rationale, as well as the value creation opportunity for our shareholders. First, the addition of Rotech both strengthen and expands our existing suite of products and services, improving patient access to these solutions, resulting in the generation of robust opportunities for growth across chronic conditions. In addition, Rotech also provides us with the access to durable medical equipment markets, including hospital beds, wheelchairs, and mobility aids.
Second, our combined customer base gives us the kind of platform payers want across one network. This will facilitate improved efficiencies for claim approval and payment, while also providing more flexibility for patients.
Third, we will be able to serve more patients through our combined comprehensive suite of product offerings, geographic footprint, and payer contracts. This will ultimately improve the continuity of service for patients across the country living with the chronic conditions we serve. And finally, on the financial side, we identified synergies of approximately $50 million by the end of year three, with further upside potential. The strength of our combined financial profiles and the cash flow generation is expected to improve our financial flexibility to invest in future organic and inorganic opportunities, and ultimately drive significant value for our shareholders.
Jon will provide a deeper dive in the long-term financial implications shortly, but at a high level, as I just noted, the strategic rationale of Rotech acquisition provides a platform to accelerate growth when you consider: the current and future demographics of the United States, the estimated 133 million Americans who suffer from at least one chronic condition, the 40% of American adults suffering from multiple chronic conditions, and those individuals currently undiagnosed with chronic conditions. Being able to serve the patient with chronic conditions through one platform will be critical to providing better service to our customers, while also delivering long-term growth for Owens & Minor. Second, the acquisition will be accretive to our operating and EBITDA margins, driven by improved efficiencies across the combined organization.
We are also going to have greater free cash flow generation, which will give us more flexibility to deleverage our balance sheet and reinvest in our existing businesses. And finally, we're going to see financial benefits dropping to the bottom line, with a neutral impact on our adjusted EPS in the first full year and approximately $0.15 accretion in year two. Now turning to slide five. Rotech's product portfolio aligns with the chronic and acute conditions our Patient Direct segment supports today, in addition to the broader DME market. The addition of Rotech will diversify our mix of patients, our suppliers, our payers, and our geographic footprint, all of which enrich our capabilities to serve the market.
It is this diversification that will support our efforts to be the partner of choice in new areas, thus expanding our revenue streams and improving our service offerings, creating significant value for our shareholders by driving growth, expanding our reach, and enhancing our ability to deliver superior service to patients. Rotech has a 40-year history as a privately held company that has grown to $750 million in annual net revenue and more than $200 million in adjusted EBITDA in 2023. They are truly among the best-in-class home medical equipment distributors, serving patients, providers, suppliers, and payers nationwide, with a proven track record of success. Their far-reaching geographic footprint spans approximately 325 locations in 46 states, providing growth opportunities to leverage their robust infrastructure in areas we have yet to enter. Now, moving to slide six.
At our December 2023 Investor Day, we outlined Patient Direct's key revenue mix by condition. When looking at the mix on 2023 pro forma basis, it is clear that we will serve a well-balanced and diversified mix of chronic therapies, with no one therapy representing more than 28% of the total business. That said, we will continue to strive to expand the smaller categories as well as expand into new categories. Similarly, at Investor Day, we outlined the payer mix with our Patient Direct segment. Based on this combination, our new pro forma basis constitutes approximately 68% commercial payer, 27% Medicare, 4% Medicaid, and 1% other. Rotech shifts our Patient Direct payer mix slightly away from commercial payers and more towards governments. It should also be noted that Rotech will also increase our rural and small suburban presence on a pro forma basis.
Overall, diversification provides us with a healthy product portfolio and payer mix that will enable us to better serve patients, providers, and payers. Moving to slide seven. When we charted our long-term vision for the Patient Direct segment, we wanted to strike the right balance between using internal investments and M&A to achieve our 2028 target of $5 billion in annual revenue. Since we acquired Byram in 2017, we have grown a $400 million business to a $2.5 billion dollar in annual Patient Direct revenue....
To keep that momentum going in 2028, we want to continue to build strong brand recognition with a national footprint and local presence, use our proven model, which we believe will continue to drive organic growth, grow our business across our core disease categories while expanding into new categories, and drive organic growth through the reinvestment of savings from synergies and operating model realignment to drive organic growth while continuing to use free cash flow to deleverage. And finally, on the right side of slide seven, we outline areas in which Rotech will assist in driving us to meet our 2028 goals. We can benefit from Rotech's strong organic growth to help accelerate our Patient Direct segment path to, one, achieving $5 billion revenue target by 2028, meeting a revenue CAGR of 8% or greater, and exceeding our adjusted operating income target of $400 million.
The team at Rotech has built an impressive organization, and we are incredibly excited to welcome them to the Owens & Minor family and support our long-term goals. I will now turn the call over to our Interim Chief Financial Officer, Jon Leon, to review the pertinent financial information of the transaction and our preliminary results for the second quarter. Jon?
Thank you, Ed, and good morning, everyone. This transaction presents a fantastic opportunity for Owens & Minor to continue its growth and expansion in the home-based care space. As is our practice, we undertook a robust and thorough diligence effort, and I believe that by acquiring a high-quality company like Rotech, we will be well positioned to accelerate growth in this very large and growing addressable market. Let's next turn to slide eight. As we outlined during our Investor Day, we take a very disciplined approach to M&A by evaluating transactions against a rigorous financial criterion, led by our goal of creating value for shareholders. We believe Rotech meets this financial criterion well and has significant strategic benefits to patients, providers, and payers, which Ed discussed earlier.
The purchase price of $1.36 billion, or $1.32 billion, when factoring in certain tax benefits, represents an attractive purchase multiple of approximately 6.3x LTM EBITDA, or 5.1x when factoring in the benefit of identified run rate synergies. In terms of our sales and growth, we are confident that the integration will help our long-term growth rate and that we can benefit from the best go-to-market approaches across our strong brands. We also expect this acquisition to become accretive for our EBITDA margins, while also improving our free cash flow. As the Patient Direct segment becomes a larger percentage of our business, our earnings and cash flow power grows.
As Ed mentioned, we'll see improvement to our bottom line, with the adjusted EPS impact of the acquisition projected to be about neutral in the first full year and approximately $0.15 in year two, and continue to ramp up in years three and beyond. We also anticipate achieving approximately $50 million in synergies by the end of year three, following the close, with the potential for additional upside. These synergies will be realized through a combination of driving network and procurement efficiencies, heightened cash collection processes, and enhanced customer onboarding and technology, just to name a few. We intend to take a very thoughtful and deliberate approach to synergy recognition, and will not rush into any changes that could impact the customer experience, but we are confident in the abundance of synergy opportunities.
After the transaction closes, we expect our book leverage ratio to increase to about 4.2x EBITDA on a trailing 12-month basis. This would be an increase from our recent ratio of approximately 3.5x. We will remain steadfast around deleveraging the balance sheet and expect to deleverage to below 3x book leverage in approximately 24 months closing. During this period, we may, from time to time, choose to deploy capital to ensure a smooth integration of Rotech into our Patient Direct segment. This transaction demonstrates our commitment to using our balance sheet most effectively as opportunities arise to position our company for sustainable growth and ultimately generate a better customer experience and more shareholder value.
In terms of financing this deal, we have fully committed financing in place for the purchase price of $1.36 billion, and we expect to use a combination of cash on hand and debt to fund the acquisition. To summarize this slide, this acquisition of Rotech is very financially compelling. We have a proven track record for successful M&A, and this transaction is great for customers, will deliver attractive financial benefits, and will create further value for our shareholders. Now let's turn to slide nine.
Before I hand the call back to Ed, I want to reiterate our previously communicated 2024 guidance, with revenue to be in a range of $10.5 to $10.9 billion, adjusted EBITDA in the range of $550 to $590 million, and adjusted EPS to be in a range of $1.40 to $1.70 for the existing business. To be clear, this guidance does not include any contributions from Rotech. In addition to the full-year guidance reaffirmation, we have provided second quarter 2024 preliminary financial results on this slide into the 8-K file this morning. We will release final quarterly results and hold a conference call to discuss those results before the market opens on Friday, August 2nd. Our entire organization is excited about this acquisition and looks forward to welcoming our Rotech teammates.
We believe the addition of Rotech will leave us better positioned to serve the home-based care market and ultimately improve the financial profile of the overall business. Now I'll turn the call back to Ed. Ed?
Thank you, Jon. Before we open the line of questions, I want to finish with slide 10, with why we are so excited about the transaction and the opportunities that it creates. One, it squarely aligns with the strategy we articulated at our Investor Day for the Patient Direct segment... Two, our combined capabilities and reach to patients, providers, and payers will support improved service. Three, we can serve more patients through a comprehensive and broader suite of product offerings and improved service levels. Four, adjusted EPS will be neutral in the first year and approximately $0.15 accretive in the second year. Five, it will accelerate our long-term revenue growth and help us hit our $5 billion 2028 Patient Direct revenue target.
Six, it will also be accretive to operating and EBITDA margins, as well as improving our free cash flow generation, which further supports our ability to quickly delever and reinvest in the business for the long term. And finally, it provides a significant synergy opportunity with further upside potential. I'm truly excited about the acquisition and the future of Owens & Minor. We've known the team at Rotech for many years and look forward to a shared vision. And with that, we'll now open the call for questions. Operator?
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue, and for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Stephanie Davis with Barclays. Please proceed.
Hey, guys. Thank you for taking my question. I know on the presentation you gave us some color on book leverage, but from a, like, a standard net debt to EBITDA standpoint, can you tell us how you got comfortable with these levels, given they're quite a bit higher? And how are you going to approach the pace of deleveraging, given some of the cash conversion headwinds this year?
Hey, good morning, Stephanie. It's Jon. Yeah, so obviously, the patient direct space, we're pretty excited about the EBITDA cash flow, free cash flow that all these companies throw off, including Rotech. So going to just slightly over four, we're pretty confident that given the, the overall patient direct cash flow generation and what we have from the entire business, we can get this leverage down fairly quickly. Rotech has been very nicely cash flow positive for quite some time, and that combined with the cash flow generation of the overall business, we think we can delever pretty comfortably.
You know, going up slightly to four is a little higher than we would like to be at this point, but this attractive target came to market when it did, and we thought it was something that we needed to own, and we'll just look to delever very quickly.
A follow-up on that for the target coming to market. I was a little surprised that you decided to go deeper into the sleep space, given some of the recent challenges in that. Is that just a function of Rotech coming to market first compared to other home care deals? Or should we think of more home care deals, I guess, in the pipeline, is another way of saying that?
Yeah, I think... Thanks, Stephanie, for the question. I, I think at a high level, you know, we're really bullish in, on, on the, on the opportunities within really the whole Patient Direct space. You know, and this was just a critical and a key asset that came up that created the, the opportunity for us to go after and capture. You know, I, I think when I think about the space, specifically, probably more where Rotech is, and you look at a lot of the information out there, where you've got, you know, a significant number of Americans, so six out of ten have a chronic condition and four out of ten have two chronic conditions. You know, if you think about sleep, too, specifically in that area, yes, there's GLP-1s out there, and we do want, you know, a healthy, healthy America.
But in the same sense, you know, one aspect of this is the fact that if you have a patient, and I'll just do an illustrative example, a patient that's, you know, levels 0 to 4 of need of sleep devices, you know, maybe the GLP-1 helps them move from a four t o a three, or a three to a two, or a two to a one, you know, but there's still a significant number of people that are going to need the product, you know, need this product. And GLP-1 doesn't necessarily cure the sleep issue. In addition to that, we also looked at it with, you know, the significant number of Americans with sleep apnea that haven't been diagnosed yet. You know, tremendous opportunity there.
You know, so those are some of the reasons why, how we got comfortable, you know, continuing in at least, you know, this part of our Patient Direct space. But we'll continue to look at and execute upon our strategy in Patient Direct. And if we think about that, it's really, we're going to try to continue to grow our base business through a new patient acquisition. That's with organic investment. You know, we're not pulling back on the sales reps we added to continue to drive growth. We're going to continue to use technology to help us with things like reimbursement, and we're going to continue to expand our products and services into adjacencies. And really, that fourth one was this inorganic, and this was the opportunity that came up, and we seized on this opportunity.
Makes sense. Thank you much.
Our next question is from John Stansel with JP Morgan. Please proceed.
Hi, guys. Thanks for taking the question. Just comparing the pro forma deck that you provided to the Investor Day deck. Just want to kind of make sure that I'm thinking about Rotech correctly. I mean, it you kind of called out here, you know, the skew moves away from commercial, a little bit more towards government payers. In back of the envelope, it seems like that imply Rotech, most of its revenue comes from government payers at this point, and then obviously the move up in diabetes and respiratory seems like a large majority of Rotech's, you know, business would be in the diabetes and respiratory space. Is that about the right way to think about their business mix? And then how do you kind of see this, you know, the pro forma go-forward mix changing over time? Thank you.
Hey, John, it's Jon Leon. I would say that most of the payer mix for Rotech is very heavily commercial, maybe a little less commercial than the current Patient Direct segment, but still pretty heavily commercially focused. As to the product mix, you know, Rotech is certainly fairly heavily deep into sleep and oxygen, and then followed by vents. The team there has done a really nice job in the last few years of growing their diabetes business, but it's roughly 5% to 6% of their total business right now. They've also recently picked up some capitation business, so it's a nice diversified portfolio. But I would say, certainly, they're probably more focused on sleep, respiratory, sleep oxygen and vents, but with a nice, nicely growing capitation in the diabetes space as well right now.
It adds to a pretty nice well-balanced portfolio for the overall portfolio Patient Direct business.
Okay, great. And then just kind of, can you give us a sense, you know, relative to the market, how you view kind of Rotech's growth over time, you know, kind of back pre-2023? Thank you.
Yeah. Well, so you got to be careful until you go back pre-2023, because we all had pretty nice, you know, oxygen vent growth, coming out of the pandemic. But Rotech has consistently been a, at or above market grower, very consistent with our existing Patient Direct business, and we expect that to continue going forward.
Okay, great. Thank you.
Our next question is from Michael Cherny with Leerink Partners. Please proceed.
Great, thank you. This is Dan Clark on for Mike. We noticed in the deck, Rotech has about 300 account execs. How are you thinking about your current sales footprint, given you just hired 300 reps fairly recently, or excuse me, 80 reps fairly recently? Do you think you're at a good, good number there? Thank you.
Yeah, here's the way we think about it is one, with part of the transaction, once it closes, we do not wanna create confusion for the customer, you know, whether that be the patient, the payer or the provider. You know, we believe that the footprint we've added, you know, continues to exist, and we believe that, you know, they've got a strong footprint also in Rotech in the commercial team. You know, look, with an acquisition, you know, you get to that point, you're gonna assess all aspects of the business. But really, out of the gates, our main theme is to make sure we don't confuse the customers that we have today, and make sure we maintain the relationships that we have today with our customer base.
Great, thank you.
Our next question is from Allen Lutz with Bank of America. Please proceed.
Good morning, and thanks for taking the questions. You know, it seems like Rotech is somewhat similar to the Patient Direct business overall, but the margin profile of Rotech is materially higher. Can you talk about some of the drivers of why that margin differential exists? And you know, is there any opportunity to close that over time? Thanks.
Yeah, it's Jon. I'll start by saying, one, it's a really well-run business at Rotech, so we give that metric a lot of credit. And second, it does have to do a lot, a little bit with the product mix. Obviously, as I mentioned earlier, they're very much, very large into sleep, ventilation, oxygen. Diabetes has come on nicely smaller, but, you know, those respiratory categories tend to carry higher margins, specifically things like sleep supplies. Diabetes, though it's a very nice, large, growing market, tends to carry a lower, a lower margin profile, which we're very big in, particularly from the, the bottom side of the house. So the mix is gonna be the biggest driver of the margin profile. And obviously, as Ed talked about his remarks, we have a very well-balanced product portfolio.
So, you know, this is gonna be our, our highest margin profile business line that we have. But, you know, and as we grow more respiratory, margins will grow. There's diabetes, which is very nicely growing, does carry a little slower, a little lower margin profile overall.
You know, Alan, I think the other thing, you know, we think about this one is we think about integration and synergies. You know, very similar with the acquisition of Apria. We actually looked at best practices on both sides and end up generating, you know, overall better service and improvement in the Patient Direct segment. You know, as we begin, you know, understanding the business deeper and we start to think through the integration process, we're completely comfortable with taking best practices from either direction and putting them together, and that's gonna be some of the drivers of the synergy. So, you know, as Jon said, you know, Rotech was an extremely well-run and is an extremely well-run business, and I think there's learnings we can take from that and bring them back to the entire Patient Direct segment and vice versa.
So that's the other way we're thinking about the delta in profitability.
Thanks, Ed, appreciate that color. And then for a quick follow-up for Jon, can you talk about the CapEx profile of Rotech? What are they spending annually? And then are there any notable synergies from capital expenditures? Thanks.
Yeah. So very much like our Apria business, the respiratory side of the business is pretty heavy patient CapEx. So way to think about Rotech is roughly 13.5% of their top line will be for CapEx. That's gonna be for growth and for patient CapEx predominantly. But we certainly do expect some synergies around procurement and efficiency and, and, and how we go to market that equipment. So that's, that's something we'll take a hard look at over time.
Great. Thank you very much.
We have reached the end of our question-and-answer session. I would like to turn the conference back over to Ed for closing remarks.
Thank you, operator. First, I wanna thank everyone for joining us on the call this morning. You know, the addition of Rotech to the organization, it is an extremely exciting opportunity for us. You know, we have strong beliefs that this deal will help us expand our, you know, not only our established Patient Direct business, but the overall company. You know, and it will also be accretive across many, many of the metrics we have. And we look forward to sharing much more with you in this around the second quarter earnings. That call is gonna be August 2nd. So again, thank you. Everyone, have a great day, and look forward to catching up with everybody on August 2nd, where we can go through the detailed results of our second quarter. Thank you, everyone.
Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.