Q1 2024 Owens & Minor Inc Earnings Call

Good day, and thank you for standing by welcome to the Owens <unk> minor first quarter 'twenty 'twenty four earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If he would like to ask a question during that time. Please press.

Operator: Good day, and thank you for standing by. Welcome to the Owens and Minor First Quarter 2024 EARNINGS CONFERENCE CALL. All lines have been placed on mute to prevent any background noise.

Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, please press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star and number one again. Thank you. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker for today, Jackie Marcus. Please go ahead.

Sorry, followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press star and number one again. Thank you. Please.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker for today Jackie Marcus.

Jacqueline Marcus: She relations. Please go ahead.

Jacqueline Marcus: Thank you, Operator. Hello, everyone, and welcome to the Owens & Minor First Quarter 2024 Earnings Call. Our comments on the call will be focused on the financial results for the first quarter of 2024, as well as our outlook for 2024, both of which are included in today's press release. The press release, along with the supplemental slides, is posted in the Investor Relations section of our website. Please note that during this call, we will make forward-looking statements.

Jacqueline Marcus: Thank you operator, Hello, everyone and welcome to the Owens <unk> minor first quarter 2024 earnings call or comments on the call will be focused on the financial results for the first quarter of 2024 as well as our outlook for 2024, both of which are included in today's press release.

Jacqueline Marcus: The press release, along with the supplemental slides are posted on the Investor Relations section of our website.

Jacqueline Marcus: 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 could cause actual results to differ materially from those projected or implied here today. Please.

Jacqueline Marcus: The matters addressed in these statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or applied here today. Please refer to our SEC filings for a full description of these risks and uncertainties, including the risk factors section of our annual report on Form 10-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 is included in our press release. Today I'm joined by Ed Pesicka, President and Chief Executive Officer, and Alex Bruni, Executive Vice President and Chief Financial Officer. I will now turn the call over to Ed.

Please refer to our SEC filings for a full description of these risks and uncertainties, including the risk factors section of our annual report on Form 10-K, and quarterly reports on Form 10-Q.

Jacqueline Marcus: 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.

Speaker Change: Today, I'm joined by <unk>, President and Chief Executive Officer, and Alex Bruni, Executive Vice President and Chief Financial Officer.

Speaker Change: Now I'll turn the call over to Ed.

Speaker Change: Okay.

Ed: Thank you Jackie and good morning, everyone and thank you for joining us on the call today.

Edward A. Pesicka: Thank you, Jackie. Good morning, everyone, and thank you for joining us on the call today. As I reflect on Q1, I am both pleased with our financial performance and encouraged by the continued progress we've made with our evolving operating model for the first 12 weeks of 2024. In addition, we were able to make investments related to our long-term strategic plan we introduced in December of 2022. And these investments are ahead of schedule. We are also making operational investments to bring higher levels of service to our customers, and ultimately, the patients served.

Ed: As I reflect on Q1 I'm, both pleased with our financial performance and encouraged by the continued progress we've made with our evolving operating model through the first 12 weeks of 2024.

Ed: In addition, we were able to make investments related to our long term strategic plan, we introduced in December 2023.

Ed: And these investments are ahead of schedule.

We are also making operational investments to bring higher levels of service to our customers and ultimately the patients sure.

Edward A. Pesicka: Finally, in Q1, we onboarded new customers in our medical distribution division, navigated the seasonality of our patient direct segments, and overall met our internal expectations. While Alex will do a deeper dive into our financial performance and expectations for the remainder of 2024, let me review a few of our financial and operational achievements from the first quarter. First, our products and healthcare services segment posted a 3% year-over-year improvement in revenue, with our Medical Distribution Division delivering mid-single-digit growth as a result of the onboarding of new customers, in addition to attractive same-store sales.

Ed: Finally in Q1, we on boarded new customers in our medical distribution division navigated the seasonality of our patient direct segments and overall met our internal expectations.

While Alex will do a deeper dive into our financial performance and expectations for the remainder of 2024.

Alexander J. Bruni: Let me review a few of our financial and operational achievements from the first quarter.

Alexander J. Bruni: First our products in health care services segment posted a 3% year over year improvement in revenue.

Alexander J. Bruni: With our medical distribution division delivering mid single digit growth as a result of the Onboarding of new customers. In addition to attractive same store sales.

Edward A. Pesicka: In our Global Products Division, we saw growth in our U.S. proprietary product sales driven by improving in-channel sales as a result of enhanced focus and new product launches. Overall, I'm pleased to see the flattening of the curve of our product sales, with unit volumes continuing to increase as prices continue to settle back to pre-COVID levels. Our Patient Direct segment had a 5% year-over-year improvement in revenue. We anticipated first quarter growth to be in the mid single digits as a result of very strong growth in Q1 of 2023, along with the adjustments to sales territories, as we invested in additional commercial resources consistent with our long-term strategic plan. Additionally, we were not immune from the impact of the cyber incident at Change Health in late February, which did have some marginal top-line impact on our business.

Alexander J. Bruni: And our global products Division, we saw growth in our U S proprietary product sales driven by improving in channel sales as a result of enhanced focus and new product launches overall I'm pleased to see the flattening of the curve of our product sales with unit volumes continue to increase as prices continue to settle back to pre COVID-19 level.

Alexander J. Bruni: Yes.

Alexander J. Bruni: Our patient direct segment posted a 5% year over year improvement in revenue.

Alexander J. Bruni: We anticipated the first quarter growth to be in the mid single digits. As a result of very strong growth in Q1 of 2023, along with the adjustments to sales territories as we invested in additional commercial resources consistent with our long term strategic plan.

Alexander J. Bruni: Additionally, we were not immune from the impact of the cyber incident, a change health in late February.

Alexander J. Bruni: Which did have some marginal top line impact to our business. However, we are currently working with change to ensure we capture the associated revenue and received full payment for all services and products render.

Edward A. Pesicka: However, we are currently working with Change to ensure we capture the associated revenue and receive full payment for all services and products rendered. And I'm also very proud of our responsiveness to this issue to mitigate the impact on our company. More importantly, I'm even more pleased with our ability to successfully limit the potential disruption of our customers' ability to receive life-saving products and supplies they need every day. At Owens & Minor, we believe life takes care of itself, and we felt it was our responsibility, regardless of the obstacles, to continue to process orders and make the essential deliveries as quickly and efficiently as possible to provide continuity of care when it matters most.

Alexander J. Bruni: And I'm also very proud of our responsiveness to their tissue to mitigate the impact to our company.

Alexander J. Bruni: More importantly, I'm, even more pleased with our ability to successfully limit the potential disruption of our customers' ability to receive a lifesaving products and supplies they need every day.

Alexander J. Bruni: At Owens <unk> minor, we believe light takes care and we felt it was our responsibility regardless of the obstacles to continue to process orders and make the essential deliveries as quickly and efficiently as possibly to provide continuity of care when it matters most.

Edward A. Pesicka: Turning back to our broader business, we enter the next phase of our operating model realignment at the beginning of the year, with an emphasis on identifying and capturing meaningful growth and profitability in our patient-directed sector. This added focus in 2024 will enable us to make assessments and take actions related to improving our already well-run patient-directed sector. We are utilizing the operating model realignment to implement transformational opportunities to improve our business reimbursement and collection model and to gain efficiencies and grow profitability in areas such as our sleep supply customers.

Turning back to our broader business. We entered the next phase of our operating model realignment at the beginning of the year with an emphasis on identifying and capturing meaningful growth and profitability in our patient direct segments.

Alexander J. Bruni: This added focus in 'twenty 'twenty, four will enable us to make assessments and take actions related to improving our already well run patient direct segment we.

Alexander J. Bruni: We are utilizing the operating model realignment to implement transformational opportunities to improve our business reimbursement and collection model and to gain efficiencies and grow profitability in areas such as our sleep supply customers.

Edward A. Pesicka: At the same time, in our product and healthcare services segment, we have embedded past initiatives into our daily activity while continuing to bring recently identified opportunities to fruition. Our segment leaders and I remain keenly focused on network rationalization and operational excellence, everything from optimizing our manufacturing footprint to our supply chain network.

At the same time, and our product and health care services segment, we have embedded past initiatives into our daily activity, while continuing to bring recently identified opportunities to fruition.

Alexander J. Bruni: Our segment leaders and I remain keenly focused on our network rationalization and operational excellence.

Alexander J. Bruni: Everything from optimizing our manufacturing footprint to our supply chain network.

Edward A. Pesicka: Throughout the company, these activities have taken meaningful investment and will continue to do so for the remainder of the year, but we believe they will result in greater profitable growth for years to come. Lastly, I'm encouraged by our year-over-year adjusted earnings improvement and many of our other key indicators. These improvements show continued positive momentum, and we're in line with our expectations. Alex will discuss these financials in greater detail shortly.

Alexander J. Bruni: Throughout the company. These activities have taken meaningful investments and we'll continue to do so for the remainder of the year.

Alexander J. Bruni: But we believe they will result in greater profitable growth for years to come.

Alexander J. Bruni: Lastly, I'm encouraged by our year over year adjusted earnings improvement and many of our other key indicators. These improvements show the continued positive momentum and were in line with our expectations.

Alex will discuss these financials in greater detail shortly.

Alexander J. Bruni: Our recent success demonstrates that we are on the right path and that our strategy is working.

Edward A. Pesicka: Our recent success demonstrates that we are on the right path and that our strategy is working. We all know there will be obstacles in the future, and we believe that our focus on constantly improving the business will assist us in mitigating many of these obstacles, even those that we can't see today. We will remain focused on our long-term strategy and our future as an organization built on excellence. At our Investor Day in December of 2023, we outlined our five-year strategic plan, our vision for 2028, which is pillared by three key tenets.

Alexander J. Bruni: We all know there will be obstacles in the future and we believe that our focus to constantly improve the business will assist us in mitigating many of these obstacles even those that we can't see today.

Alexander J. Bruni: We will remain focused on our long term strategy and our future as an organization built on excellence.

Alexander J. Bruni: At our Investor Day in December of 2023, we outlined the five year strategic plan, our vision for 2028, which is pillared by three key tenants accelerating growth.

Edward A. Pesicka: Accelerating growth, optimizing our business to drive long-term profitability, and investing in our business. While we are in the early innings, we are doing exactly what we said we would, and we are seeing results. I would now like to turn the call over to our Chief Financial Officer, Alex Bruni, to discuss our first quarter financial performance in more detail.

Alexander J. Bruni: Optimizing our business to drive long term profitability.

Alexander J. Bruni: And investing in our business.

Alexander J. Bruni: While we are in the early innings, we are doing exactly what we said we would and we are seeing the results.

Alexander J. Bruni: I would now like to turn the call over to our Chief Financial Officer, Alex Bruni to discuss our first quarter financial performance in more detail Alex.

Alexander J. Bruni: Thank you, Ed. Good morning, everyone.

Alexander J. Bruni: Thank you Ed good morning, everyone I'll begin by providing an overview of our financial results and the primary factors that drove our performance in the first quarter of 2024, our revenue for the quarter was $2 6 billion up.

Alexander J. Bruni: I'll begin by providing an overview of our financial results and the primary factors that drove our performance in the first quarter of 2024. Our revenue for the quarter was $2.6 billion, up 4% compared to the prior year. We generated top-line growth in both of our business segments on a year-over-year basis. Products and healthcare services grew 3%, with medical distribution growth in the mid-single digits, and in our global products division, we saw growth in our U.S. proprietary product sales. Patient Direct Revenue was up 5%, which was partially impacted by the changed healthcare cyberism that slowed our ability to onboard new patients and renew eligibility for existing patients.

Alexander J. Bruni: Up 4% compared to the prior year, we generated top line growth in both of our business segments on a year over year basis.

Alexander J. Bruni: Products and health care services grew 3% with medical distribution growth in the mid single digits and in our global products Division, we saw growth in our U S proprietary product sales.

Alexander J. Bruni: Patient direct revenue was up 5%, which was partially impacted by the change healthcare cyber incident.

Alexander J. Bruni: Our ability to onboard new patients and renew eligibility for existing patients gross profit in the first quarter was $536 million or 25% of revenue compared to $497 million or 19, 7% of revenue in the first quarter of 2023.

Alexander J. Bruni: Gross profit in the first quarter was $536 million, or 20.5% of revenue, compared to $497 million, or 19.7% of revenue, in the first quarter of 2020. Our gross margin expansion of 79 basis points can be attributed to three things. First, the profitability expansion in the products and health care services segment driven by efficiency gains and the successful efforts of the operating model realignment program. Second, improved collections of patient direct sales.

Alexander J. Bruni: Our gross margin expansion of 79 basis points can be attributed to three things.

Alexander J. Bruni: And third, patient direct sales growth, which carries a higher gross margin than products in healthcare services. Our distribution, selling, and administrative expenses for the quarter were $478 million, making up 18% of revenue. The $29 million dollar year-over-year increase reflects higher variable expenses to support the growth in both segments, an increase in our teammate benefits, and our decision to make incremental investments throughout the company for future profitable growth. Gap operating income for the quarter was $10 million, and adjusted operating income was $57 million.

Alexander J. Bruni: First the profitability expansion and the products and health care services segment.

Alexander J. Bruni: Driven by efficiency gains and the successful efforts of the operating model realignment program.

Alexander J. Bruni: Second improved collections of patient direct sales and third patient direct sales growth, which carries a higher gross margin than products and health care services.

Alexander J. Bruni: Our distribution selling and administrative expenses for the quarter were $478 million.

Alexander J. Bruni: Up 18% of revenue.

The $29 million year over year increase reflects higher variable expenses to support the growth in both segments, an increase in our teammate benefits and our decision to make incremental investments throughout the company for future profitable growth.

Alexander J. Bruni: GAAP operating income for the quarter was $10 million and adjusted operating income was $57 million adjusted operating income was up more than 20% year over year and was driven by the overall improvements in the products and health care services segment.

Alexander J. Bruni: Adjusted operating income was up more than 20% year-over-year and was driven by the overall improvements in the products and healthcare services segment. The patient direct segment was impacted by expected investments in its future growth, regulatory reimbursement changes, and to a lesser extent, the changed healthcare cyber incentives. Adjusted EBITDA was $116 million, up $8 million versus the first quarter of 2020. Interest expense for the first quarter was $36 million, a 16% decrease from the first quarter of last year, reflecting our prior work to reduce our total debt in 2023.

Alexander J. Bruni: The patient direct segment was impacted by expected investments in its future growth regulatory reimbursement changes and to a lesser extent the change healthcare cyber incident.

Alexander J. Bruni: Adjusted EBITDA was $116 million up $8 million.

Alexander J. Bruni: Versus the first quarter of 2023.

Alexander J. Bruni: Interest expense for the first quarter was $36 million, a 16% decrease from the first quarter of last year.

Alexander J. Bruni: Reflecting our prior work to reduce our total debt in 2023.

Alexander J. Bruni: Our gap effective tax rate was 19%, and the adjusted effective tax rate was 29%. Our gap net loss for the quarter was $22 million, or a loss of $0.29 per common share. Adjusted net income for the quarter amounted to $15 million, or $0.19 per common share. The significant increase in adjusted net income was driven by the factors mentioned above. Moving to our capital structure and considering the investments we continue to make, as Ed outlined, Cash Flow Generation, and the Change in Debt Levels Reflected Investments Across the Company Specially in inventory to support medical distribution, customer onboarding, and to maintain high quality service levels.

Alexander J. Bruni: Our GAAP effective tax rate was 19%.

Alexander J. Bruni: And the adjusted effective tax rate was 29%.

Alexander J. Bruni: Our GAAP net loss for the quarter was $22 million or a loss of 29 per common share.

Alexander J. Bruni: Adjusted net income for the quarter amounted to $15 million or <unk> 19 per common share.

The significant increase in adjusted net income was driven by the factors mentioned above.

Alexander J. Bruni: Shifting to our capital structure and considering the investments we continue to make as Ed outlined cash flow generation and the change in debt levels reflective of investments across the company, especially.

Alexander J. Bruni: Inventory to support medical distribution customer on boardings and to maintain high quality service levels.

Alexander J. Bruni: As of March 31st, our total debt was $2.2 billion, and net debt was $1.9 billion, up about 3% from last year's average. Through the remainder of 2024, we expect minimal net debt reduction as we make investments to drive long-term profitable growth. We remain committed to delivering our 2024 guidance. As a reminder, we expect revenue to be in the range of $10.5 billion to $10.9 billion. Adjusted EBITDA is expected to be in the range of $550 million to $590 million, and adjusted EPS is expected to be in the range of $1.40 to $1.70.

Alexander J. Bruni: As of March 31, our total debt was $2 2 billion.

Alexander J. Bruni: Net debt was $1 9 billion.

Alexander J. Bruni: Up about 3% from last year end.

Alexander J. Bruni: Through the remainder of 2024, we expect minimal net debt reduction as we make investments to drive long term profitable growth.

Alexander J. Bruni: We remain committed to delivering our 2020 for guidance.

Alexander J. Bruni: As a reminder, we expect revenue to be in the range of $10 $5 billion to $10 9 billion.

Alexander J. Bruni: Adjusted EBITDA to be in the range of $550 million to $590 million and adjusted EPS to be in the range of $1 40 to $1 70.

Alexander J. Bruni: Also, as a reminder, we expect seasonality to lead to a roughly one-third, two-thirds split across the first and second halves of the year from the adjusted EPS perspective, and we'd expect to deliver improvement in each sequential quarter. With that, I'll turn the call over to the operator for the Q&A part of the call. Operator?

Alexander J. Bruni: Also as a reminder, we expect seasonality to lead to a roughly one third two third split.

Alexander J. Bruni: Across the first and second halves of the year from an adjusted EPS perspective, and we'd expect to deliver improvement in each sequential quarter.

Speaker Change: With that I'll turn the call over to the operator for the Q&A part of the call operator.

Thank you we are now opening the floor for a question and answer session. If you'd like to ask a question. Please press star and number one on your telephone keypad.

Operator: Thank you. We are now opening the floor to questions and answers. If you'd like to ask a question, please press star and number one on your telephone keypad. Our first question comes from Michael Cherny from Lyrinc Partners. Your line is now open.

Speaker Change: Our first question comes from Michael Cherny.

Operator: <unk> partners. Your line is now open.

Michael Aaron Cherny: Good morning, and thanks, so much for taking the question.

Michael Aaron Cherny: Good morning, and thanks so much for taking the question. Maybe if I could jump in first on patient direct, the dynamics of the quarter, you talked about the change outage, not a surprise to anyone. Can you give a little bit more color on some of the magnitude of that change outage and what you're seeing already in terms of visibility into improved payment rates and improved flows? Sure.

Michael Aaron Cherny: Maybe if I can jump in first on patient direct the dynamics in the quarter.

Michael Aaron Cherny: You talked about.

Michael Aaron Cherny: Change outage not a surprise to anyone can you give a little bit more color on some of the magnitude of that change outage and what you're seeing already in terms of visibility into improved payment rates and improved flows.

Edward A. Pesicka: Sure, yeah. Mike, thanks for the question. Hey, on Unchanged Health, I mean, first of all, I think you've got to recognize what Q1 is. Q1 is, for PatientDirect, probably the most complicated, labor-intensive quarter of the year, as so many patients are changing insurance or payers. They're adjusting, so there's a lot of work associated with that. It had really, I would say, a minimal impact on the top line, but it did have an impact on our collection. I'll also want to make sure that change is recognized as an incredible partner. They have worked closely with us. We've worked through it together.

Speaker Change: Sure Yeah, Mike Thanks for the question.

Speaker Change: Unchanged unchanged I mean first of all I think you've got to recognize what Q1 is I mean Q1 is for patient direct probably the most complicated labor intensive quarter of the year as so many of the patients are changing insurance or payers, they're adjusting so theres a lot of work associated with that it had really I would say a minimum.

Speaker Change: Impact on the top line, but it did have an impact on our collection I'll also want to make sure Thats recognize this change has been an incredible partner. They have worked closely with US we've worked through it.

Edward A. Pesicka: As we're coming through April, we're starting to see more and more of that work its way through the system. But it was a labor-intensive process, and I think that's the thing that's important from an operating expense standpoint, a significant labor-intensive process to do things more manually that were done instantaneously from a system standpoint. I think that had an impact on cash flow this quarter. It had an impact on our receivables. But as we get through Q2, we expect most of that to work its way through the system.

Speaker Change: We're coming through April we're continuing we're starting to see more and more of that work its way through the system.

Speaker Change: But it was a labor intensive process and I think thats the thing Thats important from an operating expense standpoint significant labor intensive process to do things more manually that Houston that word done instantaneously on them from a system standpoint so.

Speaker Change: That had an impact this quarter on cash flow and had an impact on our receivables, but as we get through Q2, we expect most of that to work its way through the system.

Speaker Change: Got it and if I could just ask one more on patient direct.

Edward A. Pesicka: Got it. And if I could just ask one more question on Patient Direct, A number of recent developments across the CPAP market, in terms of the OSA surmount data from Lilly, in terms of the Philips proposed and accepted settlement or at least accrual relative to their CPAP devices. Anything you can provide us on updates on how you see the development of your sleep franchise and all things CPAP against the backdrop of your multi-year targets and anything that's changed as we see some of these incremental data points on hopefully getting this market Yeah, I guess when you look at it, it's obviously you've got to fill up.

Speaker Change: A number of recent developments across the CPAP market in terms of the OSA surmount data from Lilly in terms of the Philips proposed.

Speaker Change: That settlement or at least accrual relative to their CPAP devices anything you can provide us an update on how you see the development of.

Speaker Change: Your sleep franchise, and all things CPAP against the backdrop of your multiyear targets.

Speaker Change: Anything that's changed as we see some of these incremental data points on hopefully gain this market back to both a normalization and potential for demand changes over time.

Edward A. Pesicka: Yeah, I guess the way we look at it is, you know, obviously you've got Philips, you know, with the issue that's out there publicly now, you know, that's been, I mean, think about it, Philips products have been really on hold for over a year here. And, you know, one of the things we've been able to do is continue to partner with others to bring the right amount of inventory in so that way, we can meet the customer's needs.

Speaker Change: Yes, if you look at it is we obviously had the Philips.

Speaker Change: The issue that's out there publicly now.

Speaker Change: That's been I mean think about it fill those products have been really on whole for over a year here.

Speaker Change: And one of the things we've been able to do is continue to partner with others to bring the right amount of inventory and so that way, we can hit the customer's needs. So.

Edward A. Pesicka: So, that hasn't had an impact on us because other manufacturers have stepped up and increased production. You know, I think you'll continue to see that as we move forward. Demand and starts on sleep, you know, will continue to be strong for us. You know, that one, along with diabetes, are still our two fastest growing categories growing faster than the overall segment. You know, so we anticipate that to continue. And, you know, we talked a little bit about some of the work we're doing in the operating model realignment specifically around sleep. I think it's important to make sure we understand the sleep journey better so that way, we can continue to drive, you know, some strong growth in the future.

Speaker Change: That hasnt had an impact on us because other manufacturers have stepped up and increased production.

Speaker Change: I think youll continue to see that as we move forward.

Speaker Change: Manned and starts on sleep continue to be strong for us.

Speaker Change: All of that one along with diabetes are still our two fastest growing category growing faster than the overall segment as we anticipate that to continue.

Speaker Change: We talked a little bit about some of the work we're doing the operating lottery alignment specifically around sleep I think that's important to make sure we understand the sleep journey better. So that we can continue to drive strong growth in the future.

Speaker Change: Alright, thanks, guys.

Speaker Change: Yes.

Speaker Change: Our next question comes from Kevin Caliendo from UBS. Your line is now open.

Operator: Our next question comes from Kevin Caliendo from UBS. Your line is now open.

Kevin Caliendo: Thank you and thanks for taking my question.

Kevin Caliendo: Thank you. Thanks for taking my question. Oh, I want to continue a little bit on PatientDirect.

And I don't want to continue a little bit on patient direct the margins operating margins year over year fell about 35 36 basis points I know you talked a little bit about investments you just mentioned.

Edward A. Pesicka: The operating margins year-over-year fell about 35, 36 basis points. I know you talked a little bit about investments. You just mentioned how difficult it is in the quarter. I guess what I'm wondering, is there any change in mix? Is there anything specific to that? Is there any way to think about how the margins should progress, or if there were any one-timers in there that would prompt the margins to decline year-over-year? What you expect margins in the business, maybe how we should think about the improvement, or I know we expect sequential improvement every quarter in the overall business, but how should we think about margins in that business on a year-over-year basis?

And how difficult it is in the quarter.

I guess, what I'm wondering is there any change of mix is there anything specific to that is there any way to think about.

Kevin Caliendo: How the margin should progress or if there was any one timers in there that would would prompt the margins to decline year over year, and what you expect margins in the business maybe.

Kevin Caliendo: How we should think about the improvement or I know we.

<unk> sequential improvement every quarter and the overall business, but how should we think about margins in that business on a year over year basis.

Edward A. Pesicka: So you've got a couple different factors, I think, to consider there. One is an investor day last year, and even at the end of Q4 last year, we talked about this. So, you know, first of all, we are making investments in that patient direct segment with a significant add of commercial resources. We talked about it back in December when we had our investor day and shared our 2028 strategy. And on that, we recognize two things happen when you do that. One is you do create some level of disruption as you're adding territories and expanding it out.

Kevin Caliendo: We had a couple of different factors I think that the <unk>.

Kevin Caliendo: Consider theres, one as an investor day last year and even at the end of.

Kevin Caliendo: Q4 last year, we talked about this so one we are making investments in that patient direct segment with a significant add on commercial resources, we talked about back in December when we had our investor day and shared our 2028 strategy.

And on that we recognized two things happen. When you do that one is you do create some level of disruption as youre, adding territories and expanding it out.

Edward A. Pesicka: You know, in addition to that, you know, the other aspect of it, we said that it takes about 12 months or so for those assets or investments to break even. So one of the things we should share is we're actually ahead of schedule on adding those resources. You know, we think about it; we're trying to find the best assets to bring to the market, or, in our case, our best teammates to add to the team.

Kevin Caliendo: In addition in addition to that the other aspect of it we said that it takes about 12 months or so for those those assets or investments to breakeven. So one of the things. We should share is we're actually ahead of schedule on adding those resources, we think about it we're trying to find the best assets to bring to the market on our <unk>.

Kevin Caliendo: Our best teammates to add to the team and we were able to find much more of those at a quicker pace than we thought so we had a little bit extra expense associated with that.

Edward A. Pesicka: You know, and we were able to find much more of those at a quicker pace than we thought. So we had a little bit of extra expense associated with that. You know, and then there was also, as I discussed in the last comment, some of the processing costs and the extra time that we had to put in to make sure we could get patients the product and get it out the door. That's another aspect around that, you know.

Kevin Caliendo: And then there was also as I discussed in the last comment some of the processing cost and the extra time that we had to put in to make sure we could get patients to the product and get it out the door that's another aspect around that.

Edward A. Pesicka: But ultimately, if you think about the long term, and this kind of goes to the first question, your question, you know, we still remain extremely bullish on our patient direct segment. You know, from the market space we're in, from our positioning, how well the businesses run, the investments we're making, not just looking at it in the short term, but looking at it from a long term perspective. You know, those are the things that give us, you know, the extreme excitement around it and the bullishness in it.

Kevin Caliendo: But ultimately we think about long term and it kind of goes to the first question. Your question, we still remain extremely bullish on our patient direct segment.

Kevin Caliendo: From the market space were in from our positioning how well the business is run.

Kevin Caliendo: The investments, we're making not just looking at it in the short term we're looking at it from a long term those are the things that give us the extreme excitement around in the bullishness in it I think the one other thing to remember is we knew Q1 was going be a little tough because if you look at it.

Edward A. Pesicka: I think the one other thing to remember is, you know, we knew Q1 was going to be a little tough because, if you look at it, you know, we're coming over the last two years in Q1, and that business grew at double digits. So we're coming over off of some strong, strong growth, sequentially, I'm sorry, annually over the last two years. But again, you know, we're adding resources, we're doing what we need to do to deliver on that long-term target, and we remain extremely excited about that.

Kevin Caliendo: Coming over the last two years in Q1 that business grew at double digits. So we're coming overseas office, a strong strong growth.

Kevin Caliendo: <unk> I'm sorry annually over the last two years, but again, we're adding resources, we're doing what we need to do to deliver on that long term target and we remain extremely excited about the space.

Edward A. Pesicka: That's helpful. If I can ask a quick follow-up. On sleep, you are going to be lapping a tougher comp coming up. I just maybe how should we think about the mix between sleep rental versus consumables growth as we progress through the year?

Speaker Change: That's helpful. If I can ask a quick follow up.

Kevin Caliendo: Okay.

Speaker Change: We you are going to be lapping tougher comps coming up.

Speaker Change: Maybe how should we think about the mix between sleep rental versus consumables growth.

Speaker Change: As we as we progress through the year.

Edward A. Pesicka: Yeah, I think at a high level, you know... Yes, that's true. But we're still, you know, our sleep starts, we're not seeing a slowdown on those, you know, but you're right that, over time, you're going to have more and more consumables versus starch, just because it's the law of numbers. So, you know, that's the way you should think about it

Speaker Change: I think at a high level.

Speaker Change: Yes, that's true, but we're still our sleep starts we're not seeing a slowdown on those.

Speaker Change: But you are right it is over time.

Speaker Change: We're going to have more and more consumables versus versus starts just because it's the law of numbers. So that's the way you should think about it.

Edward A. Pesicka: And just, can you just remind me, how do we think about the impact? As that progresses over time, does that mean higher growth margin or something like that? on that.

Speaker Change: And just can you just remind me how do we think about the impact.

Speaker Change: As that progresses over time does that mean higher gross margin or like what is the impact.

On that I apologize for my ignorance.

Speaker Change: Okay.

Speaker Change: Yes.

Edward A. Pesicka: I'm sorry, Kevin. The question is, what's the impact of what on gross margins, the difference between the two? Oh, as the mix, as the consumables start to grow faster, as you said, like the law of large numbers, consumables become a bigger part. Just I just wanted to understand or make sure I understood what the impact of that is on them on the margin, like the consumables versus the rental.

Speaker Change: I'm sorry, Kevin.

Speaker Change: The question is what's the impact on gross margin the difference.

Speaker Change: As the mix as the consumables start to grow faster.

Speaker Change: You said like the law of large numbers consumables becomes a bigger part.

Speaker Change: Just wanted to understand or make sure I understood what the impact of that is on the on the margin is like the consumables versus the rental what does that mean for the gross and operating margin.

Edward A. Pesicka: What does that mean for the gross and operating margin? Yeah, thank you. Thank you for repeating that. And good morning. Yes, that's so the growth outside growth in the sleep supplies will be favorable to growth.

Speaker Change: Thank you. Thank you for repeating that hey, good morning, yes.

Speaker Change: Yes.

Speaker Change: The growth outsized growth in this fleet supplies will be favorable to gross margin.

Okay. Thank you.

Kevin Caliendo: Okay, thank you.

Speaker Change: Okay.

Speaker Change: Our next question comes from Daniel <unk> from Citi. Your line is now open.

Operator: Our next question comes from Daniel Grosslight from Citi. Your line is now open.

Daniel: Hey, guys. Thanks for taking the question.

Daniel R. Grosslight: Hey guys, thanks for taking the question. Just a couple on cash flow. First on CapEx, you kept guidance at $220 to $240 for the full year. I just wanted to confirm if that's on a gross basis or net of sales, because obviously, if it's net, you're basically flat this quarter, which implies a pretty significant step up for the remainder of the year. And then on your commentary around basically net debt staying effectively the same, is that implying that on a free cash flow basis, you're going to see kind of de minimis free cash flow as you rebuild inventory here?

On cash flow first of all on Capex.

Daniel: You kept the guidance at $2 20 to $2 40 for the full year I just wanted to confirm if thats on a gross basis or net of sales.

Daniel: Because obviously if it's if it is that you're basically flat this quarter, which implies a pretty significant step up for the for the remainder of the year and then on your commentary around basically net debt.

Daniel: Staying effectively the same is that implying that on a free cash flow basis, youre going to see kind of de Minimis free cash flow is can I get rebuilt.

Daniel: Rebuilt inventory here.

Daniel: Yeah.

Speaker Change: Yes, thank you for the questions and good morning.

Alexander J. Bruni: Yeah, thank you for the questions and good morning. So, on the CapEx, that is, in fact, gross CapEx, and we do expect increased spending as we head through the year. So, you know, again reiterating that guidance range. And then on net debt, we do expect that to stay relatively flat through the remainder of the year, reflecting our investments not only in commercial capabilities but also in inventory as we've made to support onboarding new customers as well as driving service levels overall.

Daniel R. Grosslight: Got it. Okay.

Speaker Change: So on the Capex that is in fact, the gross Capex and we do expect to increase spending as we head through the year. So again reiterating that guidance range and then on the net debt. We do expect that to stay relatively flat through the remainder of the year, reflecting our investments not only in commercial capabilities, but also in inventory as we have made to support.

Speaker Change: Onboarding, new customers as well as driving service levels overall.

Speaker Change: Got it okay and as a follow up.

Daniel R. Grosslight: And as a follow-up, I had similar questions on the cadence of margin improvement, but on the P&H segment. I know you've got a large client that's in the process of onboarding, so I was hoping to get an update on that, and then also investments across that segment, too. So would you be able to provide just a little more color on how you're thinking about those kind of big spend items this year and the cadence of P&HS improvement for the remainder of the year?

Speaker Change: My question is on the cadence of.

Speaker Change: Margin improvement, but but on the <unk>.

Speaker Change: Segment, I know you've got a large client that's in the <unk>.

Speaker Change: <unk> of Onboarding. So I was hoping to get an update on that and then also investments across that segment too. So would you be able to provide just a little more color on how youre thinking about those kind of big spend items.

Speaker Change: This year in the cadence of Pn Hs improvement for the remainder of the year.

Edward A. Pesicka: Well, I'll take part of that, and we'll have Alex add some color to it. So, you know, think about investments in PNHS. So there's a couple different areas. We outlined them at investor day, and we're already in the process of investing in them. You know, one is in proprietary product portfolio expansion. So we brought resources in, you know; those are obviously operating expenses to continue to assess onboard and bring in new additional expansion, new proprietary products.

Speaker Change: I'll take part of that will allow us to add some color on it so think about investments in P&A Jess So theres a couple of different areas, we outlined at Investor day, and we're already in the process of investing in.

Speaker Change: One is in proprietary product portfolio expansion. So we brought resources in and those are obviously operating expenses to continue to assess and onboard and bring in new additional expansion new proprietary products and one of the areas. We've already launched as wound care. Some additional our own proprietary products in that space. In addition to that.

Edward A. Pesicka: You know, one of the areas we've already launched is wound care, some additional of our own proprietary products in that space. In addition to that, from a commercial standpoint, looking to make the right investments in commercial to beef up our external presence as well as to get closer to the customer and be able to provide more support there. The next aspect of it is both capital investment and operations. You know, we talked about continuous improvements, and it's really around optimizing our manufacturing footprint as well as our supply chain.

From a commercial standpoint looking to make the right investments in our commercial to beef up our external presence as well as to get closer to the customer.

Speaker Change: And be able to provide more support there. The next aspect of it is both capital investment and operations, we talked about continuous improvement and it's really around optimizing our manufacturing footprint as well as our supply chain. Some of that technology is going to be investigated with <unk>.

Edward A. Pesicka: You know, some of that technology is going to be invested in, with something as simple as VisionPIC to turn around and drive higher accuracy in PIC, and more efficiency within our warehouses to drive operating expenses. So there's a capital expenditure associated with that. But then there's also the operating expense on the learning curve. And then, really, on margin, we anticipate margin as those things start to take hold to drive margin improvement within the business this year and in future years.

Speaker Change: Simple its vision to turnaround and drive a higher accuracy of more efficiency within our warehouses to drive operating expenses. So there is a capital expense associated with that but then there's also the operating expense on the learning curve.

And really on margin, we anticipate margin as those things start to take hold to drive margin improvement within the business as the year as well.

Speaker Change: This year in the future years progress.

Speaker Change: Yeah. Thanks, So maybe just add a little bit more color.

Alexander J. Bruni: Yeah, thanks. Maybe just add a little bit more color. You know, similar to Patient Direct, we've made investments in PHS. As outlined from an OPEX standpoint, we've invested in commercial capabilities, for instance. And so a lot of those are already factored into the run rate.

Speaker Change: Similar to patient direct we've made investments in Phs is.

Speaker Change: Outlined from an Opex standpoint, we've invested in commercial capabilities for instance, and so a lot of those are already factored into the run rate.

In parallel with that we're driving a number of transformational efforts that we do expect to continue to drive margin as we move forward and then again, we've got the normal seasonality where.

Alexander J. Bruni: And, you know, in parallel with that, we're driving a number of transformational efforts that we do expect to continue to drive margin as we move forward. And then again, we've got the normal seasonality where the increased top line and operating leverage would expect to drive some margin improvement as we head into the back half of the year. So let me put some more facts behind that too.

The increased top line and operating leverage we would expect to drive some margin improvement as we head into the back half of the year. So let me put some little bit more facts behind that too is if you think about our 79 basis points improvement this quarter in gross margin and you think about what we talked about last year and the operating model realignment and one of the key things we're sourcing.

Edward A. Pesicka: If you think about our 79 basis points improvement in gross margin this quarter, and you think about what we talked about last year in the operating model realignment, you know, one of the key things was sourcing. You know, we worked extremely hard to put together what I believe is a world-class sourcing organization that is now internally providing the ability to go out and find raw materials at a lower price and continue to be competitive.

Speaker Change: So we worked extremely hard to put together.

Speaker Change: I believe there is a world class sourcing organization that now internally is providing the ability to go out and find raw material at a lower price.

Speaker Change: We continue to be competitive so as product prices are coming back down to pre pandemic levels. We have the ability to go out and drive additional sourcing to offset that which is part of the reason why you saw the 79 basis points.

Edward A. Pesicka: So, as product prices are coming back down to pre-pandemic levels, we have the ability to go out and drive additional sourcing to offset that, which is part of the reason why you saw the 79 basis points, you know, this quarter in margin expansion. And then on the other side of the house, there's some of the investments we're making in really, I'll call it the order to cash or cash collection cycle, you know, continuing to work on that to drive margin expansion in our PD.

Speaker Change: This quarter in margin expansion and then on the other side of the house that some of the investments, we're making and really I'll call. It the order to cash or cash collection cycle.

Speaker Change: <unk> to work on that to drive margin expansion in our PD. So I don't want to make sure everyone recognizes that there's a lot of the work we did in the operating model realignment program is now embedded into the business.

Edward A. Pesicka: So, I want to make sure that everyone recognizes that a lot of the work we did in the operating model realignment program is now embedded in the business, and a great example of that is sourcing and being able to see margin expansion. And then some of the transformational change we anticipate this year in patient direct, you know, around sleep and around order to cash or additional opportunities to drive margin expansion as the year progresses.

Speaker Change: A great example of that is sourcing and being able to see margin expansion and then some of the transformational change we anticipate this year and patient direct around sleep and around order to cash or additional opportunities to drive margin expansion as the year progresses.

Speaker Change: Next question operator.

Operator: Next question, Operator.

Operator: Our next question is coming from Eric Coldwell from Baird. Your line is now open.

Speaker Change: Our next question is coming from Eric Coldwell from Baird. Your line is now open.

Eric White Coldwell: Thanks, good morning. I wanted to, you mentioned a couple of times the order to cash and the improvements in patient bad debt or collections. Could you give us some ratios on the bad debt ratio or the patient collection improvement?

Eric White Coldwell: Thanks, Good morning, I wanted to you mentioned a couple of times.

Eric White Coldwell: Order to cash and the improvements in patient bad debt or collections could you give us some ratios on the bad debt ratio or the patient collection improvement.

Speaker Change: Yes, I think.

Edward A. Pesicka: Yeah, I think, you know, at a high level, consider it right now, in the, I would call it, the low to mid 90s. And there's an opportunity for us to continue to pick that up. And that's really what the focus is on. You know, Q1 is a tough quarter. Obviously, there was a lot of a lot of complexity in Q1. But you know, the anticipation is that it will continue to get better as the year progresses.

Speaker Change: At a high level consider it right now.

Speaker Change: Ill call it.

Speaker Change: Low to mid nineties, and there is an opportunity for us to continue to kick that up and Thats really what the focus is on.

Speaker Change: Q1 is a tough quarter, obviously, there was a lot of a lot of complexity in Q1.

Speaker Change: But the anticipation is that we'll continue to get better as the year progresses.

Eric White Coldwell: Edward, was that, say, a year ago or a few years ago? How has that ratio changed?

Speaker Change: And Ed where was that.

Ed: A year ago or a few years ago, how has that ratio changed.

Edward A. Pesicka: I would say overall, Eric, it's relatively consistent, and it gets difficult, right? You know, if you go back and look at it from a Byram standpoint, when it was a stand-alone division within the segment, you know, we had a really good collection, you know, bringing on APRA and doing an integration, you know, we continue to be able to drive some of the best practices across both of the divisions within the segment, you know, and now we really, after having digested the acquisition two years later, we believe there's an opportunity to take those best practices across both, as well as reimagine it a little bit, to drive, you know, several points of improvement, you know, that are out there from an availability standpoint.

Ed: I'd say overall, Eric it's relatively consistent and it gets difficult right.

Ed: If you go back and look at it from a buy around standpoint, we have as a standalone division within the segment.

Ed: Haven't really good collections and bringing on apprehend doing an integration we continue to be able to drive some of the best practices across both both of the divisions within this segment.

Ed: And now we really after having digested the acquisition two years later, we believe there is an opportunity to take those best practices across both as well as re imagine a little bit to drive several points of improvement.

Ed: That are out there from available from an availability standpoint.

Ed: Yes.

Ed: On the.

Edward A. Pesicka: On the call, when you were talking about some of the challenges in Q1 here related to, I think it was all patient-direct, you obviously talked about the tough year-over-year comparisons, a little bit of changed healthcare, the new sales territory, and realignment disruptions, but I thought I also heard a mention of regulatory changes. I'm not sure if that was..., related to sales or if that was related to profitability. But there was a mention in the prepared remarks about regulatory changes impacting the segment. I'm just curious if you could dive into that. Yeah, sure.

Ed: On the call there was.

Ed: You were talking about some of the.

Ed: Challenges in Q1 here related to I think I think it was all patient direct Q <unk>.

Ed: You, obviously talked about the tough year over year comparisons a little bit of change healthcare, the new sales Tory territory.

Ed: Realignment disruptions, but I thought I also heard a mention of regulatory changes I am not sure if that was relate.

Related to sales or if that was related to profitability, but there wasn't mentioned in the prepared remarks about regulatory changes impacting the segment I'm. Just curious if you could dive into that yes sure. Alex maybe you can just dive into it.

Alexander J. Bruni: Good morning, Eric. We were referring there to the PHE relief on the 75-25 funding, so just as a reminder on that, we had incorporated for either scenario playing out within our internal operating plan as well as our guidance. We have levers to offset that, but that's what we're talking about here.

Alexander J. Bruni: Thanks, Ed Good morning, Eric.

Alexander J. Bruni: So we were referring there to the phe relief on the 70 525 funding.

Speaker Change: Got it.

Alexander J. Bruni: So just as a reminder, on that we had incorporated for either scenario playing out.

Within our internal operating plan as well as our guidance. So we have levers to offset that but that's what we're talking about there and could you remind us on the the magnitude I think it was just a few million dollars right, but if you could remind us.

Eric White Coldwell: And could you remind us of the magnitude? I think it was just a few million, right? But if you could, could you remind us?

Alexander J. Bruni: It was not material, but we did not quantify it exactly.

Alexander J. Bruni: It was not material, but we did not quantify it exactly.

Eric White Coldwell: Okay, go ahead, please. I think, you know, when you're running the business, you know, you know, you're going to potentially have these headwinds, which you can continue to look at what contingency plans you have in place. And, you know, opportunities, like we talked about earlier on the order of the cash opportunities on the sleep journey and other things, you know, our availability and the speed at which we move on those can help mitigate those, which is why I think Alex's comment has been, you know, we've contemplated those, and we have the ability to make sure that we're focused on that. Last one for me, in PHS, you've obviously talked about So it's clear that you have new large customers that need onboarding.

But I think.

Speaker Change: Go ahead. Please for generic I think you think about it is we are running the business you know youre going to potentially have these headwinds which.

Continue to look at what contingency plans you have in place.

Speaker Change: I think opportunities like we talked about earlier on the order to cash opportunities honestly journey and other things.

Speaker Change: Our availability and the speed at which we move in those can help mitigate those which is why I think Alex's comment has been we've contemplated those and we have the ability to make sure that we're focused on that.

Speaker Change: Last one for me.

Speaker Change: You've obviously talked about the inventory step up to handle onboarding new customers. So it's clear that you have new large customers that need onboarding.

Edward A. Pesicka: At the same time, your other public competitor yesterday was talking about future health system wins coming online later in their fiscal 25. So, you know, over the next few quarters, starting to onboard. And the other large competitor that's private but puts out a fair amount of press is also talking about a pretty constant stream of wins.

At the same time your other public competitor yesterday was talking about future health system wins coming online.

Later in their fiscal 'twenty five so.

Speaker Change: Over the next few quarters, starting to onboard and the other large competitor that's private but puts out a fair amount of press is also talking about a pretty constant stream of wins so.

Edward A. Pesicka: Bottom line, I'm looking at the three largest players that make up the vast majority of the market all talking about wins. Who's losing? And what is the net win-loss ratio in PHS? You know, are you overall gaining traction? Do you have some future business leaving? I'm just curious what's really happening because I see all the big players talking about wins.

Speaker Change: Bottom line I'm looking at the three largest players that make up the vast majority of the market all talking about wins who's losing.

Speaker Change: What is the what is the net the net win loss ratio in Phs.

Speaker Change: Are you overall, gaining traction do you have some future business, leaving I'm just I'm curious, what's really happening because I see all three of the big players.

Speaker Change: Talking about wins, yes, I would say, we're net winning right now.

Edward A. Pesicka: Yeah, I would say we're net winning right now. You know, there is a bit of a time trading paint, I guess, but we are net winning, net winning on this. And I think we're being, we're being disciplined to one on both wins. And, you know, as we talked about a year ago, there was some business that we, you know, that we separated from because of the financial profile of it. So, you know, that's the way we thought about it, and the way we're going to continue to think about it is both through both sides. Okay.

Speaker Change: There is a bit of a times trailing claims I guess, but we are not winning net winning on this.

Eric White Coldwell: Okay, thanks very much. I appreciate the answers.

Speaker Change: I think we're being.

Speaker Change: We're being disciplined to one on both wins and as we talked about a year ago. There was some business that we that we separated from because of the profile of it so.

Speaker Change: That's I think the way, we thought about it and the way we're going to continue to think about it is both disciplined on both sides of it.

Speaker Change: Okay. Thanks, very much I appreciate the answers yes.

Speaker Change: Next question comes from Stephanie Davis from Barclays. Your line is now open.

Operator: The next question comes from Stephanie Davis from Workplace. Your line is now open.

Stephanie Davis: Hey guys, thank you for taking my question. I wanted to ask another one on the patient direct business, just because you did mention that change had a minimal impact on that side of the world, but it did see a bit of a deceleration. Should we think about a re-acceleration of this as coming off of the tough comp, or is it more going to be a function of a ramp-up of some of your sales investments that you've made, which may make it a little bit more back half-weighted?

Stephanie Davis: Hey, guys. Thank you for taking my question.

Stephanie Davis: Wanted to ask another one on the patient directly.

Stephanie Davis: Because you did mentioned that change had a minimal impact on that side of the world.

Stephanie Davis: It did see a bit of deceleration.

Stephanie Davis: Do we think about.

Speaker Change: We acceleration of this as coming off of the tough comp or is it more going to be a function of ramp up of some of your sales investments that you've made which may be a little bit more back half weighted.

Edward A. Pesicka: I think really the latter is a better way to think about it is, you know, well, we know the investments that we're making, you know, are going to pay off, you know, we've done it in a much smaller scale over the last five years, you know, we are adding a person or two, several here or there, this is a broader, broader push, you know, and so I think the latter is the way to think about this is as they start to take, get traction, you'll see the lift going out in towards the back half of the year.

Speaker Change: I think really the latter is a better way to think about it is we know the investments that we're making are going to pay off we've done it in a much smaller scale over the last five years, we're adding a person or two several here. There. This is a broader broader push.

Speaker Change: And so I think the latter is the way to think about this is <unk>.

Speaker Change: Dr to take get traction you will see the lift filling out in towards the back half of the year.

Speaker Change: Understood and then I think about the priority of investments always had modernizing your back office system as one of them.

Edward A. Pesicka: Understandable. And then when I think about the priority of investments, you always had modernizing your back office IT systems as one of them. I imagine what happened with change makes us much more top of mind. So is this something where we can maybe see heavier upfront investment spend in order to go and try to mitigate future risks like that?

Speaker Change: I imagine what happened with change makes us much more top of mind. So is this something where we can maybe see heavier upfront investment spend in order to go and try to mitigate future events like that yes.

Speaker Change: Yes, actually Stefan you actually would absolutely right is that something we've discussed and it's something that's in process already continuing to look at our patient direct again when you do an acquisition one of the things. We one of the tenants. We had an acquisition was don't confuse the customer right out of the gate and we don't want to have breakage in that I think we did in <unk>.

Edward A. Pesicka: Yeah Actually, Stephan, you're actually absolutely right. Is that something we've we've discussed and it's something that's in process already You know continuing to look at our in our patient direct, you know again you do an acquisition You know one of the things we one of the tenants we had on acquisition was don't confuse the customer right out of the gate You know, we don't want to have breakage and I thought I think we did an exceptional job of that with acquiring Apria You know now you're two years in you've kind of got it settled You know exactly what levers you want to pull and one of those is making sure we have systems that can can Enable us to continue to grow but enable us to have a stronger and more solid foundation So that's exactly one of the an example of an investment on some of the capex as well as that's just not all capex There are some operating expenses associated with that which you can anticipate You know this year and into the next year as I was to go a little more detail of what's in the plan But the anticipation is you know in process already is looking at that our systems to make sure They're solid and they can be leveraged and we can drive they can help continue to drive growth as we scale up

Speaker Change: Exceptional job of that with acquiring accurate.

Speaker Change: Now you are two years and you've kind of got it settled in on exactly what levers you want to pull in one of those is making sure. We have systems that can can enable us to continue to grow but enabled us to have a stronger and more solid foundation. So that's exactly one of an example of an investment on some of the Capex as well as the <unk>.

Speaker Change: It's not all capex or some operating expense associated with that which you can anticipate this.

Speaker Change: This year and into the next year is absolutely going a little more detail of what's in the plan, but the anticipation is.

Speaker Change: In process already is looking at that our systems to make sure. They are solid and they can be leverage can we can drive that can help continue to drive growth as we scale up.

Stephanie Davis: So, putting that all together, I know you reiterated your guidance for the year. Could we see maybe a heavier weighting on investments and more of the growth towards the back half given all these moving pieces?

Speaker Change: So putting that all together I know you reiterated your guidance for the year could we see maybe a heavier weighting on investments and more than that.

Speaker Change: Growth towards the back half given all the moving pieces.

Edward A. Pesicka: I think that's a pretty fair assessment. Yeah, very similar to last year, too. I mean, very, very similar to last year, also because you then have seasonality in the business. Think about last year. We had seasonality in the business. Think about last year; we had, you know, investments we were making up front to drive operational efficiency, and we saw those carry through to the back half of the year. So I think it'd be relatively consistent. Thanks for helping.

Speaker Change: Yes, I think Thats, a pretty fair assessment very similar to last year.

Speaker Change: Very similar to last year also because you then have the seasonality in the business think about last year, we had seasonality a bit as I think about last year. We had investments we are making upfront to drive operational, especially efficiency. We saw those territories the back half of the year. So I think it would be relatively consistent.

Stephanie Davis: Super helpful. Thank you much.

Speaker Change: Okay very helpful. Thanks, so much.

Speaker Change: Next question comes from Allen Lutz from Bank of America. Your line is now open.

Operator: The next question comes from Alan Lutz from Bank of America. Your line is now open.

Good morning, and thanks for taking the questions Ed you talked a little bit about some of the sourcing and improved collections that drove the gross margin higher I think thats now a few quarters in a row, where you've seen a nice improvement in gross margin I guess, how should we think about sort of where we are in the timeline.

Alan Lutz: Good morning, and thanks for taking the questions. Ed, you talked a little bit about some of the sourcing and improved collections that drove the gross margin higher. I think that's now a few quarters in a row where you've seen a nice improvement in gross margin. I guess how should we think about sort of where we are in the timeline of those factors driving the improvement, and can you provide maybe a little bit more information on the progression of the gross margin line over the course of the year? Thanks.

Speaker Change: Those factors driving an improvement in can you provide maybe a little bit more information on the progression of the gross margin line over the course of the year.

Edward A. Pesicka: Maybe I can start with some qualitative, and Alex can bring a little more quantitative. And so, you know, the expectation is that we will continue to look to drive margin expansion throughout the year. You know, obviously, sourcing and some of the other things are already embedded in the business, you know, and some of those were incorporated into the business at the end of last year. So, think sourcing, for example. By the time we got to Q4 of last year, some of that sourcing was already in place and helped drive the back half margin expansion within there. So again, we're starting to get ready to start to overlap that.

Ed: Yes, maybe I can start with some.

Speaker Change: The qualitative.

Speaker Change: Alex can bring a little more quantitative and so the anticipation is that we continue to look to drive margin expansion throughout the year.

Speaker Change: Honestly, a sourcing and some of the other things are already embedded in the business.

Speaker Change: And some of those more embedded in the business at the end of last year. So thanks store site. For example by the time, we got to Q4 of last year. Some of that sourcing was already in there and help drive the back half margin expansion within there. So again, we're starting to get ready to start to overlap that but the other projects like the order to cash process is another example.

Edward A. Pesicka: But, you know, other projects like the order-to-cash process are another example of where we're going to be able to drive it. We should anticipate some margin expansion within the business for that. You know, continuing to get, you know, that overlap effect on sourcing is another example where we can drive margin expansion. But in the same sense, I don't want to call it a headwind, but the other side of the equation also is, you know, within products is a good example.

Speaker Change: Where we're going to be able to drive it we should anticipate some margin expansion within the business for that.

Speaker Change: Continuing to get that overlap effect on sourcing is another example, where we can drive margin expansion.

Speaker Change: But in the same sense.

Speaker Change: That's the other.

Speaker Change: Call it a headwind, but the other side of the equation also is.

Speaker Change: Within products is a good example, we're continuing to see prices come back down closer to where we were pre pandemic.

Edward A. Pesicka: We're continuing to see prices come back down closer to where we were pre-pandemic, you know, but as we're driving the cost out, we're able to neutralize that and mitigate that. We continue to work with our customers to help provide savings to them, as many of our customers are continuing to look for that. So you think about, as we think about it, we had a 79 basis points year-over-year improvement in this quarter. You know, we would anticipate that we would continue to drive some level of improvement in the back half or the back three quarters of the year. Alex, maybe you can add a little more? Yeah, thanks.

Speaker Change: We're driving the cost out we are able to neutralize that and mitigate that we continue to work with our customers to help provide savings to them as many of our customers are continuing to look for that so you would think about as we think about the rate of 79 basis points year over year improvement in this quarter, we would anticipate that we would continue to drive drive some law.

Speaker Change: Evel of improvement in the back half or the back three quarters of the year, Alex maybe you can add a little more.

Comments on that yes.

Alexander J. Bruni: Yeah, thanks, Ed. Yeah, so on gross margin, as Ed mentioned, we do expect that to continue to improve throughout the year. There are three key drivers here on the products and healthcare services side. The main driver is the sourcing savings that's driving improvement within our cost of goods sold. And then on patient direct, there are two drivers.

Yes, Thanks Ed.

Alexander J. Bruni: So one on gross margin as Ed mentioned, we do expect that to continue to improve throughout the year. There are the three key drivers here on the products and health care services side. The main driver is the sourcing savings.

Alexander J. Bruni: Driving improvement.

Alexander J. Bruni: <unk> within our cost of goods sold and then a patient direct the <unk>.

Alexander J. Bruni: Two drivers one just margin expansion driven by the improvement in collections that we've talked about in our investments in revenue cycle in general.

Alexander J. Bruni: One, just margin expansion driven by the improvement in collections that we've talked about in our investments and revenue cycle in general. And then we've got a favorable mix, essentially, between patient direct and products and healthcare services. So insofar as patient direct is growing faster than products and healthcare services, that will drive gross margin expansion overall for the company. And so if you look at just the normal seasonality of the business in both segments, as we get into the back half of the year with top line growth and operating leverage, that'll also aid with margin expansion as we get towards the end of the year. Great

Alexander J. Bruni: And then we've got favorable mix essentially between patient direct and products and health care services. So in so far as patient direct is growing faster than products and health care services that will drive gross margin expansion overall for the company.

Alexander J. Bruni: So if you look at just the normal seasonality of the business in both segments as we get into the back half of the year with topline growth and operating leverage that will also.

Alexander J. Bruni: With margin expansion as we get towards the end of the year.

Alexander J. Bruni: Okay.

Alan Lutz: Great, thank you. And then just a quick model question. I see a 50 million gain on sale. Can you just provide some commentary on what that was?

Speaker Change: Great. Thank you and then just a quick model question I see a $50 million gain on a sale can you just provide some commentary on what that was.

Speaker Change: Yes.

Speaker Change: What was it.

Alexander J. Bruni: We did have a gain of $7.4 million on the sale of our home office here in Mechanicsville, Virginia, and

Speaker Change: Yes, but it wasn't clear that totaled $50 they could add go.

Speaker Change: Go ahead home modestly, yes, we did have.

Speaker Change: A gain of $7 4 million on the sale of our home office.

Here in <unk>.

Next Bill Virginia.

And thats it.

Alexander J. Bruni: And that hit E&R. Got it. Thank you.

Speaker Change: Sure.

Speaker Change: Got it thank you.

Operator: Before we proceed, if you'd like to ask a question, please press star and number one on your telephone keypad. Our next question comes from Michael Cherny from the Ring Partners. Your line is now open.

Speaker Change: Before we proceed if you'd like to ask a question. Please press star and number one on your telephone keypad. Our next question comes from Michael Schmidt from Leerink Partners. Your line is now.

Speaker Change: Okay.

Michael Schmidt: Michael are you there.

Operator: Michael, are you there?

Michael Schmidt: Okay.

Michael Schmidt: Hi can you hear me, yes, we got you Michael you got back in line for a second.

Michael Aaron Cherny: Hi, can you hear me? Yeah, we got you, Michael. You got back in line for a second. Second set of questions. Go ahead, Michael.

Speaker Change: Second set of questions Michael.

Michael Aaron Cherny: I wasn't even muted, which I usually do as a mistake. Is there any way you can give us some directional color, given you don't formally guide on cash flow? The reason I ask is you mentioned the dynamic of net debt staying steady over the course of the year. I know the CapEx investments are spelled out. I just would have thought there'd be a little bit more of a cash build given the reiterated EBITDA. So just curious if there's any moving pieces in the middle of that conversion that you can give us some color on. I think I'll start.

Speaker Change: I wasn't even muted, which I usually do is a mistake.

Speaker Change: Is there any way you can give us some directional color, giving you don't formally guide on cash flow and the reason I ask is.

Speaker Change: You mentioned the dynamic of net debt staying steady over the course of the year I know the capex investments are spelled out.

Speaker Change: Just would would've thought there'd be a little bit more of a cash build given the reiterated EBITDA. So just curious if there's any moving pieces in the middle of that conversion you can give us some color on.

Edward A. Pesicka: I'll start this on a directional note. I think at a high level, you know, one is we're making some investments in inventory to bring in new customers and continue to drive service. You know, I want to make sure it's clear that there's opportunity there as the year progresses. And when you bring on a big new customer, you have a tendency to add a significant amount of additional inventory because you want service from day 1 to be impeccable.

Speaker Change: I'll start just on a directional I think at a high level one as we're making we're making some investments in inventory to bring on new customers continue to drive service.

I want to make sure it's clear that there is opportunity there.

Speaker Change: As the year progresses, when you bring on a big new customer you have a tendency to add significant amount of additional inventory because you want service from day, one to be impactful and as we learn them and they learn US better there is an opportunity to tweak that down a little bit.

Edward A. Pesicka: You know, and as we learn them, and they learn us better, there is an opportunity to tweak that a little bit. You know, I think, also from a receivable standpoint, as we continue to work on our order to cash, there's opportunities, you know, there may be some opportunities there. But I think we wanted to be disciplined in our assessment that, you know, what we have today, the timing on how we can tweak those, you know, may take, you know, maybe sooner rather than later.

Speaker Change: Also from a receivable standpoint, as we continue to work on our order to cash theres opportunity there.

Speaker Change: There may be some opportunities there, but I think we wanted to be disciplined in our assessment that what we have today the timing on how we can tweak those may take may be sooner rather than later.

Edward A. Pesicka: And then on CapEx, I think the expectation is, you know, as we continue to see growth in areas like sleep, we're going to need CapEx. And as we continue to implement some automation and other technology to drive efficiency, there's going to be some capital deployment as the year progresses. So, you know, that's more qualitative in how we're thinking about it, as well as where there are potential levers and opportunities as the year progresses.

Speaker Change: And then on Capex I think the expectation is as we continue to see growth in areas like sleep, we're going to need capex and as we continue to put some automation.

Automation and other technology to drive efficiency, there will be some capital deployment as the year progresses.

Speaker Change: That's more.

Speaker Change: Qualitative of how we're thinking about it as well as where there is potential levers and our opportunities as the year progresses.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Okay. So.

Michael Aaron Cherny: So I assume free cash flow will be positive for the year, though. Is there any framework we can use relative to history, even if it's less based on the inventory bill?

Speaker Change: I assume free cash flow will be positive for the year, though is there any framework you can use relative to history.

Based on the inventory build.

Speaker Change: Yeah. Thanks, Mike So I'll, just add a little bit more color here. So we expect fairly minimal free cash flow for the remainder of the year, we expect net debt to remain pretty much where it is.

Alexander J. Bruni: Yeah, thanks, Mike. I'll just add a little bit more color here. So we expect fairly minimal free cash flows for the remainder of the year. We expect net debt to remain pretty much where it is. And this obviously reflects our investments that we're making from an OpEx standpoint, as well as CapEx, as well as some of our transformation efforts that are hitting exit and realignment. So our expectation is that where our net debt is right now is roughly where we would exit the year. And then, obviously, leverage is a function of our adjusted EBITDA guidance at the end of the year.

And this obviously reflects our investments that we're making from an opex standpoint, as well as capex as well as from our transformation efforts that are hitting.

Mike: Exit and realignment so our expectation is that where our net debt is right now is roughly where we would exit the year and then obviously leverages a function of our adjusted EBITDA guidance at the end of the year.

Speaker Change: Okay. Thank you so much.

Michael Aaron Cherny: Okay, thank you so much.

Speaker Change: As of right now we don't have any questions I'd now like to hand back over to Ed <unk> for final remarks.

Edward A. Pesicka: As of right now, we don't have any questions. I'd now like to hand the microphone back over to Ed Pesicka for final remarks. Thank you, and thank you, everyone.

Edward A. Pesicka: Thank you and thank you everyone for joining in the call. Before I make some closing business comments, I'll make a personal comment. I want to shout out Sentara Health. You know, think about our purpose; life takes care of itself.

Ed: Thank you and thank everyone for joining on the call before I make some closing business comments I'll make a personal comment I want to shout out Sentara health.

About our purpose life takes care less than two days ago, our daughter and son in law delivered their first daughter and brought her into the world and our first grandchild, So <unk> health and terrorism everybody. Their experience is exceptional so to the clinicians and all the support staff. Thank you.

Edward A. Pesicka: Less than two days ago, our daughter and son-in-law delivered their first daughter and brought her into the world, as well as our first grandchild. So, Sentara Health, you know. Sentara's got everybody there. The experience was exceptional. So, to the clinicians and all the support staff, thank you. With that, you know, as you heard today on the call, the team and I are extremely excited about 2024, a year where we're going to continue to make investments to drive long-term growth.

Ed: With that.

Ed: As you've heard as you did here today on the call.

Ed: And I, we are extremely excited about 2024 year, where we're going to continue to make investments to drive long term growth.

Edward A. Pesicka: I also want to thank our teammates across the globe. I want to thank our customers, our partners, and, of course, our shareholders. You know, we are going to, as a leadership and an organization, continue to execute on our strategy. I really look forward to sharing the progress with you over the summer and our next earnings call. So, thank you, everyone.

I also want to thank our teammates across the globe I want to thank our customers our partners and of course our shareholders.

Ed: We are going through as a leadership and an organization continue to execute on our strategy I really look forward to sharing the progress with you over the over this during the summer in our next earnings call. So thank you everyone.

Ed: Okay.

Ed: Okay.

Operator: Thank you for attending today's conference call. We hope you have a wonderful day. You may now all disconnect from the call.

Speaker Change: Thank you for attending today's conference call. We hope you have a wonderful day you may now all disconnect to comp.

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