Apria, Inc. (APR) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon, and welcome to Apria's First Quarter 2021 Earnings Conference Call and Webcast. . Please note that 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 we will be making 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. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements can be found in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2020, and its other filings with the Securities and Exchange Commission. Additional information will also be set forth in Apria's quarterly report on Form 10-Q for the period ended March 31, 2021, which is expected to be filed later today. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance.
Dan Starck: Thank you, operator. Welcome, and thank you all for joining us this afternoon to discuss our first quarter 2021 earnings results. I'm joined today by Debby Morris, our Chief Financial Officer. I'll begin my remarks with some high-level comments on our results from the quarter and context around our activities, and Debby will provide a more detailed review of the financials later on the call. We built on our momentum coming out of 2020, delivering a strong quarter, ahead of our expectations on all 3 of our key metrics. Our first quarter revenue grew to $275.3 million, a 2% increase over Q1 2020. Adjusted EBITDA grew to $48.3 million, a 15% increase over Q1 2020. And adjusted EBITDA less patient equipment CapEx grew to $24.7 million, a 41% increase over Q1 2020. We have built a very solid foundation on which to grow this company and manage through these unprecedented times. I believe this promising start to the year is reflective of that position. I'll spend the bulk of my time today sharing some updates on our continued pursuit of the priorities that I outlined in our first call as a public company; execution, leveraging technology to drive operating efficiencies, and growth, both organic and through M&A. Starting with our priorities for the year, I'll begin with execution. As we all remember, the country faced a massive surge of COVID cases from the holiday season through mid-February. As a result of the surge, in January, our new patient starts per day on oxygen were the highest single month total on record. And while the virus prevalence began to dissipate to some extent in the back half of February, we again had historically high new patient starts on oxygen. In meeting the incredible challenge posed by those increased levels, the entire Apria team pulled together to work night and day to meet the needs of our referral customers and our new respiratory patients across the U.S. Throughout this pandemic, Apria and the industry have served as the pressure relief valve for hospitals by getting people home to free up beds for the most severe cases, and we continue to serve in that critical role during Q1. Further, during the quarter, we leveraged our national infrastructure to move assets and people around the country according to need. We have now lapped Project Simplify, and we continue to realize the benefits as evidenced in our Q1 2021 results. Despite the dampening effect of the spike early in the year on our non-oxygen products, we are encouraged by the new patient volume trends that we saw towards the very end of the first quarter. We saw increases in our non-oxygen business lines that had been impacted previously, and we exited March 2021 with incoming volumes nearly back at pre-pandemic levels.
Debby Morris: Thank you, Dan, and thank you to everyone who joined the call today. To echo Dan, we delivered a solid start to the year.Net revenue, adjusted EBITDA, and adjusted EBITDA less patient equipment CapEx for the quarter were all up year-over-year. Net revenue of $275.3 million, increased 2% year-over-year, largely due to growth in oxygen and sleep supply, offset in part by the negative impact of COVID on some of our other therapies. Net revenue came in above the high end of the range as we saw a stronger than projected quarter end, including the return of new sleep equipment patients as well as some rebuild of noninvasive ventilation census. The rebuild in noninvasive ventilation census stemmed from new patients coming on service as well as the stabilization of the patients on service as we work through beginning of the year, processing of patients who changed insurance coverage. As you may have already seen, we've included a product level revenue table in our earnings release to provide further clarity into the breakdown of the revenue contribution in the quarter and how that compares on a year-over-year basis. During the quarter, gross margin contracted slightly year-over-year to 68.4%, primarily as a result of the increase in sleep supplies, coupled with higher depreciation costs associated with the increase in oxygen therapy, and lastly, an increase in reserves for non-recoverable patient equipment.
Operator: . Our first question comes Kevin Fischbeck with Bank of America.
Joanna Gajuk: This is actually Joanna Gajuk filling in for Kevin today. So thanks for taking the question. So first, just to make sure I get it right in terms of the guidance rate. So you mentioned you're only weighted for Q1 outperformance versus your guidance, right? So that's about almost $2 million at the midpoint and then the sequestration release. So last time you talked about $3 million to $4 million for the sequestration relief right through the end of the year. So is it still the number you're thinking about for that benefit?
Debby Morris: Yes, Joanna. That's correct.
Joanna Gajuk: So that would bring us to more like, I guess, $5.5 million of guidance raise? And then would I get it correctly that you're not including anything incremental for the extension of the PAG.
Debby Morris: So both -- to answer both your questions. In regard to the PAG that we already had assumed that would be effective through July of this year. So that did not change our guidance point. As far as the -- your math, it's correct. So the other component that's just the $1 million, relatively small number is, as I said, the offset to those 2 effects as we see the impact of COVID and the delay in the census build, we expect some volatility still and some delay in that revenue and earnings build. So that's why it's just slightly offset from the increase over Q1.
Joanna Gajuk: And then you mentioned also something about increased cost, so wasn't quite sure what you're referring to?
Debby Morris: Well, what I had said is we are anticipating, as volume grows, that we'll have an increase in cost, that we have anticipated. We're also keeping our eye on as the macroeconomic we're hearing about materials costs and such. And we have not seen a significant increase in either labor costs or materials costs, but obviously, just keeping an eye on that.
Joanna Gajuk: So you're pretty much just including some conservatism in the number for those reasons?
Debby Morris: Yes.
Joanna Gajuk: And my other question was the wound therapy business, the revenue, so it's very good. I guess it's very helpful that you provided the segment revenues in the press release. So the wound therapy revenue rate declined slightly year-over-year. So you're pretty much saying that things kind of are slower to rebuild. Is that the way to think about that?
Debby Morris: Yes. In Q1, we still saw, because of the surge of COVID, there's still an impact on negative pressure wound therapy with the increase. We do expect, when you look at full year guidance that we will see some increase as patients return to surgical procedures and such.
Joanna Gajuk: And also on the segments, right, I know that you're deemphasizing the other business, the other equipment revenues or business. And those revenues were down still a lot, 9% year-over-year, right, and actually came in below how we were expecting it. So is this a similar dynamic? Or are you kind of exiting more parts of that business?
Debby Morris: No. We're not exiting anything else in other equipment and services, but we have seen a further deterioration of the census because there is a large part of rental census in the other equipment. So that too has been impacted by the COVID surge. So while we had products that were up, mainly oxygen and sleep resupply, other equipment and services also has been negatively impacted, including the census. So we expect to see that start to rebuild again as some of the volatility diminishes. And we have not -- we're not exiting any other services in there.
Joanna Gajuk: And I guess that's what you were talking about before and just to close that loop. So as you expect these businesses that were impacted negatively kind of returning to normal over time. And since it's rebuilding then, I guess, the expectation is that the oxygen business is going to kind of normalize, meaning the decline from the peak numbers that you've seen so far, right?
Debby Morris: We'll see some slower growth rate in home respiratory therapy as oxygen slows and noninvasive event picks up. We'll see increase in the OSA treatment, increase in negative pressure wound therapy, and increase in other, albeit not likely this year as high as the other products.
Joanna Gajuk: But on that front, I guess, would you say that there's -- on the respiratory demand, is there any indication that you actually -- these patients actually might stay longer with you, they were kind of turning to chronic patients? Or are they pretty much kind of stop using it at some point, and that's why you expect normalization?
Debby Morris: Well, we have some increase with acute patients, acute COVID patients, and those are the patients that we expect to ultimately come off service. And there are still COVID patients. We still do have some of the volatility across the nation. So we do expect the acute patients to come down. We do -- we have seen some rise, expect, we may continue in COPD patients just with the higher awareness of the disease and the importance of respiratory health.
Operator: Our next question comes from Ralph Giacobbe with Citi.
Ralph Giacobbe: I hate, if you guys can -- but hoping you could talk more about the rebuild and the air pocket. I'm not sure I'm exactly following. And I guess part of it was Dan's commentary of sort of encouraging patient volume trends. So obviously there's a lot of effect and maybe it's sort of a specific segment that I'm not getting, but just help us sort of tie those 2 together.
Dan Starck: Yes. Sure, Ralph. This is Dan, and I'll let Debby pick up after I finish. But one of the things we're uncertain about is the duration on length of stay for the COVID patients. And we had a significant amount of COVID patients that came on service and they have a much -- we're expecting to have a much shorter length of stay than our normal COPD population. So -- and then we're offset by the delay in kind of growth of replenishing the census on the other therapies. So what we saw coming out of March was basically back to pre-pandemic on a new patient start basis for the other therapies, but the census had essentially had a setback because of basically 10 months of lower starts and new patient starts. So we're not quite sure how the transition of the COVID patients off of oxygen, if that will outpace essentially the growth in the census and the other products in order to make sure that the revenue continues to accelerate. Does that make sense at all? What I'm trying to paint there.
Ralph Giacobbe: That's helpful. And then I did want to ask also about the OSA business because that actually did a lot better than we had and especially when considering the still heightened COVID period. Anything there to call out in terms of being able to tell if some of that was deferring, coming back, or anything on what drove that stream?
Dan Starck: Yes. I think -- so two things. One, all of last year, really, we saw an increased demand from a sleep supply, resupply business, and that performed very well in the first quarter. And then really through kind of March and towards the very end of March, really, we've seen the return of pretty significant volumes from a new patient start standpoint and essentially exited March specific to new patient starts on CPAP right at where we were in Q1 of 2020. So that was a pleasant surprise with how quickly it kind of snapped back after the virus prevalence started declining in late February -- mid to late February. That came back pretty quickly.
Ralph Giacobbe: And then last one for me. Debby, I think I heard you say some increase in reserves. I wasn't following exactly what that related to. If you could just give us some details there.
Debby Morris: Yes, Ralph, that related to gross margin comment, the slight contraction in Q1. So we had increase in reserve for lost equipment. I would say it's partially attributable to some of the craziness, for lack of a better word, but with all the volatility last year, an increase in certain equipment and then difficulty in certain cases, getting into patients' homes as we looked at reserves, we increased those reserves for lost equipment. And it's not something that I would expect to repeat, but there was some impact of, call it, 40, 50 basis points in Q1.
Ralph Giacobbe: Sorry, 40 to 50 basis points to the gross margin?
Debby Morris: Gross margin, yes.
Ralph Giacobbe: And that's not going to repeat, so that's sort of a, let's call it, a one-timer?
Debby Morris: Correct.
Dan Starck: Yes. Ralph, maybe to add just a little color. In our -- in the normal course of business, when there's not a pandemic, we have a great opportunity when we instruct patients about how to contact us, where to find us, when to contact us, when they need it picked up. And through the COVID period, there was -- we don't always have patient contact upfront as direct as we normally do. So we took just a conservative view there that Debby alluded to for the course of the past year from an equipment reserve standpoint.
Operator: Our next question comes from Chris Neamonitis with Piper Sandler.
Chris Neamonitis: Congrats on a strong quarter. I just want to touch on some of the margin improvement on the quarter. I just wanted to square in on really what's been driving that. Has it been primarily like a product mix thing? Are you guys getting outsized benefits from Simplify or your continued focus on RPA or maybe it's a little bit of COVID benefit related. So just maybe any color around that and the expectations for the year would be great. It looks like the midpoint of your updated guidance implies about a 20 basis points lift for the year versus prior?
Debby Morris: Yes, Chris, I think some of that is -- you've hit on some of them, right? The continuing, and Dan hit on in his opening remarks, the continuing benefit of Simplify, which continues to be difficult to precisely carve out. But we see continued favorability in our costs. In addition to that, we continue to benefit from, whether you call it Simplify or other, being able to manage our variable costs. So while volume returns or has it returned in certain cases, we can continue to manage to keep costs down. And so to the extent they're not coming up in advance of the revenue build. And if you look at, yes, go ahead.
Chris Neamonitis: No, go ahead, you can finish your thought.
Debby Morris: I think that those are like the two primary areas that I would point out.
Chris Neamonitis: And then just on the sleep new start, are you still getting the benefit of at-home testing? I'm kind of thinking like would it be fair to attribute the stronger new starts as kind of getting a lift from maybe more at-home testing and in combination with some of the traditional sleep labs that are likely opening back up?
Dan Starck: Yes. I think that's a really good observation. Yes, basically, home sleep testing kept the industry afloat for a period of time last year. And then with the labs beginning to reopen and trying to get back capacity, get back to 100% capacity as well as the addition of home sleep test, there is an opportunity to open the top of the funnel, if you will, around the diagnosis of new sleep patients.
Chris Neamonitis: And then last one for me. Just kind of another interesting call out on telehealth in your prepared remarks. But can you just remind us again what the biggest benefit has been and really what processes it's really been replacing or maybe enhancing in your operations?
Dan Starck: Yes. From our perspective, what it really does is drive efficiencies and the ability for our teams to be able to talk and actually see a patient and/or what's happening in order to avoid going to the home. And that really, historically, in this industry, everything was done that, you get a call, you go to the home. COVID drove and forced not going to the home, so we could learn to use telehealth and we use it for instruction. We use it for diagnosing of patient equipment problems, which makes them going to the home physically really the last resort, if it can be solved that way. So it's driven just a tremendous amount of efficiency within our organization. And really the -- what it really does, also not just , but it really opens access because an individual that whether respiratory therapist, someone diagnosing an issue, they can look, touch, and feel many more things going on every day than if they're moving around the city to try to do so. So we think telehealth is beneficial. The patients -- most of the patients enjoy it, and they don't all enjoy it, but some still want the personal interaction, but it's been a very high uptake on it, and we certainly think it will be, again, a normal means of access in the future.
Operator: Our next question comes from Jamie Perse with Goldman Sachs.
Jamie Perse: I wanted to just -- as we get towards the end of COVID potentially here, just go back to the impacts you actually experienced from COVID, both positive and negative. I know you've spoken to these qualitatively a lot on this call. But wondering if you can put some numbers to them. I know there're some positives in oxygen and sleep supplies. To the extent you can quantify that, that would be great and the negatives on NIV and new sleep patients, just so we can get a sense of how you're thinking about where you might have been ex-COVID and where we should think about being this trending as we get on the other side of this?
Debby Morris: Sure, Jamie. As we've consistently said, it's difficult to precisely measure. But we do -- we've worked very hard on trying to measure. So I would say kind of summing up what do I think the impact was for Q1. From a revenue perspective, it's essentially no impact, strangely enough, because the rate increases in PAG are offset by the reduction in volume from some of the other therapies. So if I really look at revenue, it neutralizes between those 2. When we get down to adjusted EBITDA, there is some flow-through because their price flows through at a certain full rate versus the reduction in volume, we get not the full drag on volume, hits the bottom line because we're managing cost. So I'd say, it's between $1 million to $2 million for Q1, that's an estimate, but it's really an estimate. But that's roughly from an adjusted EBITDA and adjusted EBITDA less CapEx perspective, it's in that range.
Jamie Perse: And then on respiratory, you talked about some of the benefit from COVID patients and those might having a lower period of time that they're on your census for. Can you give us a sense, what percent of your census is tied up with these more recent COVID patients? And how you're thinking about that potentially rolling off?
Debby Morris: It's relatively -- it's very small. Our patient census is pretty significant. So the volume of COVID patients in the overall census is not a material percentage.
Jamie Perse: But it would still potentially be a noticeable headwind to the extent that rolls off or it wouldn't be material?
Debby Morris: Yes, some has built up and now those patients will come off census. So yes, we will see a reduction over time because there's a cumulative effect, reduction of those patients while noninvasive event increases. I don't know off hand of the COVID patients, but I think it's less than 5%. I can follow up with you on that.
Jamie Perse: And then, Dan, maybe one for you, just the high level. I wanted to ask about your capitated business and relationship with Kaiser. I know that's the big part of the business, and it's a longstanding relationship. I just wanted to get an update from you on what the latest agreement looks like? What's driving growth? And then Debby, if you can chime in with any commentary on how the margin profile of that business compares to the fee-for-service business.
Dan Starck: Yes. So I think just from a broad relationship standpoint, we are -- continue to be in a negotiation position with Kaiser. All signs are that things are moving towards a very mutually beneficial agreement moving forward, and we hope to update everybody on one of these calls that it's done. But I'd say we're making substantial progress and I think a good outcome will be in the near future here. So very pleased with having been Kaiser's partner for 20-plus years, and we expect that to go on for a few more years, so through the renegotiation. From -- interestingly enough, just maybe a little color, Jamie, around COVID and Kaiser. The 2 companies made extreme modifications to the way that we interacted. Even though 20-plus years, we've had very close relationship of working together. Kaiser and Apria really did just an outstanding job, and I give all the credit to our folks in the field of thinking of ways to make sure that they helped Kaiser specifically in the overwhelming volume that they were seeing really in the Los Angeles area, the Orange County area, and the San Francisco Bay Area during January and February, just a phenomenal job between the 2 organizations.
Debby Morris: And Jamie, from a margin -- I was going to comment to your margin question. Margin from a payer perspective or otherwise, I would just say, it's a very important relationship for us. It is a different profile because there's certain administrative burden, right, because it's paid on a per member per month amount. So there's not some of the authorization and such requirements and a number of different aspects. But other than that, I can't comment further.
Jamie Perse: And Dan, I just wanted to follow up on some of your comments. I mean, that sounded pretty promising that you gave on the agreement with Kaiser. How should we think about the range of outcomes? I mean, could that relationship be expanded? Are you thinking about additional partners for capitated business, the way healthcare is going these days? Just any additional thoughts on how that could impact the business once you reach an agreement?
Dan Starck: Well, I don't -- I think the successor agreement will be very similar in nature to where we are today around products and services initially. We would love to explore, and it's really up to us and Kaiser to think about that for the future. But I think the job at hand right now is to make sure that we gain the successor agreement with the current situation. And we'd love to expand and have expanded over the years with them. So I think it's getting the -- like I said, getting the successor agreement done, mutually beneficial for both and then look at potential other opportunities.
Operator: That concludes today's question-and-answer session. I'd like to turn the call back to Dan Starck for closing remarks.
Dan Starck: Great. Well, I appreciate that. And thank you, everyone, again, for joining us this afternoon. We appreciate both your time and your interest in Apria, and we certainly are proud of the first quarter. We're absolutely proud of our team and what they've delivered, and we certainly look forward to speaking with everybody in the future. So thank you, everybody. Take care.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
