Owens & Minor, Inc.

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Welcome to Owens & Miner's first quarter 2022 financial results conference call. At this time, all participants are on a listen-only mode. After the speaker presentations, there will be a question and answer session. To ask a question during the session, you would need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker today, to Alex Jost, Director of Investor Relations. Please go ahead.

Thank you. Hello and welcome to the Owens & Miner first quarter 2022 earnings call. Our comments on the call will be focused on the financial results for the first quarter of 2022, as well as our full year outlook for 2022. Both are included in today's press release. The press release, along with the supplemental slides, are posted on the investor relations section of our website. Please note that during this call, we will make forward-looking statements. The matters addressed in these statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied here today. Please refer to our SEC filings for a full description of these risks and uncertainties, including the risk factor section of our annual report on Form 10-K and quarterly reports on Form 10-Q. 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 on our annual report on Form 10-K. Today, I'm joined by Ed Pasica, our President and Chief Executive Officer, and Andy Long, our Executive Vice President and Chief Financial Officer. I'll now turn the call over to Ed. Thank you, Alex.

Good afternoon, everyone, and thanks for joining us on the call today. I'll review three areas this afternoon in my prepared remarks, starting with the strong performance that we delivered in the first quarter of 2022. This is a result of our great execution and the expected momentum we carried from a record 2021 as previously discussed in our Q4 2021 earnings call. Secondly, how the Owens & Miner differentiated model led to another strong quarter. And finally, our continued focus on disciplined investing and operational execution to deliver long-term profitable growth. Starting with Q1 2022, I am very pleased to report another strong quarter as we saw the momentum from the record-setting 2021 carry into the start of the year largely as we had expected. Revenue was up year over year in both our products and healthcare services segment and our patient direct segment. However, it should be noted that our patient direct segment led the way at over 25% growth, driven by Byram's strongest performance in two years. Once again, Byram's growth is well ahead of its market. Now moving on to operating profit. We knew going into this quarter that we faced unprecedented year-over-year comps, but our year-over-year growth in revenue, our operational execution, combined with our unique business model enabled us to deliver over 90 basis points of operating margin expansion sequentially from Q4 of 21 to Q1 of 2022. Now looking ahead at adjusted EBITDA in the first quarter, we delivered over $118 million of adjusted EBITDA, which was nearly 22% higher than Q4 of 2021. We also saw strong cash flow, generating $80 million of cash from operations during the quarter. And in addition to that, we were able to reduce our debt ahead of the Apria acquisition. And finally, I'm also pleased with Apria's performance for the quarter, which was right in line with our expectations. All in all, we executed very well during the quarter. The performance in this quarter is another example of our great teammates continuing to leverage the Owens & Miner business blueprint to manage through the current macroeconomic environment. As a reminder, our blueprint starts with our culture that is based on our humble mission to empower our customers to advance healthcare along with the guiding principles of our ideal values. This is then combined with both our Owens & Miner business system of continuous improvement and our investment strategy that is disciplined and focused on making the right investments to provide for long-term profitable growth. The first quarter of 2022 also marked an important milestone. With the completion of the acquisition of Apria, the largest acquisition in the company's history, and we're excited to welcome the Apria team to Owens & Miner. This acquisition is part of our disciplined investment process, and it strengthens our position in the higher growth direct-to-patient home market. It fits perfectly with our strategy to expand our customer offering and to diversify our revenue and EBITDA and deliver long-term profitable growth. Our integration activities have been underway and are off to a great start. The organizations are coming together very nicely. And with the acquisition of Apria, we have enhanced our ability to serve the patients through the hospital and into the home. I will cover this in more detail later in my prepared remarks. But let me discuss how the Owens and Miner differentiated model led to another strong quarter. As an overview, our scalable value chain starts with manufacturing, moves to channel access with great supplier partners, and serves the patient through the hospital and into the home. Owens & Miner is uniquely positioned vertically integrated healthcare solutions company with a scale that starts with our Americas-based manufacturing using our technology, our teammates, our factories, and our specifications. We manufacture from raw material all the way to finished goods. Look, we manufacture the vast majority of our proprietary Halyard brand surgical and infection prevention products, including PPE. We are not a company that sources the majority of our proprietary products from manufacturers. Let me provide you with an illustrative example of our significant control of the manufacturing process from start all the way to finish. For this example, I'll use nonwoven, spun-bound fabric-based SNIP products. It all starts with the production of the fabric in our North Carolina facility with polypropylene supply primarily out of Texas. This fabric is then converted into surgical masks, isolation gowns, N95s, drapes, surgical gowns, wrap, as well as other SNIP products. Conversion of this fabric to finished goods is then completed in our facilities in Texas, North Carolina, Mexico, and Honduras. These products are then transferred to our centralized distribution centers which is a much shorter delivery route than products shipped from China. The takeaway here, as demonstrated in this quarter, is that this model provides benefit for us and our existing and potential customers due to continuity of supply, increased cost control, and flexibility. Next, our products are then moved to our distribution channel that provides flexibility based on the right balance between technology and touch and has partnered with some of the best manufacturing supplier partners. We have invested in technology that improves service and productivity, but does not impact our ability to be flexible and scalable to best serve our customers. The technology that we have invested in, such as voice pick, predictive analytics, train pick, inline technology, data analytics, and route optimization, has enabled us to scale as needed. The takeaway here is that the deployment of technology combined with our Owens & Miner business system throughout our nationwide distribution system has enabled us to provide 99% plus service levels for on-time delivery and shipping accuracy for our customers while delivering efficiencies and productivity to us as demonstrated in this quarter. And finally, our value chain finishes with our broad-based patient direct business. to serve the patient from the hospital and into the home. Our recent acquisition of Apria expands our position in the direct-to-patient market. This acquisition expands our patient-direct platform for growth with expanded geographic reach and payer relationships. It creates market expansion through a broadened patient-direct portfolio with well-positioned complementary product categories. It generates cross-selling opportunities to drive increased revenue with the opportunity to serve treatment of overlapping conditions for patients and product bundling. And finally, this acquisition provides access to approximately 90% of insured healthcare customers in the U.S. The takeaway here is that this expansion enhances our ability to serve the patient in one of the fastest growing spaces in healthcare, the home. And our strength in this market was demonstrated in this quarter with 25% revenue growth. In addition, this acquisition broadens our product portfolio, serving some of the fastest-growing categories, like diabetes, home respiratory, and obstructive sleep apnea, which leads me to the last item, long-term profitable growth. So let me start with our patient direct segment. This is a segment with multiple secular tailwinds. It's a $50 billion market that is highly fragmented, growing fast, with over 80% recurring revenue. In addition, this market has strong demographics, such as aging population, increased obesity, and increased adoption of home health. And it's the market we have been winning consistently since 2017, as our Byron business has grown at multiples of the market rate. recording organic revenue growth in the high teens on a compounded annual basis. And we expect the strong double-digit growth to continue in the future, and as I mentioned earlier, PatientDirect grew at over 25% this quarter, which really supports our expectation for strong growth. Related to products in our healthcare services segment, we expect to continue to expand our diversification of product offering both with existing products into adjacent markets, such as retail, with new products into existing markets, such as new surgical and chemo gloves, and new offerings into new markets, such as clean room apparel and gloves. Along with the portfolio expansion, we continue to advance our distribution network with new facilities and increased investment in technology to continue to improve our ability to serve our customers. Next, I will cover our revised guidance. But before I do that, let me also address the macroeconomic conditions we are currently dealing with. Like everyone else, we have concerns about the macroeconomic landscape. While we remain excited about the future, the uncertainty around inflation and interest rates has guided us to remain abundantly cautious related to our bullishness on the year. What I can't point you to is our track record over the past several quarters. and how we have taken steps to mitigate inflation as we have offset a significant amount of cost pressure. We will continue to look for levers to reduce growing inflationary pressures going forward, but we recognize that some may take more time to show benefits. What we can control is how effectively we run the business, and we certainly intend to continue to execute at a high level. So now let me move on to guidance for 2022. With Q1 coming in consistent with our internal expectations of a strong start to the year and the expected accretion from AFRIA for the remainder of the year, we are revising our adjusted EPS guidance to the range of $3.05 to $3.55 for the full year of 2022. Andy will provide more detail later. Lastly, I'm excited that January marked Owens & Miner 140th anniversary. a fantastic accomplishment few companies can boast about. We have a proud legacy of focusing on our customers, our teammates, and our communities. I thank all the past and current teammates for their dedication and look forward to many successful years ahead. Before I turn the call over to Andy, let me conclude by saying that we will continue to use the Owens & Miner business system and our differentiated business model to deliver another strong year remain on track to achieve our long-term goals, and minimize the impact of inflation. With that, I'll turn it over to Andy for discussion of our first quarter financial results. Andy? Thank you, Ed, and good afternoon, everyone. Today, I'll review our financial results and key drivers for our performance in the first quarter, and then I'll discuss our expectations and assumptions for 2022, which reflect the completion of the AFRE acquisition, as well as the current macroeconomic environment. A reported first quarter revenue was $2.4 billion compared to $2.3 billion or 3.5% growth versus the prior year. Both segments contributed to the year-over-year growth with products and healthcare services growing at 1.2% and patient direct growing 25.7%. Excluding the impact of the three days of revenue from the APRA acquisition, the patient direct segment grew 20.7%. When looking at the entire quarter, I'm very pleased to report that Apparaty delivered strong results, including revenue growth of 4.6%, despite a headwind from the Phillips recall. Turning back to consolidated results, sequentially revenue was down 2.4% as expected. Half of this was due to a reduction in glove prices, with a balance attributable to seasonality and a slowdown in elective procedures. PPE volume was up slightly versus Q4, which included a significant increase in N95 revenue despite the ending of the government stockpile program in Q4. Much of this increase came from international markets, reflecting the traction that we're getting from our efforts to expand in this channel. From a gross margin perspective, the first quarter came in at 15.5%. This was a year-over-year decline of 350 basis points. which was largely driven by last year's favorable timing of glove costs, as well as the impact of inflation net of mitigation efforts in the first quarter of 2022. On a sequential basis, gross margin was 170 basis points higher than in Q4, as glove costs and prices are now more aligned in Q1 as expected. Our first quarter distribution, selling, and administrative expense was $280 million versus $293 million in the prior year. In the first quarter of last year, operating expense included a donation to establish the Owens & Miner Charitable Foundation, further cementing our commitment to ESG efforts. And last year's unprecedented profitability drove incentive-based compensation higher. This favorability was partially offset with the addition of three days of APRA's operating expense, coupled with inflationary pressures. Execution of our Owens and Miner business system enabled us to successfully mitigate a large part of these inflationary cost increases. First quarter interest expense was $12 million, or $11.4 million, excluding the interest expense associated with the financing of APRIA. This compares to $13.7 million in the prior year. The decrease is primarily due to lower interest rates in Q1 of 22, resulting from our debt refinancing in March of last year. Our gap net income for the quarter was $39 million or 52 cents a share. Adjusted net income in the first quarter was $73 million compared to $111 million last year. Current quarter adjusted EPS was 96 cents compared to $1.57 in Q1 of last year. As I mentioned earlier, the glove cost dynamic had an outsized impact in Q1 of 21, skewing year-over-year comparisons. The foreign currency impact on adjusted EPS for the first quarter was 3 cents unfavorable compared to last year. It's worth noting that just two years ago, in Q1 of 2020, our adjusted EPS was 4 cents, which reflects the sustainable improvements we've made in the business in just two years. First quarter adjusted EBITDA was $118.5 million, with a margin of 4.9%. When compared sequentially to the fourth quarter, adjusted EBITDA increased by $21 million, with margin improving 98 basis points. Our Owens & Miner blueprint and business system once again allowed us to mitigate a substantial portion of the accelerating inflationary pressures seen in the quarter. Before turning to segment results, Q1 represents the first quarter of reporting under our new segment structure. We've organized our business into two distinct segments to reflect how we go to market, our organizational structure, budgeting, and financial reporting processes. These two new segments are Products and Healthcare Services and Patient Direct. Products and Healthcare Services provides distribution, outsourced logistics, and value-added services, and manufactures and sources medical surgical products through our production and kitting operations. Patient Direct expands our business along the continuum of care through the delivery of medical supplies and equipment direct to patients and home health agencies. largely to address chronic conditions, and is the leading provider of these services in the United States. On a segment basis, products and healthcare services reported first quarter revenue of $2.1 billion, up 1.2% year over year. This was a result of market share gains and growth with existing customers, partially offset by lower PPE sales and lower glove prices as previously communicated. Products and healthcare services operating income for the quarter was $89.1 million compared to $150.4 million in the prior year's first quarter. The decline versus prior year was largely due to the glove cost and price dynamics from Q1 of last year that I described earlier, coupled with higher inflation, net of efforts to mitigate its impact. As anticipated, we saw sequential operating margin expansion of 107 basis points from Q4 of 21 to Q1 of 22, as glove costs and prices are now more aligned in Q1, which will result in a significant reduction in margin variability going forward. Finally, the year-over-year foreign currency impact on revenue was unfavorable $8 million, and the FX impact on operating income was unfavorable $3 million versus Q1 of last year. Turning to PatientDirect, our net revenue in the first quarter was $273 million, an increase of 25.7% year-over-year. Excluding Apri's contribution, Byron grew 20.7%, their strongest quarter in two years as the business saw volume growth across all major product lines, along with increased price realization. Operating income for the quarter was $15.8 million, compared to last year's first quarter of $12.3 million. Moving now to cash flow, the balance sheet, and capital structure, In the first quarter, we generated $80 million of operating cash flow as a result of strong earnings along with improved working capital. Net debt was $2.4 billion at the end of the quarter. On a pro forma basis, inclusive of APRIA's trailing 12 months of adjusted EBITDA, net leverage finished at 3.7 times. Going forward, we'll continue to prioritize debt reduction and reinvestment in long-term growth and expect a return to our target leverage range of two to three times within 18 to 24 months. In the first quarter, free cash flow is defined as adjusted EBITDA, less CapEx, was approximately $100 million and was applied to both debt reduction and reinvestment in the business for future growth. As Ed mentioned in his remarks, with the recent close of the APRA acquisition, we have updated our guidance for the year and now expect adjusted EPS to be in a range of $3.05 to $3.55. The expected contribution from APRIA on our 2022 results is revenue in excess of $900 million, approximately $180 million of adjusted EBITDA, and 5 cents of adjusted EPS. The 2022 adjusted EPS impact is reflective of APRIA's expected adjusted operating earnings, initial synergies, higher interest expense, incremental inflation, and preliminary purchase price allocation. It's worth noting that between the time we announced the APRIA acquisition to the day we priced the debt, interest rates increased 150 to 200 basis points. At the end of the quarter, approximately two-thirds of our entire debt portfolio was under fixed rates. Our teams have been working together building synergy growth plans, and we remain very excited about the opportunities that have been identified to date. Over the next three to five years, we expect synergies from the acquisition to generate incremental annual revenue in the range of 80 to 100 million dollars and adjusted annual EBITDA in the range of 40 to 50 million dollars. In looking at the total company, we expect revenue for the full year to be in the range of 9.9 to 10.3 billion dollars and adjusted EBITDA in a range of 580 to 630 million dollars. Additional assumptions for 2022 guidance include a gross margin rate of approximately 20%, interest expense in the range of $125 to $130 million, capital expenditures of $175 to $185 million, and increase from previous guidance, which is driven by APRA's growth-related expenditures netting to free cash flow of over $400 million available for debt reduction and organic investments. an adjusted effective tax rate of 24 to 26%, FX rates as of March 31st, 2022, and fully diluted share count of 77 million. And finally, a few comments about the calendarization of earnings for the remainder of the year. Coming off a strong Q1, we continue to expect solid performance in each of the next three quarters, but certainly not at the level experienced in the first quarter for many of the reasons Ed and I have previously discussed. In particular, we expect the fourth quarter to be the strongest of the three remaining quarters this year, reflecting a more typical seasonal pattern. Please be aware that these key modeling assumptions have been summarized on supplemental slides filed with the SEC on Form 8 earlier today and are posted to the investor relations section of our website. In summary, I am very pleased to report another strong quarter. We are executing very well, and the outlook for the year is sound as we continue to manage through macroeconomic volatility. Our cash flow and liquidity are in great shape and will be further strengthened as we continue to integrate Apria. And of course, we are always focused on delivering long-term profitable growth. Before opening the call for questions, I want to take a moment to personally welcome our new Apria teammates to the Owens & Miner family. At this point, I'll turn the call back over to the operator to begin the Q&A session. Operator?

Thank you, sir. As a reminder, to ask a question, you would need to press star 1 on your touchtone telephone. To return your question, please press the pound key. Please stand by while we compile the Q&A roster. I show our first question. It comes from the line of Michael Cherney from Bank of America. Please go ahead.

Good afternoon, and thanks for all the callers so far. Andy, if I can ask just a little bit about the cadence of and thinking about over the course of the year, relative to that 4Q comment being stronger, is the implication that 4Q is going to be stronger than what 1Q was? And just along those lines, if you think about the cadence, what are some of the pushes and pulls that you can expect relative to upside-downside drivers that you can control versus the macro dynamics of utilization that obviously will remain potentially uncertain?

Sure, Mike. Good afternoon. Happy to take that question. So I think it's a great question because cadence of the year is really important. And let me talk about the general cadence for the year, and then let me talk about some of the drivers, and then we can discuss controllable versus maybe market-driven. So the way I see the year playing out in terms of EPS, I do see the first quarter as being the strongest quarter of the year with the 96 cents of EPS. The second strongest quarter of the year I see is the fourth quarter. I think we're going to finish the year very strong, and I'll describe for you the reasons for that. And then I think Q2 and Q3, the middle quarters, I think will be the softer two quarters of the year. So it's probably worth talking about some of the key drivers of what's driving that. So starting with kind of why we are seeing the change from Q1 to Q2 and Q3, a couple of drivers there are, first of all, let's look at the effective tax rate. You probably haven't had enough time to look at our financial statements yet, but in Q1, we had an adjusted tax rate of 21.4%, but we've given guidance for the year in that 24 to 26 range. So, you know, just the math says that the last three quarters are going to be somewhat higher than 25, 26%. So you've got higher taxes. We do expect higher interest rate or a higher interest expense to the higher interest rates, right? We have developed our forecast for interest expense in sync and lockstep with the consensus out there. We're aligned with the timing, the amount of the Fed increases, which of course will drive our variable rate debt. We do expect to see sequential inflationary pressures as we move through the years. We talked about in our prepared remarks. I'll give one example of that is polypropylene. That's one of our key raw materials used in manufacturing. while that commodity has eased in price recently from its recent highs, we are seeing that climb somewhat. So that's one of the drivers of inflation. And an assumption that hasn't changed, that's been pretty consistent for a long period of time, is we continue to assume that PPE will ease as we move throughout the year. Again, I'll highlight, though, this is Q4 to Q1, we did see slightly favorable, slight increase in PPE in aggregate, and in fact, a pretty significant increase in N95s, Q4 to Q1. So again, the assumption on easing PPE, if that doesn't come to fruition, that could be potential upside to our sequential model here. If you move now to Q4, what are some of the drivers of why we think Q4 is going to be stronger, will exit the year strong? So we've put in a number of inflation mitigating actions into place, Mike, and some of those actions take place and we can get an immediate effect from that, but others take a little bit longer to get traction. So as you look at what can we control, what can't we control, this is some things that we've put into place, but we'll just take some time to see the benefit. Again, as we pay down debt, I talked about the $400 million of expected free cash flow in a year, so as we start to pay down debt, we do expect to see lower interest expense as we get to the fourth quarter. And then maybe some color on the two segments and how we expect them to perform. So in the products and healthcare services segment, we do see an acceleration as we end the year. Part of that is just going to be the normal seasonal uptick. We do see elective procedures potentially getting stronger in the fourth quarter. I think that's tied to that seasonal uptick as well. And account win implementation, right? So we have seen a number of implementations get delayed throughout the year So we think it's going to be more weighted to the fourth quarter. And then just turning to the patient direct segment, we also see that exiting the year at a higher pace. And keep in mind, Mike, the patient direct segment is now more than just Byram. So this segment now represents 50% of our annualized EBITDA. So this is a big chunk of the business. We see seasonal influences here as well, that uptick that's traditionally driven as people hit their deductibles and they spend more. So we expect that trend to continue. Q4 has the highest level of synergies, right? So as we look at the integration of the Apria business, we do see higher synergies in the fourth quarter. And the final factor driving this is, you know, in terms of both the sleep and the respiratory equipment availability, right? I think we're all familiar with what's going on with the Philips recall, and we do see that situation improving in the fourth quarter. And there's a significant amount of backlog that's been created from this. So we're going to start to see that backlog easing and coming down in the fourth quarter. And quite frankly, we expect that to continue strong into 2023. Thanks.

That's quite helpful. And I guess just one last question relative to leverage levels. It looks like you're exiting the quarter, I think, at 3.7 times on a net debt basis. Anything changed about your target leverage levels recently? into the end of this year when you're going to get back to, I think it was around the two times level that you had previously been targeting?

Yes. So there's absolutely no change in our thoughts on that. I think with the strong free cash flow that we think this business is going to deliver over the next several quarters, we believe we can get back into that target leverage range of two to three times, and we can do that in the next 18 to 24 months.

Understood. Thanks so much.

Thank you. I show our next question. It comes from the line of A.J. Rice from Credit Suisse. Please go ahead.

Thanks. Hi, everyone. You mentioned a couple times in the prepared remarks accelerating inflation. Now, you clearly have been able to offset that with some of the initiatives you called out, but I just want to make sure I understood where are you seeing in that? Is that in the patient direct segment, or is that across the board? And then also specifically in the Apria, we hear a lot about the supply-demand issues around nursing. I know that's not their primary clinician that they're dealing with, but what does the market look like for respiratory therapists and the other types of clinicians that they have?

So, AJ, this is Ed. You know, I'll take that, and thank you for the question. You know, when we say inflation, we're seeing it actually in both sides of our business, so both in patient directives and our product and healthcare services segment. You know, and where we're seeing it is general inflation, whether it's, you know, inflation related to transportation, inflation related to labor, as well as commodity inflation with really, you know, transportation fuel probably being the bigger of them. You know, and I think it's important to recognize that You know, I think everyone recognizes that the US CPI was coming in at 8.6 in March, was one of the highest we've had in four decades. And it's very different than when we set our plan and our guidance for 23 back in May of 2021. But I will tell you what I'm proud about, and Andy alluded to some of this and how we've offset it, is really what we've done to be able to mitigate that. And it's really what makes us different in the fact that We have focused on ways to mitigate it using our own as a minor business system of continuous improvement, everyday finding ways to take out waste and continue to optimize our operations. And those are the things we've done, you know, really over the last four quarters or so to minimize the impact of inflation. You know, the other thing I don't want the group to miss here is our model is also different in the fact that, you know, we have an America's based manufacturing footprint where we're making the raw, we're taking raw material, making the fabric, making the product, And frankly, our transportation cost in that business is very different when we're producing product in North America. So that's also helped us and saved us a tremendous amount. So that's why we see that ability to offset that and the ability to minimize it up to this point in time. And frankly, I'm excited that the team continues to be laser focused on finding new ways, leveraging our business system and continuous improvement to reduce the impact going forward. So that's where we are on that. Go ahead.

No, that's great. Are you going to say something about the respiratory therapists and the APRIA clinicians?

Yeah, I'll cover that too. So within our patient direct business, again, we're not hiring nurses. We do have respiratory therapists. Our staffing has been a little tighter, but it hasn't impacted our ability to serve our customer base. So we're still comfortable with where we are with that. And you're right, you know, we have talked to our customers, you know, across the board where, you know, the clinician, there is tightness in clinicians, you know, being able to fill all the open roles that are out there. But from our business, from ourselves, you know, we're in a good position with our respiratory therapists and we're pretty comfortable with where we are.

Okay. Let me just ask for maybe one follow-up clarification on the guidance, too. Two points. I know you said in the release, elective procedures had ended the quarter coming back to close to pre-pandemic, but slightly below. And I think that's what you've incorporated in your guidance. Is that solely because of what you saw in January, or are you now assuming that elective procedures are a little lower than you had been assuming previously? And I was also going to ask you about the gloves. I think you had that as about a $235 million revenue item this year, largely no margin associated with it. Has that been updated? Is that still your thought? I don't know. You may have mentioned it in the prepared remarks, and I missed it, but I just wanted to check that. AJ, it's Andy.

I'm happy to take both of those questions. The first quarter was really an interesting quarter from an elective procedure standpoint. From what I saw, it was probably one of the more volatile quarters in terms of demand of any of the quarters we've seen since the pandemic started. And, you know, we came into the quarter roughly a little bit slow. It strengthened in mid-quarter, and we thought at one point in time that the first quarter would actually be sequentially up versus Q4. We thought at one point in time that it would actually be higher than pre-pandemic levels. And then things eased as we moved into March, and we actually finished the quarter on elective procedures down sequentially and actually down versus pre-pandemic. Now, when we put our original guidance together for the year, we saw that strength in the first quarter at one point in time, right? And so our calendarization was stronger in the first quarter, weaker in the second, so that the entire year was flat year-over-year, flat to pre-pandemic. Now, with the miss in the first quarter on the elective procedures, we've chosen to let that miss go, just let that flow through to the year rather than just stacking it on to the end of the year and making it kind of a go-get for us. The way I look at it is, should elective procedures improve, that would be upside to where we are today in terms of our guidance. Part two of your question on gloves, you're absolutely right. If you look at the glove pricing that we experienced in 2021, we did communicate at our last earnings call that we thought glove pricing would ease between $400 and $450 million, netting to the number that you referenced earlier. I would say no major changes in that. If anything, we might be operating in the lower end of that range, but that's our current thinking on glove pricing. All right, great.

Thanks a lot. Thank you. I should have our next question. From the line of Kevin Caliendo.

Hi, thanks for taking my call. I have a couple of questions. The first one, what kind of benefit did interim get from APRIA in the quarter? Was there any stocking or anything in particular or not that hasn't really started to sell through yet?

Yeah, I'll start that and then Andy can talk about it. There's a tremendous amount of feedback. Is that better?

Yeah, that is. So

So for the quarter loan, there was slight revenue lift, and that's why from reported revenue, about 25% growth on the patient direct segment, down to over 20% growth when you pull out the three days in the quarter. So there's only three days in the quarter, and it had a minimal impact overall to the company for the quarter. But let me add on to the question a little bit. So one of the things we talked about was this being a revenue synergy play, and that's really how we focused on it. And we talk about where we think this is going to go longer term with $80 to $100 million of top line synergies over the next several years from a run rate standpoint, another $40 to $50 million of EBITDA run rate. But here's what we've done already. We've had it for five weeks, and we initially thought we would see some of the revenue benefits maybe late in the fourth quarter. But after only five weeks since we closed on March 29th, our commercial teams are already engaged. They're already working leads together. You know, we've already closed some new business, which to me is extremely encouraging. You know, if we told you that this was going to happen and now already the team is starting to deliver on some of the revenue synergies, albeit small, but they're starting to get traction with that already. And, you know, the expectation is that continues to ramp, you know, as we move through the year, Q2, Q3 to Q4 to start to get the revenue ramp, you know, going. And look, the other part of our DNA as a company is obviously, you know, five weeks we're in so far. You know, we're going to continue to look to find additional ways that we think this can drive value, and it's something we're going to continue to do. So it had very little impact in Q1 because of only three days. We were part of our company for three days. But we're already seeing traction on the synergies and the ability to drive revenue growth overall.

Okay, that's helpful.

Two quick follow-ups. With the Apria business, I know this only came out last night, but were you able to review the FDA's communication about the potential that the manufacturers might have to provide some kind of give back to Apria and the other players in the industry, reimburse them for lost? Is that something you've contemplated, or have you thought through how that might impact your numbers? Was it that recent? No, we have not. It was last night, so I assume not. And then one last one. In your 10-K, you had mentioned the health trust renewal was due in April. Is there any update on that? Yeah, it's been renewed, and it's been renewed for a four-year term. Any changes to the economics or anything we should note?

No, the simple answer is no, no changes.

Great. Thank you so much.

Thank you. Our next question comes from the line of Daniel Grossleit from Citi. Please go ahead.

Hi, guys. Thanks for taking the question. Maybe I'll stick with kind of that HPG type of question. In your core acute distribution business, I'm wondering if you're seeing any health systems and hospitals push back and GPOs push back on pricing because, you know, if you look at 1Q results for the publicly traded hospitals, they've all been really impacted by higher labor expenses. So I'm curious if they've started to push on pricing negotiations with you to try to offset some of the higher labor expense they've all experienced.

You know, what we've seen is really, let's call it more of a balanced approach. You know, they recognize that, you know, continuity of supply is important. They recognize that, you know, that's a component of price. You know, I think our transparency has been well received in the fact that where we've had, you know, price increases, we've been open and transparent on why. Frankly, we've minimized those as much as we possibly could. I would tell you that I also see some hospital networks willing to think differently about operations and how we serve, so that way it can drive efficiency for them, efficiency for us, and we both win. In the same sense, though, there is also the normal process of wanting to continue to find more and more value, and there's different ways that we can help them with that. you know, specifically related to, you know, wage increases and other inflationaries, you know, coming back to us specifically on that. I haven't seen that specific ask, but, again, it's really been focused on the value that we can provide.

Got it. Makes sense. And then a longer-term question for you just on the Byram business. So just looking at Byram, if we go back to your investor day last year, You know, did you expect that business to grow to around $1.4 billion by 2026, which would imply around an 8% CAGR from 2021? That's a step down from the 32% growth you experienced from 2017 to 2021. Obviously, you're growing off of a larger base now, but it's a pretty steep step down. And also, if you look at the growth this quarter, that was three days, that 20% you mentioned, still a pretty big step down. Curious if there are any updates on how you're thinking about the longer-term growth of the Byron business and if there's any temporary tailwinds specifically that you don't anticipate repeating longer term.

So specifically with the Byron business, obviously when we get to Investor Day this year, we'll revise guidance. There is no individual tailwinds that I can point to on that. And third is our expectation for that Byron business is to continue to perform at a very high level. but we will give final numbers when we get to investor date and update the long-term 2026. But look, they performed extremely well last year. They are performing extremely well right now. And our expectation as a business is that you don't take your foot off the gas, you continue to accelerate, and you continue to do what we can to drive, again, back to our phrase, the long-term profitable growth, which is really what our ambition is.

Got it. Looking forward to that. Thank you.

Thank you. Our next question comes from the line of Eric Coldwell from Baird.

Please go ahead. Thank you very much, and congrats on putting up good numbers here despite the macro headwinds. The first topic, you've addressed it in a couple of different ways. I wanted to be a bit more specific. You talked on the call, prepared remarks about your Appreciation for the macro environment driving you to maintain what you view as a, quote, abundantly cautious guidance outlook, even though you've maintained the core. I know electives you did not, I guess, anticipate a catch-up on the lower activity in Q1. It sounds like one of the areas you've stayed cautious, but I was hoping you could identify other areas where you've potentially erred on the side of caution when thinking about the range for the year.

Yeah, so obviously we talked about inflation. We talked about elective procedures. I'll add a couple other ones. One is we had a tremendous amount of wins last year, and we've implemented customers as fast as 45 days, and at times it takes six to nine months. I think with some of the global supply chain issues, those implementations are going a little bit slower to make sure we don't mess up because of global supply chain issues. of leading brand products that may be manufactured offshore. So we're a little cautious there. And then really talk about some of the global supply chain pressures. That's the other one where it's not impacting our manufacturing model, but it does have an industry-wide impact. And last thing I would explain on this one, Eric, is on inflation. And I want to be clear on this. Absent of inflation... we would have raised our guidance. But because of where that is and being cautious, that was one of the factors. But again, if that didn't exist to the rate it is, the accelerating rate it's going to or it's at, we would have raised guidance.

Okay. Thank you for that. And I guess I'm more of a glass-half-full guy when thinking about your results. But the second topic is on APRIA. talked a little bit about the performance they've had and how the integration has started off well. I'm curious if you could give us a sense on what you're expecting Apria to grow for the remainder of the year, both with and without the CPAP headwinds. Obviously, that's a sleep and respiratory therapy is a headwind for anybody in the market in the short term, but I'm curious what you see their growth rates looking like with and without those headwinds.

Yeah, Eric, good afternoon. It's Andy. I'm happy to answer that question. So, yeah, there's certainly been a lot of discussion on the impact that that's had on the APRIA business that we've had with the management team, and certainly even some of that information just coming out very recently, as recent as last week. But overall, I think that the APRIA team has done a fantastic job of navigating this very difficult situation. I think they've been in just – constant communication with the equipment manufacturers, so I think they've been looped in and up to date on all the latest. I think the team's done a really nice job of looking for alternate sources of equipment. They've purchased equipment where it's possible to reduce the impact. So I think they're doing all of the right things. Probably the only other thing I'll add is that up to and including the information that was released last week by one of the equipment manufacturers, our guidance for the year, our expectation for APRIA's growth in excess of $900 million of revenue over the course of the last nine months of this year reflects that impact. Certainly, if the manufacturers of equipment can exceed their timelines, that would certainly provide upside to our forecast.

Andy, you may not be able to share this or want to share this. Clearly, we can take the 900 million plus and compare it to the past, I'm just curious what that 900 plus might have been absent the incremental prolonged reduction in revenue potential from CPAP, i.e., if growth is going to be X, it might have been X plus 3%, 5%, some higher number in a normal manufacturing and supply chain environment, just to give us a sense on what kind of a recovery we might see moving into 23 and beyond?

Yeah, I mean, I think, you know, as I look at that, I think the $900 million is a very balanced figure. And I think that is our stake in the ground at this point in time. And going forward, I think if, you know, schedules change, if remediation plans change, you know, I think we'll be happy to plus minus off of that and share the impact that this will have. But You know, right now I think $900 million is a fair and balanced rest of the year forecast that reflects all the information that we know up to this point in time.

Okay. Thank you.

Thank you. As a reminder to ask a question, you may do so by pressing star 1 on your telephone. I show our next question comes from the line of Michael Minchak from J.P. Morgan. Please go ahead.

Good afternoon, and thanks for taking the questions. I was just wondering if you could talk about the new business pipeline and the acute care distribution business. You know, is there any way to quantify the size of that pipeline, maybe relative to where we were at this point a year ago? You know, what are customers, what are prospective customers focused on most? And have you seen any change in the competitive dynamics on that side of the business?

Yeah, so let me start and work it backwards. So competitive dynamics, you know, we're seeing consistent. It's really consistent with what we've seen over the last several quarters from a competitive dynamic standpoint. You know, I talked a little about this last quarter is that, you know, we continue to have a really robust pipeline. The pipeline right now is as strong as it's ever been. You know, this quarter alone from a revenue, recognized revenue, realized revenue, we saw, you know, what I would say is pretty good growth related to wins and implementations of wins that we had last year. We will continue to look at whether it's renewals or business. What we look at is we want to drive long-term profitable growth. So we parade out our customers. We know by product, by SKU, as well as by delivery route, how we can maximize our operations, which also should benefit the customer. And again, we'll continue to look at our business that way. But high level, pipeline is still strong. We've got a focus on business development. the quarter from a recognized revenue, a realized revenue. We showed growth again, you know, both gross and net, which is really helping pave where we want to go into the future.

Got it. That's helpful. And then just wanted to drill down a little bit more on gloves. In the past, you've talked about a new facility that's coming online. Can you talk about sort of when that is expected to be, you know, fully up and running? And then once it is, How much of your glove production will be coming from your own facility versus third-party manufacturers? And then maybe just to level set, are you able to quantify how much of your business comes from the sale of gloves versus sort of other segments of the PPE market?

Yeah, so the glove manufacturing facility, our expansion in our facility, it's producing gloves. We told everyone it would be producing gloves in the first quarter, and we're delivering on that promise. In addition to that, we would expect it to ramp over the next three quarters meaning that the lines are in, you're not going to get fully optimized lines on day one, and it's going to slowly tweak those going forward. You know, we're going to add close to a billion and a half units of gloves coming off of those lines, and it can be varying from a simple exam glove all the way to a chemo or surgical glove. We'll be able to do both simple as well as complex gloves within those production lines. You know, right now we're at, call it, 40 to 50 percent, and this is going to add another 10 to 15 percent of capacity there. So, north of 50% of what we sell will be our own products that could be as high as 60. In addition to that, and I'll share, we're continuing to look at other partnerships and opportunities to expand our capability in gloves. So that's where we are in that. And I've said this many times, it's rare in your career to get an opportunity that you can add capital or spend capital for expansion and know that either you could produce more technical products off of there that have a different margin profile or a favorable margin profile, or worst case scenario, you can insource product that you're outsourcing, which also provides margin expansion. And then lastly, by adding that capacity, there's additional fixed cost overhead absorption there that takes our piece. It can eventually, once it's up full and running, running at full speed, excuse me, we'll be able to take the piece price down.

Got it. Appreciate the comments.

Thank you. I'm showing no further questions in the queue. At this time, I'd like to turn the call over to Mr. Ed Basica, President and CEO, for closing remarks. Thank you.

So first, you know, I'm extremely pleased with the quarter. You know, it really is a continuation of the founding fundamental changes that we've made in the business over the last three years. If you think about some of those changes, many of those actions that we've taken, you know, have helped mitigate various pressures in the market. You know, it's really been focusing on improving our efficiency and productivity of these businesses. What's important about that is that these benefits will far last into the future, and I truly believe they'll come, you know, I truly believe that over time we'll come out of this cycle we're in today, and we're going to come out of this cycle stronger than what we entered it. You know, ultimately, we're going to continue to use the Owens & Miner business system and our differentiated business model to deliver another strong year. and to remain on track to achieve our long-term goals and really to minimize the impact of the environment we're in today, that being the macroeconomic concerns that are out there. Thank you, everyone, and look forward to talking to everyone again next quarter.

This concludes today's conference call. Thank you for participating.

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