Owens & Minor Q3 2023 Earnings Call Transcript

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November 3, 2023

There are 8 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Owens and Minor Third Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jackie Marcus, Investor Relations.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to the Owens and Minor Third Quarter 2023 Earnings Call. Our comments on the call will be focused on the financial results for the Q3 of 2023 as well as our outlook for 2023, both of which are included in today's press release. The press release, along with the supplemental slides, are posted on the Investor Relations section of our website. Please note that during this call, we will make forward looking statements.

Speaker 1

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 refer to our SEC filings for a Full description of these risks and uncertainties, including the Risk Factors section of our annual report on Form 10 ks and quarterly reports on Form 10 Q. 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, which are 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.

Speaker 2

Thank you, Jackie. Good morning, everyone, and thank you for joining us today. Our Q3 represented another strong indication that we are executing at a high level. We generated High single digit top line growth in our Patient Direct segment and low single digit improvement in our Products and Healthcare Services segment. Our operational performance in the quarter was complemented by a significant reduction in our overall debt position combined with robust cash flow generation.

Speaker 2

I am incredibly proud of what the team has done thus far with our operating model realignment program, and I am excited about what the future holds for our organization. Let's now look at the business in a little more detail, starting with This is evidenced in the strength of our new patient starts across most categories. The Patient Direct Segment continues to identify opportunities for growth, including investments in technology, expanding our commercial capabilities and footprints, and identifying adjacent conditions and associated products. There is significant opportunity in this space As we see more patients and providers preferring at home treatment options for chronic conditions and we are well positioned to capture this opportunity. Now, let's turn to our Products and Healthcare Services segment.

Speaker 2

For the 2nd consecutive quarter, our Medical Distribution division And when excluding the impact of PPE, sales grew at 8%. We continue to face the saturation of PPE in various markets, including but not limited to healthcare, government, industrial and international markets, which led to a 14% top line decline in our Global Products division when compared to prior year. Finally, Much of our operating model realignment program is focused on improving this segment through operational excellence and driving efficiencies in our manufacturing footprint and supply In the 9 months since we launched our operating model realignment program, our team has done a tremendous job of positioning us to achieve or even exceed our target of $30,000,000 of benefit in 2023. We are doing exactly what we said we would do when we launched this program It should also be noted that the operating model realignment program not only continued to deliver economic benefits, But it has enabled us to reassess how we do business every day. As a result, we are well on our way to achieving the objectives established when we launched this program in the Q1 of 2023.

Speaker 2

We've also made great progress with respect to our balance sheet. We paid down $188,000,000 in total debt during the quarter with $500,000,000 in net debt reduction in the 1st 9 months of this year. With our healthy operating cash flow of $157,000,000 in the quarter and over $600,000,000 of operating cash flow in the 1st 9 months of this year. We remain focused on paying down debts we took on to acquire Apria, as well as making further investments in our people, products and processes. These efforts are part and parcel with making Owens and Minor Before I turn the call over to Alex, I'd like to take a moment to address a recent update from the FDA regarding its April 2023 communication About certain O and M Halyard facial protection products.

Speaker 2

We worked diligently over the last 7 months with the FDA to provide extensive testing and performance data demonstrating that our products provide the level of filtration and fluid resistance for which they are rated. I am pleased to report that on September 29, the FDA updated its recommendation to confirm That the Halyard facial protection products may be used in accordance with the product labeling for both particle filtration and fluid resistance. We are glad to bring this review to conclusion, which reaffirms the safety and effectiveness of our Halyard facial protection products. In conclusion, we continue to deliver on our 2023 commitments, including the strengthening of our balance sheet, The paying down of debts, the market leading performance of our Patient Direct segment and the improvement of our Medical Distribution division. With that, let me turn it over to Alex.

Speaker 2

Alex?

Speaker 3

Thank you, Ed. Good morning, everyone. Let's dive into our Q3 performance. On the top line, we posted total revenue of $2,600,000,000 up nearly 4% from the prior year. This uptick in revenue was driven by a 9% year over year improvement from our Patient Direct segment, with strong revenue growth across many of our product categories, led by sleep and diabetes, our 2 largest categories.

Speaker 3

We also saw a 2% growth in our Products and Healthcare Services segment compared to the prior year, due primarily to revenue growth in non PPE product categories. We continue to see positive momentum in our Medical Distribution division, which helped to offset the decline in our Products division. Our 3rd quarter gross margin was $538,000,000 or 20.8 percent of revenue compared to $513,000,000 or 20.6 percent of revenue in the Q3 of 2022. The changes in our gross margin can also be attributed to the strength of our Patient Direct segment and strong performance across most product categories. Turning to expenses.

Speaker 3

Distribution, selling and administrative expenses for the quarter were $453,000,000 making up 17.5 percent of revenue. The rise of DS and A expenses was mainly due to the added cost of supporting $94,300,000 were 3.8% growth in net revenue when compared to the prior year. This included a $15,400,000 increase in Team 8 benefit costs. However, these increased expenses were partially offset by productivity gains from the operating model realignment program and overall continuous improvement efforts. GAAP operating income for the quarter was $24,000,000 And adjusted operating income was $84,000,000 PHS experienced a decrease in operating income from shifts and product sales mix and reduced demand for PPE.

Speaker 3

Interest expense for the quarter was $38,000,000 which is a $2,000,000 decrease from a year ago, driven by reduced debt, but partially offset by higher interest rates. GAAP net loss for the quarter was $6,000,000 or a loss of $0.08 per common share. Adjusted net income for the quarter amounted to 34,000,000 or $0.44 per share. Adjusted EPS benefited by $0.06 due to a LIFO credit as a result of a $101,000,000 reduction in our PHS segment inventory in the 3rd quarter. We have anticipated this benefit in Q4, but we were able to realize it a quarter early due to exceptional inventory management, while maintaining market leading service levels.

Speaker 3

Adjusted EBITDA in the Q3 was $135,000,000 with a margin of 5.2%. We continue to be well positioned to achieve $30,000,000 of adjusted operating income benefit In 2023, from our operating model realignment program, as well as exiting the year with a $100,000,000 run rate. Moving to cash flow, balance sheet and capital structure. We continue to generate significant operating cash flow With $157,000,000 this quarter, we're going to be year to date total to $629,000,000 driven by strong working capital management and profitability. Our strong cash flow allowed us to reduce total debt by $188,000,000 We ended net debt by $117,000,000 during the 3rd quarter.

Speaker 3

This brings our year to date net debt reduction to $500,000,000 These actions brought our total debt to $2,100,000,000 and net debt to $1,900,000,000 and brought net book leverage to below 4x at the end of the quarter. Having delivered a solid quarter in Q3 in line with expectations and as we head into the 4th quarter, We narrowed our guidance for 2023 to reflect our confidence in Patient Direct and the operating model realignment program. Balance against the lack of visibility and caution we have around PPE product sales for the remainder of the year, we are narrowing our full year guidance for revenue to be between $10,300,000,000 $10,400,000,000 adjusted EBITDA to be between $535,000,000 and $555,000,000 and adjusted EPS to be between $1.30 1 $0.40 As we begin to look ahead to 2024, we're excited about the prospects for our Patient Direct segment, where we plan to invest to ensure its future growth and market leadership. We expect our PHS segment to continue on its path building on the benefits of our operating model realignment program to becoming a low cost provider with a broader proprietary product portfolio, while retaining our focus on the customer. With the combination of our growth outlook and planned investments, we expect 2024 adjusted EBITDA and adjusted EPS to grow in the low double digits.

Speaker 3

We will elaborate more on this at our upcoming Investor Day. With that, I'll now turn the call over to the operator for questions. Operator?

Operator

And your first question today comes from the line of Kevin Caliendo from UBS. Your line is open.

Speaker 4

Hey, guys. Thanks for taking my questions. Appreciate it and congrats on the solid quarter. How much visibility do we have in the business right now when we talk about on Patient Direct when it comes Impact from GLP-1s, which is certainly a topic and on the PPE demand. But just thinking about going forward, do you feel That it's getting better.

Speaker 4

You have better visibility, the same, worsening. Just love to hear as you think about we're Coming up to Analyst Day in a month and everybody is going to be focused on your long range plan and your guidance there. And I'm just wondering how you feel about Your own visibility into the business.

Speaker 2

Thanks for the question. Thanks for the comment upfront. Here's the way we think about the GLP-1s. For us, it's really business as usual. And if you look at what we've seen even again in this quarter We saw again double digit growth in both sleep and diabetes and those categories continue to be extremely strong for us.

Speaker 2

When you think about it, we've got nearly over about 1,000,000 new patients diagnosed with diabetes in America every single year. In addition to that, we still believe there's about 20,000,000 Americans who haven't even been diagnosed yet with OSA that have it. So you just think about the opportunity size out there. I think the second aspect of it, really as we continue to manage and drive this Business, we recognize that you got GLP that will help people, but it's not going to be a cure for everything. We really think also that the market is somewhat overreacted to the GLP-1s.

Speaker 2

So if you look at where we see it going, we continue to see tremendous opportunity in 2 of our major categories, diabetes and sleep, due to the amount of people that haven't been diagnosed and it's still out and the amount of people that are being diagnosed with those issues every year. And we continue to see growth in that segment. So I guess we see it a little bit different than maybe others do.

Speaker 4

Okay. That's helpful. And if I can ask a quick follow-up. We had some news this week that CMS, I guess, is going to reinstitute A plan which would cut DME reimbursement, I don't know if you guys have looked at that. It starts ononetwenty four and could impact The Patient Direct business, have you analyzed that?

Speaker 4

Is it meaningful for you? Any comments there would be helpful.

Speaker 3

Yes, thanks. Good morning. This is Alex Bruni. So we obviously follow this closely. And I think what we're seeing is consistent with our assumptions and what we factored in for next year broadly.

Speaker 3

Ed, I don't know if

Speaker 2

there's something you want to add. Yes, that's really it. I mean, obviously, it's already been factored in. I think there's still again, we also look at it as still tremendous opportunity for growth. And I think you also have

Speaker 5

to look at our payer mix, which is much

Speaker 2

heavily weighted to the private side payer than it is from the public side payer. So That also mitigates some of that risk for us. But again, we think there's tremendous opportunity in that segment. We're working with any of our external suppliers too at the same time As well as expanding our portfolio. So we baked it in already into assumptions for 2024.

Speaker 4

Great. Thanks so much. That's super helpful. Thanks, guys.

Operator

Your next question comes from the line of John Stansl from JPMorgan. Your line is open.

Speaker 6

Great. Thanks. This is John on for Lisa. Just want to walk through the Global Products business. Maybe a little bit of color.

Speaker 6

I think you said down about 14% in the quarter, I guess, are there pockets of relative strength or weakness that you could speak to?

Speaker 2

Yes. If you think about the pockets of strength within the global products, it's really all of the non PPE items. If you think about some of the products you make, whether it's surgical infection prevention products, excluding PPE, we continue to see strength there. In our MediChoice brand products, we continue to see strength there. So it's really isolated To the traditional or classic PPE.

Speaker 2

And now even within that, there's mix between that, whether it be Face protection, gloves, gowns and other aspects. But I think the way to look at it is it's more narrowly isolated in PPE within all of our products, the rest of our S and IP products are doing well. Our MediChoice and our broader product population is doing well. Frankly, Getting through this FDA notice, it's really helped us tremendously too because now, Obviously, working with the FDA closely on this one, it's now reopened up the opportunity for us to start to grow and sell that portion of our facial protection too. So I guess the short answer is, it's really isolated and narrowed to PPE within our Global Products division.

Speaker 6

Great. And then just a quick one on gross margins. It looks like you'll see another step up sequentially into the Q4, which I imagine lines up with seasonality. But Is there anything to call out as we start to think about how gross margins will play out in 2024?

Speaker 3

Yes. Thanks, John. Yes, so the update to the guidance to 20.5% is consistent with where we thought things would be in at Beginning of the year and in Q1, we did take it down a bit in Q2. But obviously, The gross margin is driven primarily by mix, and it is factored into where we think we're going for next year. Obviously, we'll have more to say on that as we get into December at Investor Day.

Speaker 6

Great. Thanks.

Operator

Your next question comes from the line of Daniel Grossi from Citi. Your line is open.

Speaker 5

Hi, guys. Thanks for taking the question. You had a nice improvement in Product and Services EBIT margin sequentially. I think it was around 90 basis points, which was ahead of our expectations. I'm curious if that was in line with your expectations Was it ahead?

Speaker 5

And maybe if you can kind

Speaker 2

of dig

Speaker 5

into what drove that improvement? And then looking forward, obviously 4Q implies a pretty big increase And sequential margins, largely due to seasonality. I'm curious if you can break out that margin improvement for 4Q between products and services and Patient Care.

Speaker 2

Yes. Sure. So absolutely, it was what we assumed it would be. If you think about how we talked about the phasing of the year early on with Profits continuing to rise during the year and having those, what I'll call, larger step changes from Q1 to Q2, Q2 to Q3 and Q3 3 to Q4, that's exactly how we planned it out. And what's really driving that?

Speaker 2

There's a couple of factors that are driving the Product and Healthcare Services segment. It's 1, it's the growth we're seeing in our medical distribution business. So that mid single digit growth that we've seen in the medical distribution business With share gains as well as new wins, that combined with the next aspect of it, which is the operating model realignment, which wasn't just a Tweaking, it's more of a transformational change in how we do business. That's helped us take cost out of the business It helped us add more productivity to the business. It wasn't just the operating model realignment.

Speaker 2

It was our normal continuous improvement team that continued to Drive implementation on that. That's also helped in what was expected. We knew as the year progressed, as we put those programs in place, it would take some time. Now we're starting to see the benefits of those where on the time we had anticipated and to the value we had anticipated. So those are some of the key drivers of what's been what's helped us drive that profit improvement.

Speaker 5

Got it. And you mentioned share gains as a driver of your core distribution growth more recently. I'm curious Where are those wins coming from? Are they from other large natural distributors or kind of smaller, more fragmented distributors? Are they in specific Products, maybe just double clicking to where the share gains specifically are coming from this year?

Speaker 5

Yes. It's Primarily from

Speaker 2

a mix of some smaller, but really more of the larger our larger competitors. And it's a mix of 2 ways. It's a mix of pure new wins that are That was one business from some of our competitors, but it's also expansion at current customers where they may have been doing Self distribution along with us as their distributor partner and they've gotten out of self distribution for us to implement a model that can drive Efficiency for them and really cost savings. The other thing I want to touch on that I didn't on the first question you asked, I think, is important It's really the other thing we've done and while this doesn't necessarily impact the segment profit is what we've done By utilizing both continuous improvement in the operating model program is the reduction In inventory and working capital that has driven significant amount of operating cash flow and frankly has enabled us to pay down a significant amount of debt. We're talking close to $500,000,000 of debt pay down year to date.

Speaker 2

So those are some things we've done that are also Part of the operational model, realignment and really strengthening of our P and HS segment business that translates into other parts of the P and L.

Operator

And your next question comes from the line of Eric Klauber from Baird. Your line is open.

Speaker 7

Thank you for the comments, especially the preliminary outlook on calendar 2024. Quickly trying to do some math on what low double digits means. It looks like if I think of that as being somewhere in the call it 10% to 12%, a little over 12%, maybe. It looks like earnings per share comes in well below the Street, but EBITDA comes in, In line or maybe even above. And I'm just curious, is there something going on below the line here to pull the EPS down more while the EBITDA is actually looking okay?

Speaker 3

Yes. Thanks, Eric. Good morning. No, I think there's nothing extraordinary happening. This is consistent with How we see the business evolving, so there's nothing surprising there.

Speaker 7

Okay. And then with Global Products, The minus 14% due to PPE, but you say everything else is strong. I really think we could use some additional help on Mix within the segment, I. E. How much is PPE, where was that and then how much is the weighting of everything else.

Speaker 7

If you're down 14% and PPE is only a part of the segment, that means PPE has to be down pretty substantially at this point, which To me, it's a bit surprising giving some of the commentary we're seeing from other distributors and some manufacturers, say, the glove companies in Asia, etcetera. So I'm hoping for a little more help with mix within that segment.

Speaker 2

Yes. So if we think about the mix in the segment, last year in Q1, Q2 and Q3 We're really record really the first two quarters, even the Q3 relative to this was really strong. If you recall in Q3 of last year, a lot of our customers For the triplendemic at the time and taking on a significant amount of products. And PPE During the peaks of COVID, it was a material portion of that segment. What I can say, Eric, is we have seen if you think about the drop that we've Seeing in demand for PPE, we've seen that curve flatten out, I would say.

Speaker 2

And now as we start to move forward, as we're starting to overlap some of this next year, as we start to overlap The and I'll call the decrease of stability in it, we would expect it to somewhat flatten out as we go forward.

Speaker 7

Okay. And then On Patient Direct, you highlighted some areas of strength. You also said a couple of times strong new starts in most categories. What were the categories where you did not see strong starts or

Speaker 5

where perhaps there was some pressure?

Speaker 2

Yes, probably the one that continues is really in the home respiratory, home oxygen, NIV, Maybe you got some recall issues, but also in addition to that, during COVID, that was a significantly strong business, both NIV as well as home And that's the one area where you're seeing it. And that's relatively consistent with what we've seen throughout the year. But other than that, The bulk of the categories are doing really well and we decided just to call out 2 of them, which are our 2 largest categories that being sleep and diabetes, Which again both grew at double digits.

Speaker 7

Perfect. And then last one for me. I know it's a lot, but The commentary, maybe some foreshadowing here on heavier investments. When you say investments, are you talking about CapEx, are you talking about M and A? Are you talking about operating expenses, building teams, adding sales?

Speaker 7

I'm just Give us a sense on what you're talking about with the investments looking into 24 plus?

Speaker 2

Yes. We'll go into this in a lot more detail at Investor Day, but It's really more on the operating side of the business. It's commercial, it's category management, it's sourcing, it's Those types of investments that are more operating related, that will have payback as you go forward.

Speaker 7

Okay. Thank you very much.

Operator

And there are no further questions at this time. Mr. Ed Pesicka, I turn

Speaker 4

the call back over Thank

Operator

you for final closing remarks.

Speaker 2

Well, thank you, operator. First of all, I'd like to thank everyone for joining us this morning. As an organization and personal, we are extremely excited about the work that we've done so far in 2023. And I also want to remind you about our upcoming Investor Day. We hope you'll either join us in person because it will be in Boston or virtually on Wednesday, December 6 at 8:30 a.

Speaker 2

M. Eastern Standard Time. We'll be taking a deep dive in the areas and focus on our recent performance, our strategy, our opportunities and our vision for the future of Owens and Minor. So with that, hopefully, we'll see you December 6, and thank you.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • Q3 revenue grew nearly 4% to $2.6 billion, driven by a 9% increase in the Patient Direct segment and 2% growth in the Products & Healthcare Services segment.
  • Operating model realignment program has delivered or is on track to exceed its $30 million benefit target for 2023, driving operational efficiencies and margin improvement.
  • Strong cash flow and debt reduction: generated $157 million in operating cash flow in Q3 ($629 million year-to-date) and reduced net debt by $500 million this year, bringing leverage below 4×.
  • The FDA updated its guidance to confirm that Halyard facial protection products meet filtration and fluid resistance specifications, concluding a seven-month review.
  • 2023 guidance narrowed to $10.3–10.4 billion in revenue, $535–555 million in adjusted EBITDA, and $1.30–1.40 in adjusted EPS; 2024 adjusted EBITDA and EPS expected to grow in the low double digits.
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Earnings Conference Call
Owens & Minor Q3 2023
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