Apria, Inc.
Q4 2020 Earnings Call Transcript

Published:

  • Operator:
    Good afternoon, and welcome to Apria's Fourth Quarter and Full Year 2020 Earnings Conference Call and Webcast. Please note this event is being recorded. Leading today's call are Dan Starck, Chief Executive Officer; and Debby Morris, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call.
  • Dan Starck:
    Welcome and thank you all for joining us this afternoon to discuss our fourth quarter and full year earnings results. To begin the call, I'll touch briefly on the year's financial results and the highlights from fiscal year 2020. Debby Morris, our Chief Financial Officer, will provide a more detailed review of the financials later on the call. We closed out 2020 with solid results coming in at the high end of the ranges we provided during our IPO process. I'm pleased to report that our full year revenue grew to $1.109 billion, a 2% increase over fiscal 2019. Adjusted EBITDA grew to $227 million, a 30% increase over fiscal 2019. And adjusted EBITDA, less patient equipment CapEx, grew to $137 million, a 67% increase over fiscal 2019. We believe these financial results indicate a company that is well positioned to capitalize on the tailwinds of growth in the home care setting. We had the opportunity to meet many of you on our recent IPO road show. And we thank you for your continued interest in the Apria story. For those of you who are new to Apria, I'd like to start the call today with a brief overview of our company. Apria's mission statement is to improve the quality of life for our patients at home. We have been executing on our mission since the company's inception, and we remain steadfast in that commitment. While this past year has presented us with unique challenges, the compassion and resiliency of the Apria team allowed us to rise to the occasion and continue to deliver on our mission in the most difficult of times. As the vision of a post-COVID environment begins to take shape, we're proud of how we've managed through this past year, and we are excited about the future.
  • Debra Morris:
    Thank you, Dan, and thanks to everyone for joining the call today. Before we open the call to questions, I’ll share some highlights around 2020, and then I’ll share our outlook for Q1 and full year 2021. We delivered full year 2020 results at the high end of the range that we included in our recently filed S1 on all key measures, including net revenues, net income, adjusted EBITDA and adjusted EBITDA less patient CapEx. Full year revenue of $1.1 billion increased 2% year-over-year. Net income of $46 million increased 195% year-over-year. Adjusted EBITDA of $227 million increased 30% year-over-year, and adjusted EBITDA less patient equipment CapEx of $134 million for full year 2020 increased 67% year-over-year. Our results do not include any funds from the government as we return all provider-released funds allocated to the company shortly after they were received. Overall, we had a remarkable year in spite of COVID-19, thanks to the extraordinary efforts of our employees, some regulatory tailwinds and deliberate and effective cost management throughout the year. The fourth quarter of 2020 was a record quarter for Apria. Net revenues of $294 million increased 5% year-over-year, all of which was organic. While there was some slowdown in new patient setups for non-invasive vents, sleep and negative pressure wound therapy late in the quarter following the post-holiday COVID surge, the quarter was nevertheless solid in all three of our core service lines and buoyed by strong cash collections. Home respiratory revenue was up 8%, largely driven by oxygen as a result of the COVID surge, along with strong cash collections and relaxed documentation and authorization requirements during the public health emergency. Sleep was up 4% mainly due to sleep supplies despite experiencing a reduction in demand from new patients sleep starts during the pandemic. And negative pressure wound therapy was up 4% year-over-year despite some COVID headwinds in the fourth quarter. Other equipment and services was down 2%, largely due to lower patient flows. As Dan mentioned, Project Simplify has not only meaningfully improved our cost structure, but it has made us more nimble with the ability to serve our patients consistently and reliably while also enabling more control over our variable costs. In addition, our focus on continuous improvement and investment in technology, including leveraging robotics and further automating workflow as well as our deliberate cost management during COVID has continued to reduce our cost as a percent of revenue and create operating leverage.
  • Operator:
    Our first question comes from Ralph Giacobbe with Citi.
  • Ralph Giacobbe:
    Thanks, good afternoon. First, I guess I just wanted to clarify. You had noted that the recent positive CMS oxygen bump beginning on April 1 due to the removal of budget neutrality. I guess are you including that in guidance? Or you weren't – sounded like you said you were conservative. I just didn't – I wasn't clear on if you sort of included it or just leaving yourself cushion on the other side. And if you could just quantify what that benefit is to 2021?
  • Debra Morris:
    Hey, Ralph, it's Debbie. Yes, we have included it in our annual guidance. Obviously, it doesn’t affect Q1. So, we have included it in our full year, and it's similar to what you had projected in the report you recently issued in the $3 million to $4 million range for the year for 2021.
  • Ralph Giacobbe:
    Got it. So, if everything goes to plan, the $3 million to $4 million is potential upside, but you're just choosing not to flow that through simply given the COVID backdrop. Is that fair?
  • Debra Morris:
    No, we are flowing that through. We are – excuse me, can you repeat your question? Because we are flowing it into our annual guidance. So, we basically took what was provided during the IPO process, and then we have increased it for the budget neutrality that was announced by CMS a few weeks ago.
  • Ralph Giacobbe:
    Got it. Okay. Fair enough. Does the new CMS rate impact commercial rates, either directly for some piece of your business or indirectly via negotiations, where perhaps you'll be able to capture those higher rates as well?
  • Dan Starck:
    Hey Ralph, it’s Dan. It does not directly impact commercial rates. What it does is – my opinion is continues to send the right message to the commercial payers that prices going up. And so, between the outcome of competitive bidding, not producing results that would drive any savings plus the budget neutrality, it does impact Medicare specifically, but not the commercial payers. But I think it continues to send the right through the payer community.
  • Ralph Giacobbe:
    Okay. Fair enough. And then just one more, if I could. As things hopefully get back to normal, can you just talk about the competitive landscape? Do you think smaller players can sort of try to get back on their feet? Or how quickly do you see a more active M&A backdrop? Thanks.
  • Dan Starck:
    Well, we see a pretty active M&A backdrop currently, and it really hasn’t slowed down that much. For us, it’s really about getting started and getting started on the right foot with a small deal to start in Q1 and pursue more here as we go through the rest – remainder of the year, really making sure that we get our muscle memory back, for lack of a better term, from doing acquisitions and doing integrations. So, I think we’ll slowly build here, but there’s pretty active M&A throughout the industry right now.
  • Ralph Giacobbe:
    Got it. Okay, thanks.
  • Operator:
    Our next question comes from Jamie Perse with Goldman Sachs.
  • Jamie Perse:
    Good afternoon, guys. Congrats on getting this first one out of the way. I wanted to start just first with guidance for the year and the cadence that looks like the first quarter you’re guiding to about minus 50 basis points to plus 1, and then that implies about 50 basis points positive to 4% for the remainder of the year. Just wondering if you could talk us through some of the key drivers that accelerate growth in the back half. I know you touched on the budget neutrality. You talked about project Simplify and that being a growth driver in the later part of the year. But just help kind of bridge the acceleration that you expect from 1Q to the remainder of the year.
  • Debra Morris:
    Jamie, you’re talking about 2021 as we look forward?
  • Jamie Perse:
    Yes, your guidance for 2021.
  • Debra Morris:
    Yes. So, if you look at our Q1, what we’re providing for Q1, we’re coming out of the gate with a strong first quarter. So, while there’s not significant seasonality in the business, typically, our Q1 is the lowest. And what we’re seeing is Q1 being strong, we expect to continue to have some of the normal seasonality. However, as we said, we haven’t taken up the full year guidance at this point in time, just as we – remaining kind of where we were when we met with you earlier as we see how COVID unfolds. So, there’s a lot of activity that could still occur. But just in our normal course, typically, Q4 is the strongest. So, we would see from Q1, just Q1, the lowest, Q2 and 3 about equal and then Q4, slightly higher. So as far as the year, that’s how we’ll unfold. There’s a lot of events that may occur that we talked about. Obviously, with the public health emergency, should that be expended – excuse me, extended, we’ve currently assumed that gets extended one more quarter through July since it’s just scheduled to end. If it gets extended further and then the delay of sequestration, those are some possible upsides that could occur, as well as obviously volume. There’s lots of activity that can happen with volume that could fluctuate between products. Does that answer your question?
  • Jamie Perse:
    Yes, that’s helpful. I’ll jump to margins just for a second, again, on guidance. Your 2021 guidance implies roughly 18% to 19% EBITDA margin, adjusted EBITDA margin. That’s a big improvement from where you were a couple of years ago. I know Project Simplify was part of that. But first question is really if you could just talk to whether there’s any onetime things in there from COVID? I know you had some moving pieces in 2020. Are there any of those occurring in 2021 that we should be thinking about that won’t repeat in the future? And then the second piece of that is, is there just any more, I guess, meat left on the bone? Or is there opportunity from here to continue expanding margins? Or is this what we should be thinking about longer term as the run rate for the business?
  • Debra Morris:
    Yes. I'll hit on the first part and then the second. So as far as our margins, yes, as you've noted, we've had significant improvement from 2019 to 2020. And as you may recall, 2020, we ended the year with an adjusted EBITDA margin of about 20.5%. And COVID, we can precisely measure certain activities around COVID as far as price, for example, and reduced costs. And then others, we estimate as far as volume impact. So, I think as we talked about during the IPO process, on a normalized kind of outside of COVID basis, we'd say we're in the mid-18% adjusted EBITDA range. So, as you look at 2021, we are – sticking with where we were, there's opportunity, as I said, for events that could drive that higher, before I get to kind of initiatives in your other part of your question. But so, there's pluses and minuses currently in 2021 in regard to COVID because we anticipated some events would go away, as I mentioned, with the public health emergency, which has continued. We've assumed the sequestration has not extended. Obviously, oxygen has been surging along with sleep re-supplier with some of the other products, including noninvasive vent has been a little bit slower in sleep. So, I wouldn't say there's any precise COVID onetime that you could take out at this point. We are currently, in our numbers, giving you where we said we'd be on a more normalized basis. And 2021 is still a bit of a – see how – see what happens with COVID over the next few weeks even of what's going to happen.
  • Jamie Perse:
    Okay. And the – go ahead.
  • Debra Morris:
    I was going to say in part two of your question, we have – as again, as you've pointed out, during periods there's expensive price pressure in the past, and we've proven that we can continue to make improvements. And we are committed to a company, an environment of continuous improvement. So, we will continue on an ongoing basis to invest in initiatives which will drive margin improvement. And that's before we talk about M&A, obviously. I'll hit on that in a second. But from a pure operational efficiency, we have been very focused on, I think I mentioned robotics and process automation. And we do focus on our order-to-cash process as well as our billing and collections rev cycle process. There is ample opportunity as good as we've done for continual improvement enhances and leveraging of current technology in those areas. We've done a tremendous amount, but I wouldn't for a second say that there's no additional opportunity for further expansion. In addition, our infrastructure, we have, as we've talked about, a very mature chassis that has one system, all orders go through and it can handle increased volume. So, we have a very scalable infrastructure capable of handling growth. So, when we look at layering on M&A, and as Dan talked about, we plan on starting a little bit slower and then speeding up that we expect to have some margin improvement naturally, given our scale.
  • Jamie Perse:
    Okay. That's good color. Just one last one for me, and then I'll jump back in the queue, but just the diabetes business that you recently launched. Just curious what you're seeing early on here if the early traction is encouraging, if there's challenges that are coming out that were unforeseen or just an update on the diabetes business and how we should think about that contributing to 2021 would be great.
  • Dan Starck:
    Yes. Jamie, this is Dan. So, we've had a – I'd say it's both encouraging, but also some challenges that go with like the launch of any business. It started pretty slow as we expected. But – what we are doing is obviously learning a lot about the patient experience, how to get patients and the friction actually that exists in either moving providers or getting patients started on CGM. So, we don't expect it to be a material impact to this year. We hadn't expected it when we provided any forward-looking information and – but we do expect to start to pick up a little speed on that business here over the course of the year.
  • Jamie Perse:
    All right. Thank you very much.
  • Dan Starck:
    You're welcome.
  • Operator:
    Our next question comes from Kevin Fischbeck with Bank of America.
  • Kevin Fischbeck:
    Great, thanks. Just want to follow up on the neutrality number, the $3 million to $4 million. Is that a nine-month number impact?
  • Debra Morris:
    Yes, Kevin.
  • Kevin Fischbeck:
    Okay. Is there any reason not to flow through $4 million to $5 million then into the out years?
  • Debra Morris:
    No.
  • Kevin Fischbeck:
    And then sequestration sounds like not in the numbers. How should we think about that if you do get that for the rest of the nine months?
  • Dan Starck:
    I think about it pretty strongly at this point, Kevin. There is actually – there was actually a notification sent out about 15 minutes before this call started that CMS was going to initiate a claims hold because they anticipate that The House will approve the Senate-approved sequestration language when they return on April 12.
  • Kevin Fischbeck:
    And so I guess, do you quantify then how much that would be? Is it just taking too on your Medicare business? Or is there any other impact the capitated rate or any other lines of business?
  • Debra Morris:
    Yes. I'd say that, again, will be in the $3 million to $4 million range for sequestration, should it go through the rest of the year. So, another nine months. We've already seen the development.
  • Kevin Fischbeck:
    Yes. Okay. That's helpful. And then I guess when we – I think in your prepared remarks, you kind of talked about the organic growth rate continuing, you think, to improve as the year goes on and build and ultimately normalize. I mean, how should we think about that? I mean, when do you guys think if that happens, is it just a matter of kind of anniversarying the last kind of tough COVID quarter? Or is that something that happens even Q4?
  • Dan Starck:
    Yes, Kevin, I think it will largely depend on how the virus ebbs and flows. And maybe I'll talk a little bit about what we've seen so far in the first quarter. What we saw was patient volumes that got impacted in January and really through February with oxygen being up significantly and the other products being impacted negatively but literally, as soon as the trajectory of the virus started trending down, the other products started trending up again. And we think we'll exit really Q1 here at not quite pre-pandemic levels but close to pre-pandemic levels. So, the volume indicators are positive. Now from a total revenue standpoint, we have to replace the census and keep the census moving forward and growing so that we start lapping the census that we had at the time last year when the impact started. But I think that my sense is that what we'll see is the organic growth rates slowly increase and whether it's Q4 of this year or early next year that we kind of return to a more normalized mid-single-digit number I expected maybe mid-single-digit number, I think we'll just build gradually towards that would be my impression.
  • Kevin Fischbeck:
    Okay. And then I guess, just based upon how Q1 is coming in a little bit stronger, I mean is the right way to think about it that if there's, I guess, some concern to be where the start of another COVID spike, if there is another COVID spike, that the impact to you guys would be actually probably outperformance in the quarter, but then it might just delay that normalization of the rest of the businesses back a quarter? Is that the right way to think about it, that actually kind of upside in the near term, but you kind of all else equal or better that things get back to normal?
  • Dan Starck:
    Yes, I think that's exactly the right way to think about it.
  • Kevin Fischbeck:
    All right. Great. Thank you.
  • Dan Starck:
    Thanks, Kevin.
  • Operator:
    Our next question comes from Chris Neamonitis with Piper Sandler.
  • Chris Neamonitis:
    Great. Thanks for all the color and congrats on nice first quarter, guys. I want to gears a bit and ask maybe about e-commerce sales. Curious about the momentum kind of in that area. How do you get patients to really engage with that offering? Are there any sort of metric we can think about as far as seeing traction there? And then just one of your manufacturers came out a couple of weeks ago with its own e-commerce offering, so I'm wondering to how you think about that in terms of your plans for Apria Direct in the longer-term?
  • DanStarck:
    Yes, Chris, that's a very good question. So as we – so last year – really back half of 2019, early 2020, we retooled both the management team, the platform and the strategy with our e-commerce business. We have been very, very heavily dependent on a lot of the sleep accessories and as COVID impacted anything to do with travel, it really took an impact on our business. So we retooled and are starting to see some of the early returns on that. A strong management team was brought in, they're executing on the strategy, and I'd say and diversifying product availability. We're seeing nice growth off of a small base so far, the first quarter of this year versus first quarter of last year. And so, we're pleased with where it's headed. From how do we get eyeballs, if you will on Apria Direct, there is really two ways we do it, one is a cross sell for anything we do from a new patient set up if there is an opportunity there. And secondarily, it's search engine optimization and SEM and SEO. So, we don't spend a tremendous amount of money on that yet at this point, we're still trying to make sure that our strategy and our performance is there, but that's really how we start thinking about the future and driving folks to the site.
  • Chris Neamonitis:
    Great. And then just one more from me on compliance. You announced the hire of a new general counsel about a month ago. Maybe give us a sense on your go-forward direction for compliance, especially post the settlement back in December. I know there was some confusion that ultimately led to that in particular, but maybe if you could share a little more to give us some comfort around the historical, call it, maybe on the misperception of kind of questionable billing practices that people might tend to associate with the industry?
  • Dan Starck:
    Yes, I think – so I don't – I mean, I can comment briefly on the settlement that, one; we're just happy, it's behind us. And really, we're not – we don't want to comment publicly, in fact, we can't. So, I think from a compliance standpoint, there is two aspects; one I would think of compliance as the historically the industry struggled with its compliance profile, if you will in – with CMS. We tend to think that it's – and not things, but we know it's improved significantly. The industry overall, as far as the number of the compliance efforts are concerned and especially when we get into the reports. The fact that medical necessity is less than 1% of the denials and literally everything above that is something to do with was the – something to do administratively. So, we feel much better as an industry and I think the companies that are driving it are doing a great job. If you look at Apria’s track record historically, it's very strong and compliance, we take it very seriously. Our new general counsel brings very good compliance background and I think he'll do nothing but help drive a compliance culture even more than we have today.
  • Chris Neamonitis:
    That's right. Thanks again, guys.
  • Dan Starck:
    Thanks, Chris.
  • Operator:
    I'm showing no further questions in queue at this time. I'd like to turn the call back to Dan Starck for closing remarks.
  • Dan Starck:
    Great, thanks operator. And thank you everybody. We certainly appreciate everybody joining the call. And I'd just like to wrap up one more time with a big thank you to all of the Apria teammates. It takes 6,500 of us to get the job done every day, and they've done one heck of a job and I couldn't be more proud of them. And I can't wait for 2021 and future years here. It's an exciting opportunity and exciting time to be in our space. So thank you everybody. And we'll talk to you again soon.
  • Operator:
    Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect.

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