Accendra Health (NYSE:ACH) Q1 2026 Earnings Call

0:00 Hello, good morning, and thank you for standing by. Welcome to the Accendra Health's First Quarter twenty twenty six Earnings Conference Call. Please be advised that today's conference call is being recorded. After the speakers' remarks, there will be a question and answer session. 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 twenty twenty six, all of which are included in today's press release.

0:53 The press release along with the first quarter twenty twenty six 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 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 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 ks and quarterly reports on Form 10 Q.

1:48 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 am joined by Ed Paseca, Accendra Health's President and Chief Executive Officer John 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.

2:34 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 and Minor are on track and going according to schedule, allowing Accendra Health to fully function as a completely independent company from Owens and Minor. And 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.

3:28 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 payer, and the handover has gone as expected, with our team ensuring 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 the substantial amount of Accendra owned equipment that was dedicated to the large commercial payers' patients. And 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 pivoted away from this large commercial payer.

4:26 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 payers, I am happy to announce that we recently reached an agreement for an exclusive multiyear extension with our largest commercial payer for soft goods, such as ostomy, urology, diabetes, incontinence and others.

5:17 This extension of the long standing partnership provides certainty for our business in the years ahead. In order to provide more clarity around our payer mix, we have provided you with Slide five that clearly shows the diversification of our commercial payer portfolio. As a reminder, with the notable exception of the large commercial payer discussed a moment ago, the vast majority of our commercial payer 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 payer portfolio with no major renewals on the horizon. In addition to the commercial payers just noted, approximately 20% of our revenue is from traditional Medicare.

6:05 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.

6:53 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, which is responsible for the patient's first interaction with Accendra and the initiation of their PAP therapy.

7:56 This program is building a trusted patient first ecosystem that balances operational efficiency with compassionate care. Our dedicated team manages order process, scheduling and patient onboarding to ensure 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.

8:42 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 payers, 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 twenty twenty seven maturities, significantly reduce total debt and meaningfully extend maturities while also affording the company financial and strategic flexibility with ample liquidity. John 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.

9:40 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 maturities and any pressure they may have put on our overall valuation. Before I turn the call over to John, 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 of Owens and Minor. If you look at Page six 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.

10:29 Additionally, if you move ahead to Slide seven, you can see how much of the earnings and consistent cash flow of what is now Accendra Health backstop the PNHS business consumption of cash in the 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. And 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 John to discuss the financials. John? 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.

11:28 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, 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 essentrahealth.com. First quarter of twenty twenty six was notable for the completion of a previously discussed large commercial payer exit and the initiation of our comprehensive balance sheet optimization activity.

12:16 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's 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 payer, growth would have been about 1%. The leading growth categories were sleep, excluding the payer impact, and urology and ostomy. The large sleep category grew over 4% and home respiratory fell about 4%, while the impact of a large commercial payer change is excluded.

13:05 Diabetes was off slightly versus the prior year as growth in insulin pumps did not quite offset a drop in CGMs. 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 payer, we sold patient service equipment for cash proceeds of $82,000,000 resulting in a book gain of $52,000,000 The positive income statement impact of this onetime 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 58,000,000 again in line with expectations.

13:54 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 elevated selling, general and administrative expenses lowering adjusted EBITDA. Cost reduction will continue to be a point of emphasis throughout the year. Cash flow demonstrates a typical seasonal softness and 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 $19,000,000 to the IRS to conclude tax matters related to international transfer pricing activity between 2015 and 2018 and $22,000,000 of previously accrued expenses relating to the P and HS divestiture.

14:52 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 payer is an adjustment to income in the operating activities section of the cash flow statement and is not included in adjusted EBITDA due to its one time nature. And the cash received from these sales sits in the investing activities 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 $1,770,000,000 and the entire organization remains focused on debt reduction.

15:43 At the end of the quarter, we had $337,000,000 of cash on the balance sheet and $195,000,000 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 the long term foundation for Accendra. Key benefits include a multiyear extension of our revolving credit facility, paying off our twenty twenty seven maturities, extensions of our 2029 and 2030 notes through exchange offers for longer dated new notes and meaningful debt reduction.

16:41 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 revolving lenders, Term Loan B lenders and bondholders for the balance sheet optimization transaction, and of course, commitments will be subject to customary closing additions 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 our old 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.

17:29 These exchanges are expected to result in meaningful deleveraging of up to about $115,000,000 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 $300,000,000 committed revolving facility due in 2030. The consummation of all these financing transactions will remove concerns about near term maturities by extending our maturity runaway by doubling the weighted average life of the debt capital structure to approximately five point five years, while ensuring plenty of liquidity for a business that has over 80% recurring revenue, all while advancing our commitment to deleveraging.

18:20 We look forward to the completion of these transactions in the coming weeks. This will be an enormously positive step 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 at present and in relation to the financing activity would be the most logical timing and is 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.

19:06 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 $40,000,000 We expect that approximately half of this incremental impact will occur starting in the second half of twenty twenty six. 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 leveraging the balance sheet as quickly as possible. With that, I'll now turn the call back to the operator for Q and A. Operator?

19:58 Thank you. We will now begin the question and answer session. Your first question comes from the line of Kevin Caliendo with UBS. Your line is now open. Kevin? Kevin? Sorry, I was on mute. I apologize.

20:45 Congrats on getting this all done, guys. It's, I'm sure it's quite laborious and really impressive that you got it over the finish line, so congratulations. Thanks. 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 2026 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? Yes, absolutely, Kevin. It's John, by the way. Anything we do generate will be used for debt reduction.

21:32 Getting the exact number is going to be a little bit shaky until we get through this financing and apply sometime next month. We know what we have ahead of us. Obviously, we have to pay for this transaction. We got the scheduled money going out for the P and H separation, all of which was planned. But as I said in my remarks, half of the $40,000,000 of increased interest expense will hit us this year. Still good cash flow year, still going towards all debt reduction. Peg coming up with the exact number, we'll probably need another month or two before we can actually peg in and forecast the number for you. Got it. That's helpful. If I can just ask a fundamental question. Just in terms of diabetes, what you're seeing there, how the market is continuing to evolve, how you feel like you're positioned there? Just love to get an update specifically on that, and I'll let others jump in after.

22:30 Yes. Thanks, Kevin. This is Ed. If I think about diabetes, so in the quarter, we saw nice growth in insulin pump. We actually saw unit volume grow in CGM. We did see some price compression there when you look at the mix between DME and pharmacy. Let me talk a little bit more detail about DME versus pharmacy. So the pharmacy option has been in place for several years now. 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 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, we're educating the providers of the benefit of the DME channel. And that's really because the follow-up that we provide as a company, in addition to that, the follow-up with the provider that the patient has.

23:28 So that's what we see when we see this trending out. We see it somewhat stabilizing the mix between DME and pharmacy and then the opportunity to actually see the benefits of patients and physicians using a DME channel versus the pharmacy channel. Got it. Thank you. Your next question comes from the line of Daniel Grosslight with Citigroup. Your line is now open. Hi, guys. Thanks for taking the question, and I'll add my congrats to getting this debt restructuring close to over the line here. I have a couple of questions on slide 60 of the investor presentation that you filed with the restructuring.

24:18 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 a mid single digit revenue growth rate and a little bit of margin improvement each year or do you think that will accelerate in 2020 and beyond? And it also looks like unlevered free cash flow is about $20 ish million or so lower in 2027 versus 2026 in the presentation. So 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 2017?

25:05 Thanks. Hey, good morning, Daniel. It's John. So I would tell you that the 2017 numbers that we claimed this morning certainly were the work product of a number of months of bottom up numbers, but that was done a few months ago. I would certainly caution everybody on relying too much on those. And as we get into our normal budget cycle later this year, we'll update '27 in a more fulsome manner. But to your specifically to your question, I would say the growth rates there are not a are pretty decent proxy for what we 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 2017 and respective years out there. So as I mentioned to Kevin, obviously, commitment is always going to be debt reduction to grow the business. So thinking about it correctly at a high level, but I would certainly caution everybody to not put too much along in some of those numbers.

26:03 They were wrapped up pretty detailed, but a we've few months to do it with that. And obviously, we'll update 27 as we get into the latter parts of this year. Okay, great. And then I just had one on the Sleep Journey and Sleep Center of Excellence, which is great to hear. I'm curious, is that joint effort, again, Sleep Journey and Sleep Center of Excellence, how many markets is that live in right now? And I'm wondering if you can speak to any, specific stats, in the markets they're live to in terms of adherence rates and conversion rates versus the markets they're not currently live in? Yes. So I'll start and I'll let Perry provide a little bit of additional detail on it. So on the Sleep Journey, that's been implemented over the past year. And then on the Center of Excellence, focused on the sleep starts, that's starting to be rolled out now. Perry, why don't you cover a little bit more detail?

27:01 Yes. Thanks, Ed. 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 every additional quarter. So that is proven highly successful. So one is adherence and two, our average order basket has also increased with the Sleep Journey project. From a COE perspective, this has been initiated. It is in three of our markets with full implementation across the entire network by the beginning of the fourth quarter. So it's a rolling process and it's really to have an end to end optimization for both the patient, the prescriber and the payer. And so initiation of therapy in a centralized group expert in handling sleep patients.

27:57 From the early two markets, three 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. Great. Thank you. Your next question comes from the line of Michael Cherny with Leerink Partners. Your line is now open. Good morning. Thanks for taking the question and I hope you guys are doing well. This is Ahmed Mohammad on for my attorney. As we think about the results in the quarter and the outlook for the year, appreciate all the color that you've given.

28:48 But 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 cadence regarding the Optum's onboarding? And when is the debt refinancing expected to be completed? Thanks. Okay, Accendra, it's John. I'll start to unpack that a little bit. On the quarter, basically we've seen the same dynamics by category that we've seen for the last several quarters. Our growth really led by categories like ostomy, urology. As we mentioned, the sleep business, the large commercial payer change, grew very nicely as well.

29:38 And on the other side of the coin, diabetes, pumps did well CGM, not quite as well as we would have hoped. And then other categories like home respiratory certainly underperformed our expectations as they have for the last few quarters. So all in all, a very similar story to what we've seen in the past. In terms of your question on Optum, those preferred provider agreements take a while to ramp. We would expect that to continue to ramp throughout 2026. But it's nothing that is going to be a dramatic change in the performance of the business this year, similar to other similar agreements that we've brought online recently. But they do take a while to ramp and you need sell into those. And that's how we should be modeling and thinking about those.

30:26 And financing wise, I think was your last question. We'll be here launching the actual exchange offer in the next week or two. Given the normal periods of time you need to let those things stay in the market, we should be closing that transaction, I would say, third week mid to late third week of June. Got it. Thanks. Your next question comes from the line of Alan Lutz with Bank of America. Your line is now open. Good morning and thanks for taking the questions. One for John. SG and A in the quarter was better than we expected. You called out benefits from cost saving efforts.

31:13 As we think about the trajectory of SG and A over the course of the year, how should we think about the 1Q run rate and what's embedded in the guide for the rest of the year? Thanks. Yes. I'll start and then I'll let Ed finish. Mean, certainly, Alan, cost reduction remains a significant focus for us and will be throughout the year. Keeping in mind that with the large commercial payer rolling off, we have been very rigid about taking those costs out and costs related to it as well. But from a runway perspective, I would say, would like to do better than that for the rest of the year, but it's probably not a bad number to start with. Yes. I think we would anticipate it does get better. If we think about the large customer, when we took the costs out, those costs came out towards the end of February and towards the end of March in a two phase process.

32:03 So we should be able to get additional benefit of those for the remainder of the year as they came out between February and towards the end of March. Very helpful. Thank you for that. And 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, but just between fee for service and the residual capitated, agreements on the books? Thank you. Yes. If we think about I mean, we had the chart in the exhibits that actually showed some of our larger payers. None of those are, I would say, capitated agreements.

32:50 And then you look at what's remaining, any other capitated agreement would be very small. Nothing meaningful to fall into those top five or six category five or six payers. And on the margin, I think it depends on it. It depends on the nature of it. It depends on the escalation of it. But when we look at capitated agreements, we are not opposed to them. We have them, and we they're a significant opportunity for us. Perry, I don't know if you want to add a little additional color on it. Feel free to do so. I think you've covered it. The cap agreements that we have today or the remaining cap agreements are small in nature. They're effective and efficient to run from an operational perspective. So they provide a better a very positive yield.

33:36 We are pursuing capitated agreements in the marketplace today. The marketplace is dynamic. The payers are continuing to look at opportunities to reduce their networks and align with providers like in Accendra. I think our opportunities to pursue smaller capitated agreements remains very positive. Great. Thank you both. That concludes our question and answer session. I will now turn the conference back over to Edward for closing comments. Well, thank you. Thank you, everyone, for the time today. If I reflect upon the last four to five months here as a company, a lot of accomplishments and the fact that one, we haven't had the ability to sell our P and HS business to the balance sheet optimization which we just completed today, now leaves us in the position as a leaner, more efficient company as we proceed going forward. With that, I look forward to the next several quarters to be able to have these dialogues, and we can continue to discuss the progress that the company is making. Thank you, everyone.

34:50 That concludes today's call. Thank you all for joining. You may now disconnect.