Owens & Minor Q3 2024 Earnings Report

Owens & Minor EPS Results

• Actual EPS: $0.42
• Consensus EPS: $0.41
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.44

Owens & Minor Revenue Results

• Actual Revenue: $2.72 billion
• Expected Revenue: $2.68 billion
• Beat/Miss: Beat by +$40.41 million
• YoY Revenue Growth: +5.00%

Owens & Minor Announcement Details

• Quarter: Q3 2024
• Date: 11/4/2024
• Time: Before Market Opens
• Conference Call Date: Monday, November 4, 2024
• Conference Call Time: 8:30AM ET

Owens & Minor (NYSE:OMI) is a healthcare solutions company, which engages in the product manufacturing and delivery, home health supply, and perioperative services to support care through the hospital and into the home. It operates through the Products and Healthcare Services, and Patient Direct segments. The Products and Healthcare Services segment includes medical distribution, the outsourced logistics and value-added services business, and global products, which manufacture and source medical surgical products through the production and kitting operations. The Patient Direct segment includes the home healthcare business, Byram and Apria. The company was founded by Otho O. Owens and G. Gilmer Minor in 1882 and is headquartered in Henrico County, VA.

Owens & Minor Q3 2024 Earnings Call Transcript

Presentation

[Operator]

Good day, everyone, and thank you for standing by. Welcome to the Owens and Minor Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session. Please be advised that today's conference is being recorded.

[Operator]

I would now like to hand the conference over to your 1st speaker today, Jackie Marcus, Investor Relations.

[Jackie Marcus, Investor Relations at Owens & Minor]

Thank you, operator. Hello, everyone, and welcome to the Owens and Minor's 3rd quarter 2024 earnings call. Our comments on the call will be focused on the financial results for the Q3 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 are posted on the Investor Relations section of our website. Please note that during this call, we will make forward looking statements.

[Jackie Marcus, Investor Relations at Owens & Minor]

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 are included in our press release. Today, I am joined by Ed Pesicka, Owens and Minor's President and Chief Executive Officer and John Leon, our Chief Financial Officer. I will now turn the call over to Ed.

[Edward Pesicka, President & CEO at Owens & Minor]

Thank you, Jackie. Good morning, everyone, and thank you for joining us on the call today. I'd like to begin my remarks by acknowledging our teammates who were affected by Hurricanes Helene and Milton in the Southeastern portion of the United States. While our distribution facilities in the region were largely unaffected, our North Carolina kitting operations was unable to operate regularly due to disruptions in local and regional infrastructure, which caused some delays in deliveries. This kitting facility has been fully operational for the past few weeks.

[Edward Pesicka, President & CEO at Owens & Minor]

More importantly, our teammates and their families face significant and in some cases, unimaginable personal losses. We are working with these teammates and their communities to help them recover. Turning to our financial and operational performance in the Q3, we achieved top line growth across both segments, highlighted by exceptional demand for sleep supplies and diabetes in our Patient Direct segment, as well as strong same store sales within products and healthcare services. Also in the quarter, we utilized some of our cash to reduce our overall debt and made additional investments in both segments to drive greater long term efficiencies. I am pleased with our progress and I'm confident that we will maintain this momentum, leading to good sequential growth in cash flows in the upcoming quarter.

[Edward Pesicka, President & CEO at Owens & Minor]

Our Products and Healthcare Service segment once again reported solid mid single digit revenue growth. This strong performance was driven by the strengthening of our existing customer relationships and the successful onboarding of new opportunities. Additionally, we continue to see prices stabilize in several of our key product categories, including gloves more recently. Our improved top line performance is a strong indication that our recent investments in our product and healthcare services segment were the correct and prudent choices to drive long term growth. Turning to our Patient Direct segment.

[Edward Pesicka, President & CEO at Owens & Minor]

We are seeing positive returns from our investments earlier this year, which will drive growth through 2025. In the Q3, we delivered mid single digit year over year top line growth driven by strong demand across our served indications, most notably in our diabetes products and sleep supplies. Two examples of the investments to further improve our business were our Sleep Journey program as well as our enhancements to our revenue cycle process. The Sleep Journey is focused on improving the patient experience from onboarding new patients to making it easier for patients to obtain the supplies they need. Both of these programs are examples of us not resting on our success.

[Edward Pesicka, President & CEO at Owens & Minor]

We also made progress with respect to our balance sheet, having reduced total debt by nearly $200,000,000 in the most recent quarter, using cash on hand and bringing our total year to date debt reduction to approximately $210,000,000 In the coming quarters, we are committed to continuing our debt repayment, while also investing in our people, products and processes. In mid October, we shared an update to the Rotech Healthcare Holdings acquisition timeline, noting that we now expect the deal to close in the first half of twenty twenty five. In a highly regulated industry like healthcare, it is common for the Federal Trade Commission to request additional information and documentary materials for their review process. Our team is working closely with the FTC and Rotech to respond as quickly as possible, and we remain confident the deal will close in the months ahead. Most importantly though, the addition of Rotech to our patient direct offering allows us to better support and serve patients, providers and payers across the network.

[Edward Pesicka, President & CEO at Owens & Minor]

And we can more comprehensively serve patients with additional product offerings and improve service for patients with chronic conditions. In summary, we have delivered on our commitments for the 1st 3 quarters of 2024. Looking ahead, we are confident in our ability to demonstrate continued sequential growth and improving cash flows from the 3rd to 4th quarter, positioning us well as we enter 2025. As we look ahead to 2025, we recognize the Chinese tariffs on key categories such as facial protection and gloves will impact our industry. However, our manufacturing footprint and sourcing profile is not dependent on China, unlike many of our competitors.

[Edward Pesicka, President & CEO at Owens & Minor]

This positions us well in the upcoming tariff environment. Before I turn the call over, I want to take a moment to congratulate John Leon on his appointment as Chief Financial Officer. John has been a critical member of the team here at Owens and Minor over the last 7 years, and I look forward to working with him in his official role as CFO. With that, I will now turn the call over to John to discuss our Q3 financial performance in more detail. John?

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

Thanks, Ed, and good morning, everyone. I will start by providing an overview of our financial results and review some of the key drivers of our Q3 performance as well as our outlook for the remainder of the year. Our revenue for the quarter was $2,700,000,000 up 5% compared to the prior year. Once again, we saw solid growth across both segments. The Products and Healthcare Services segment grew 5% overall as compared to the Q3 of 2023 with nearly 6% year over year growth in our medical distribution division driven by same store sales gains as we've seen throughout the year.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

There was one more selling day this year compared to Q3 2023, which accounted for 170 basis points of the segment's growth. Patient direct revenue grew by 6% compared to the Q3 of last year. Once again, diabetes and sleep supplies led the growth and most therapy categories experienced attractive growth as well. Respiratory therapies such as NIV and oxygen continue to lag and are expected to begin to return to reasonable growth levels in 2025. Within Patient Direct, the backlog of new patient starts due to delays in patient eligibility verification continue to slowly shrink throughout the quarter and has been reduced to nearly half of the peak levels we saw in the spring.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

This remains largely a timing issue and we are confident the number of patients with eligibility pending will continue to steadily decline. Gross profit in the 3rd quarter was 560,000,000 dollars or 20.6 percent of net revenue. Margins expanded by about 20 basis points from the Q2 of this year and were about 20 basis points lower than last year's Q3. You may recall that last year's Q3, we had a large LIFO credit due to a significant drop in inventory at that time and this drove the current decline in year over year gross margin. Our distribution, selling and administrative expenses for the quarter were 17% of revenue at $470,000,000 up from $453,000,000 in last year's Q3 when DS and A was also about 17% of revenue.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

The dollar increase was primarily due to sales growth. GAAP operating income for the quarter was $24,200,000 up slightly from the Q3 of 2023 and adjusted operating income was $84,200,000 flat with the prior year and 10% higher than the Q2 of 2024. Interest expense for the Q3 was just under $37,000,000 down about $1,500,000 compared to the Q3 of 2023. Continuing debt reduction, partially offset by higher interest rates versus last year drove this change. Our GAAP effective tax rate for the Q3 was 7.4 percent and the adjusted effective tax rate was 29.3%.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

Our GAAP net loss for the quarter was $12,800,000 or a loss of $0.17 per share compared to the Q3 last year with a net loss of $6,400,000 or $0.08 per share. Adjusted net income for the quarter was $33,100,000 or $0.42 per share compared to $34,100,000 or $0.44 per share last year. Adjusted EBITDA was $142,000,000 up over 5% versus $135,000,000 reported during the Q3 last year. We generated $27,000,000 in operating cash flow this quarter, and we expect better operating cash flow in the Q4 reflecting the quarter to quarter lumpiness we mentioned back in August. More importantly, debt was reduced by almost $200,000,000 which included the retirement with cash of the $171,000,000 that was remaining of our 20 24 notes as well as $27,000,000 in permanent reductions in term loans.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

It's also worth noting that since we closed the Aphria acquisition, we have now paid down over $750,000,000 of debt. Overall, we are pleased to have delivered on our expected financial performance through the 1st 3 quarters of 2024. Now as we look toward the end of the year, the segments are in good shape and expect to realize seasonal benefits. There are however a few headwinds we have to consider. For example, in Products and Healthcare Services, we continue to incur cost to manage around manufacturer supply chain problems stemming from hurricane related infrastructure damage, which also has caused delay in procedural volume among many of our customers.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

Also, despite recent improvements, we had hoped by this time to have eliminated the patient eligibility backlog within Patient Direct and have those customers on board and contributing to our results. Of course, with the passage of time, we are now able to refine our guidance and modeling assumptions for the full year. We now expect revenue to be in the range of $10,600,000,000 to 10,800,000,000 dollars adjusted EBITDA to be in the range of $540,000,000 to $550,000,000 and adjusted earnings per share with the overall range of $1.45 to $1.55 This information and other key modeling assumptions were filed this morning under Form 8 ks and reside on the Investor Relations section of our website. Again, I want to remind you that this guidance excludes any impact of the Rotech acquisition, which we now expect to close during the first half of twenty twenty five. Now, I'd like to turn the call over to the operator for the Q and A session.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

Operator?

[Operator]

Thank you. Our first question comes from the line of Kevin Caliendo with UBS. Please go ahead.

[Kevin Caliendo, Managing Director at UBS Group]

Great. Thanks for taking my question guys. First one, I guess, just Jonathan, you made a comment that your guidance was affected by manufacturing supply chains, procedural volumes and patient eligibility timing around patient direct. Can you maybe talk about the impact of each of those, like how meaningful each of those was when we think about the EBITDA guidance that like what changed in essence? Give us maybe some magnitude of that.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

Yes. It's if you want to kind of think about ranking it, Kevin, certainly we have been incurring costs throughout the quarter. A lot of our customers continue to tell or talk about they can't get what they need for the procedure volume in the surgical procedures to continue. So I would say that's probably an unexpected driver that really made us take a second thought around the guidance for the rest of the year. Now that could come back very quickly, but we just don't have a little line of sight into what that will be.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

Now we've been living with the backlog at Patient Direct for the really for most of the year. That continues to get better. We expect that will get better disproportionately positively in a positive way during the Q4. Obviously, we get to Q1, you start again with a lot of changing in health insurance providers at the customer level. But I would say, we need to really get through the bigger impact is going to be the cost and getting our provider customers and distribution back online and getting the procedure volume that they expect.

[Edward Pesicka, President & CEO at Owens & Minor]

And I'll add a little more color to that. That one right there that John just talked about is, I've talked to both directly and indirectly leaders of various hospitals and IDNs across the U. S. And the hurricane related issues and the product shortages that they've had has caused, to some extent, delays in procedural volume. Again, I know that manufacturers are working as hard as they can to get products back online and back out to be able to serve the patients.

[Edward Pesicka, President & CEO at Owens & Minor]

But as that procedural volume slows down and that could have an impact on the business. And if you think about it from a perspective, the seasonality in the P and HS business is really the Q4 is the largest quarter from volume that we would anticipate because it's generally the largest quarter in procedural volume across the industry.

[Kevin Caliendo, Managing Director at UBS Group]

Got it. And if I can ask a quick follow-up. So was there any impact of this on 3Q? And if we didn't have the weather and this Patient Direct issue, would your guidance have been the same, higher or lower? Just trying to understand sort of the magnitude of what did this impact 3Q?

[Kevin Caliendo, Managing Director at UBS Group]

And was there anything else? Like what would your guidance have been ex the weather, procedural volume and patient eligibility issues?

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

It certainly would have been higher, Kevin. I'm not sure that maybe the midpoint would have come down a little bit, but I think we would have been closer to where we were at the when we last reported guidance. Now obviously, we've been we've had some EBITDA guidance issues all year. We've acknowledged that. And that may have been a little bit from EPS perspective.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

Not much change to maybe a little bit lighter than what we saw last time. So definitely higher than what we went out this morning.

[Kevin Caliendo, Managing Director at UBS Group]

Got it. Thanks guys.

[Operator]

Our next question comes from the line of Michael Cherny with Leerink Partners.

[Michael Cherny, Senior Managing Director & Senior Research Analyst at Leerink Partners]

Good morning and thanks for taking the question. A lot of moving pieces as you mentioned, I appreciate the color regarding 4Q. How should we think about how those will set up into the jumping off point to 2025? As you sit here today, especially ahead of the Rotech acquisition closing, any more detail you can give us on where you see any potential macro puts and takes, operational puts and takes into 2025?

[Edward Pesicka, President & CEO at Owens & Minor]

Sure. I can start and then John can add some additional information. So if I think about the businesses, I'll talk about Patient Direct first. Obviously, the work we put into the sleep journey will all have positive impacts on us in 2025. As we've worked throughout the last several quarters to make it easier to onboard new patients as well as making easier to make sure that those patients can get their supplies renewed.

[Edward Pesicka, President & CEO at Owens & Minor]

Once that base is in the system, then it just continues on somewhat as annuity. So all the work put into that and what we saw within our Patient Direct business, again, this segment, that should continue into 2025. On our Product and Healthcare Services segment, on some of the procedural issues and volume or procedural volume because of some of the product shortages, kind of resets on January 1. As people hit their deductibles, they have additional procedures, which is normally why Q4 is the biggest quarter. Deductibles, they have additional procedures, which is normally why Q4 is the biggest quarter.

[Edward Pesicka, President & CEO at Owens & Minor]

All those deductibles start beginning on January 1, so it will reset there. I think the other wildcard that you really have out there, and we talked a little bit about it is the tariffs that are coming on board. If we think about it that facial protection is going to have a 25% tariff effective January 1, 2025 and medical and surgical gloves is going to have a 50% tariff in 2025. We talked a little bit about it in our prepared remarks, that could have a headwind on the industry, but could also create a tailwind for us because of our manufacturing and sourcing footprint. So that could have an impact on the P and HS segment.

[Edward Pesicka, President & CEO at Owens & Minor]

So you think about the three things. One is all the work we've done with the sleep journey in our rev cycle, that momentum just carries into 2025. Should procedure volume slow down in 2020 in Q4 because of some of the product shortfalls, that resets on January 1. And then the tariffs can have will have an impact. It's just to what degree that's yet to be seen.

[Michael Cherny, Senior Managing Director & Senior Research Analyst at Leerink Partners]

And then if I could just ask one more. You mentioned in the press release the dynamics of some of your recent share pickup. I know the dynamics of share gain has been a base point recently across the market. Can you give a little sense on where you're seeing your best opportunities for incremental share gains, especially, Ed, as you had previously commented about walking away from some of the lower margin business? And on that latter point, do you feel like your customer base is at a point now where that low margin exit, at least on the product and healthcare services side is done?

[Edward Pesicka, President & CEO at Owens & Minor]

I don't want to say done. It's never finite. There's still we're still assessing that. But I would say on the on boarding, I think there's a dynamic also on the on boarding. Like we on boarded one of our biggest customers and we're pretty much getting through that here in Q3 and we'll wrap up in Q4 on that one customer.

[Edward Pesicka, President & CEO at Owens & Minor]

Generally speaking, that does create a headwind in the business as you bring them on. The year 1 is the least profitable year, I would say, out of a 5 year deal. So we've got the full impact of this year of that big onboarding, which should create opportunities as we move into 2025. From an opportunity standpoint, I think there's opportunities really in 2 spots in P and HS since we're talking about that business. One is opportunity to expand our product portfolio.

[Edward Pesicka, President & CEO at Owens & Minor]

I talked a little bit about gloves and our glove footprints. I think as some of these tariffs go into place, it does create an opportunity for us to win some new business. I think we get fixated so much on winning business and winning distribution business, but we look at the segment as a whole, whether it's winning product business at existing distribution customer or outside of the channel or inside of the channel. So we think that creates an opportunity for us in 2025, these tariffs in our footprint not being products coming out of China.

[Michael Cherny, Senior Managing Director & Senior Research Analyst at Leerink Partners]

Great. Thank you.

[Operator]

Our next question comes from the line of Alan Lutz with Bank of America.

[Allen Lutz, Analyst at Bank of America]

Good morning and thanks for taking the question. Really nice margin performance in Patient Direct. Can you talk about the sustainability of this margin moving forward? I know that you talked about moving through backlog and there's still some work to go and you're still investing in the commercial

[Allen Lutz, Analyst at Bank of America]

part of that.

[Allen Lutz, Analyst at Bank of America]

We're just trying to think through margins in the quarter were really strong. How should we think about the trend from here? Thanks.

[Edward Pesicka, President & CEO at Owens & Minor]

I'll tell you what's nice, if you dig deeper into the business, the margin expansion came really both in fixed cost leverage on OpEx as well as on overall gross margin. And as we think about that business, it's because of the amount of effort we're putting into continuing to optimize the business. I know I've talked about it now 2 or 3 times, our sleep journey. We really tore that apart over 2024 here to understand how do we make it easier so that way we can onboard patients faster. The longer you wait to onboard and longer it takes you to onboard patients, 1, it has an impact on the patient because

[Edward Pesicka, President & CEO at Owens & Minor]

they're not getting the products they need, but 2, it has an

[Edward Pesicka, President & CEO at Owens & Minor]

impact on the business. They're not getting the products they need, but 2, it has an impact on the business. The amount of effort that we put into that this year has shown us how we can streamline our onboarding practice. So that is an opportunity to continue into 2025. And the same thing with product renewal, making sure that the patients get the product when it's available to them.

[Edward Pesicka, President & CEO at Owens & Minor]

So that way, again, they can have the high level of service. I think as we really cut through all of it in our patient direct business, ultimately, the end customer is the patient. So we have to have impeccable service. As long as we maintain that high level of service, we'll maintain those that customer base and creates the opportunity to pick up additional customers. So the relentlessness, I would say, in our patient direct business to not rest on our laurels and what we've already accomplished.

[Edward Pesicka, President & CEO at Owens & Minor]

And again, the sleep journey is a great example of that, tearing it apart of how we've done it and making sure we have it making sure it's easier for the patients going forward. The other area of revenue of margin expansion is really around the revenue cycle and cash collection, making sure we have a rigorous process. And that's another area we worked relentlessly on this year. We're starting to see that benefit. Every dollar that you don't collect ends up being a dollar lower on the bottom line.

[Edward Pesicka, President & CEO at Owens & Minor]

So that's helped us also. So the expectation is just like you've seen in the past years, we would expect year over year to get some type of margin expansion, overall margin expansion in the business. And I think we also have to recognize that the business is seasonal, that we normally see improvement in the back half of the year versus the front half of the year overall because of the volume and the seasonality in the business. So really bullish on what we can continue to do in our patient direct business and excited about the work the team has done in 2024 to really improve our processes, which ultimately improve our service to the end user, that being the patient.

[Allen Lutz, Analyst at Bank of America]

Great. Thanks, Ed.

[Edward Pesicka, President & CEO at Owens & Minor]

Our

[Operator]

next question comes from the line of John Stansall with JPMorgan.

[John Stansel, VP - Equity Research at JP Morgan]

Great. Thanks for taking my question. Just wanted to think through products and healthcare services growth on the top line. I think you called out kind of the 170 basis points from the extra working day, positive commentary about the new wins contributing as well as medical distribution, same store sales. Can you just kind of give some color as to how global products contributed in the quarter and then kind of how you're thinking about that growth going forward as we kind of jump off into 2025?

[Edward Pesicka, President & CEO at Owens & Minor]

Yes, I mean global again, we think about the segment holistically and the 2 are really intertwined together. Overall, from a global product standpoint, though, within the business, we continue well, 1, we saw stabilization in pricing for gloves. I think that's important because that is one of our bigger categories. I think as we look into the future, there's a lot of movement potentially on gloves and pricing with tariffs and other things impacting that part of the segment. We continue to see, albeit slow growth of our new products that we're bringing into the market.

[Edward Pesicka, President & CEO at Owens & Minor]

We're learning as we do this. It's something that really hasn't been done. It owns a minor and as we continue to bring the products in. So for example, we're making sure we have the inventory in stock ready to go as we're starting to launch new product portfolio and that continues to do well. And then overall, and just as a general comment, I would say our international part of that business has improved also in the Q3 and we've seen some sequential improvement in our international business during the year.

[John Stansel, VP - Equity Research at JP Morgan]

Great. And then just one quick one. Within the operating profit contribution of P and HS, step down from 2Q on margin basis, is there just anything to note there particularly or just kind of normal course?

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

No, John. There were just a couple of things that popped up during the quarter certainly. A big one will be foreign exchange. You would have seen both currencies in Thailand and Malaysia strengthened significantly during the quarter compared to the USD. So that cost us a few $1,000,000 of potential operating income there.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

As well, we saw increases in transportation and storage costs. As Ed mentioned earlier, on boarding of new customers, those 1st several months aren't the most profitable and profitability tends to ramp up over time.

[John Stansel, VP - Equity Research at JP Morgan]

Great. Thanks.

[Operator]

Our next question comes from the line of Stephanie Davis with Barclays.

[Stephanie Davis, Managing Director - Healthcare Technology & Distribution at Barclays]

Hey, guys. Thanks for taking my question.

[Stephanie Davis, Managing Director - Healthcare Technology & Distribution at Barclays]

And Jonathan, congrats on making it official.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

Thanks, Stephanie.

[Stephanie Davis, Managing Director - Healthcare Technology & Distribution at Barclays]

I was hoping we could call out some of the puts and takes of free cash flow this quarter, just given some of the moving pieces with weather and macro. And with that in mind, are you still expecting positive free cash flow for the year or is that moderated a bit?

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

Yes, we are. And we kind of expected that the Q3 will be a little softer and the inventory would build a bit during the quarter. Actually, as always, tend to gripe about, I mean, the snapshot at September 30 wasn't doesn't necessarily reflect what's going on during the quarter. Cash flow was better during the quarter, allowed us to pay down a lot of the debt. We obviously had the debt for the 24 notes, but we still paid out incremental debt beyond that.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

But inventory did rise late in the quarter with payables to a certain extent. So we do expect that to improve as we get into Q4 and we do expect no change in the expectation for much better free copy and cash flow and free cash flow as we get into Q4 compared to Q3. And we're not really surprised by the, I'll call it, relative softness to Q2 that we saw this past quarter.

[Stephanie Davis, Managing Director - Healthcare Technology & Distribution at Barclays]

So I guess following up

[Stephanie Davis, Managing Director - Healthcare Technology & Distribution at Barclays]

on that, you did call it

[Stephanie Davis, Managing Director - Healthcare Technology & Distribution at Barclays]

a bunch of initiatives to improve cash flows last quarter, right? You talked about like managing inventory ramps, improving AP and AR terms. Is there any updates you can give us on that?

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

I would say it's going as expected. Certainly, on the inventory side, which is our biggest driver, we are somewhat dependent on our manufacturer supply partners. So when things get delivered and how we manage that process will dictate where we land the plane at the end of the quarter. But it was like I said, the quarter was better than it actually looks on September 30. We actually had fairly effective working capital management during the quarter.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

And I think we'll see more of that come to fruition as we get through the buying required for the Thanksgiving and the year end holidays and manufacture shutdowns. We have that planning well in hand. And I think by the time we get to the December 31, we'll see a much improved operating cash flow result for the Q4.

[Stephanie Davis, Managing Director - Healthcare Technology & Distribution at Barclays]

Very helpful. Thank you.

[Operator]

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

[Eric Coldwell, Senior Research Analyst at Baird]

Thanks. Good morning. So you've mentioned the strong growth in sleep and diabetes a few times, but would you care to quantify those growth rates in those two categories at least directionally?

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

No. I don't know because you know we don't disclose that, but I would certainly say diabetes continues to lead the way. Sleep supplies were again really strong and as we talked about as Ed mentioned also as that backlog and patient eligibility verification clears that was getting even stronger and as you know that's a little better margin business for us. But diabetes given the size of the category we're still seeing very strong growth there. And as I mentioned, we're still not where we need to be on NIV in oxygen.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

But we're still really pleased with all the other categories, even the smaller categories, whether it be wound, osteomy, urology, doing very well at the same time.

[Eric Coldwell, Senior Research Analyst at Baird]

I was trying to get a sense on how much of the strong growth, whatever it is, is working through the backlog as opposed to more current real time market demand and or share capture whatever it is describing

[Eric Coldwell, Senior Research Analyst at Baird]

those growth?

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

Yes, I

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

would suggest the Q3 was more real time market demand. It's a high grade problem and that we're clearing a backlog while incremental demand comes in. So we're working furiously to clear that backlog, but it's we're also pleased with the incremental demand that we see every day.

[Eric Coldwell, Senior Research Analyst at Baird]

And on the patient backlog that built earlier in the year, I think some was changed healthcare. We also heard rumblings in the spring about inability to get some of the sleep product over. Were there other factors or what were the main factors that drove the patient backlog? And then my last follow-up is why is it taken longer than you expected to work through that?

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

Yes. I would say on the first part of your question, no supply chain issues. It's still the change issue. The manual work that needs to be required, the loss of functionality, some of that change did offer that we no longer have. And some of the delay is quite frankly due to the incremental demand that we're seeing.

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

So we have a queue of backlog, we have a queue of constant new starts every day. So something we need to manage or work through, but again a bit of a high grade problem to have.

[Eric Coldwell, Senior Research Analyst at Baird]

Got it. Okay. Thanks very much.

[Operator]

Our next question comes from the line of Daniel Grosslait with Citi.

[Daniel Grosslight, Analyst at Citigroup]

Hi, guys. Thanks for taking the question. As you think about perhaps taking advantage of some of the tariffs that are coming into effect in 2025 with your current manufacturing footprint. I'm curious if there are any additional investments that you need to make, whether it's a whole new plant or increasing the lines at current plants. Just anything that you'll need to do in terms of CapEx to be in a good position to perhaps take share once those tariffs are in effect?

[Edward Pesicka, President & CEO at Owens & Minor]

Yes. I think there is an increment there is not incremental capital we need to spend to be able to continue to produce the products we need. If you do recall, we did a large investment back in 2020 related to our glove factory, added 10 additional lines. That facility can run 20 fourseven at capacity. We also continue to have our operations in North Carolina as well as Texas for facial protection as well as the fabric for facial protection that has capacity availability.

[Edward Pesicka, President & CEO at Owens & Minor]

So that's how we're thinking about this as we move forward. So there really isn't any incremental capital investment that would be required.

[Daniel Grosslight, Analyst at Citigroup]

Got it. Okay. And John, you mentioned that there were some increase in transportation costs this quarter unexpectedly. Is that the cost of shipping? Or maybe if you can just dig in a little bit deeper into where you're seeing the biggest increase in transportation costs and how you're handling that for the next year or so?

[Jonathan Leon, Executive VP, CFO & Corporate Treasurer at Owens & Minor]

Yes, it is shipping as well as storage as well. We're seeing increased storage costs. I mean, as inventory fluctuates, we have to account for that and make sure we have the capacity in place for that. And secondly, everything from ocean freight to ground transportation has risen a little bit on us for the last several months. It's not really new news, but we have to match through that into Q4 into 2025.

[Daniel Grosslight, Analyst at Citigroup]

Got it. Thank you.

[Operator]

We have no further questions at this time. I will now turn the call back over to Ed Pesicka for any closing remarks.

[Edward Pesicka, President & CEO at Owens & Minor]

Thank you, operator. Obviously, I want to thank our teammates, our teammates who were impacted by the hurricanes as well as the teammates that supported them, so that way they could overcome the adversity that we had impacted that impacted us in the Q3. When I think about the future, I'm incredibly excited about what's yet to come for Owens and Minor. From continuing to drive greater efficiencies across the business, a lot of that you heard about today in our Patient Direct in both the sleep journey as well as in our rev cycle management, as well as to the approval and integration of Rotech into our Patient Direct business. Finally, I look forward to getting together with everyone in early next year to talk about the progress we're making, close out 2024 and clearly define where we're going in 2025.

[Edward Pesicka, President & CEO at Owens & Minor]

So thank you, everyone.

[Operator]

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

Participants

Executives

• Jackie Marcus, Investor Relations
• Edward Pesicka, President & CEO
• Jonathan Leon, Executive VP, CFO & Corporate Treasurer

Analysts

• Kevin Caliendo, Managing Director at UBS Group
• Michael Cherny, Senior Managing Director & Senior Research Analyst at Leerink Partners
• Allen Lutz, Analyst at Bank of America
• John Stansel, VP - Equity Research at JP Morgan
• Stephanie Davis, Managing Director - Healthcare Technology & Distribution at Barclays
• Eric Coldwell, Senior Research Analyst at Baird
• Daniel Grosslight, Analyst at Citigroup