Owens & Minor Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 20, 2024

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Owens and Minor Fourth Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to the 1st speaker today, Jackie Marcus, Investor Relations.

Operator

You may begin. Thank

Speaker 1

you, operator. Hello, everyone, and welcome to the Owens and Minor 4th quarter 2023 earnings call. Our comments on the call will be focused on the financial results for the Q4 of 2023 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.

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 1

Ed?

Speaker 2

Thank you, Jackie. Good morning, everyone, and thank you for joining us on the call today. As you saw in our press release morning, we closed out 2023 with strong positive momentum and we exited the year in a position of strength. Our Patient Direct segment continued to outpace market growth as we leveraged our proven commercial model in one of the fastest growing areas of healthcare, the home. Our Products and Healthcare Services segment successfully pivoted as we reset our approach post pandemic.

Speaker 2

We did this by leveraging the operating model realignment program, executing at a high level and winning new business, which collectively put our P and HS segment on a positive trajectory for revenue growth and margin expansion. We also finished the year by launching a 5 year strategic plan to drive growth and enhance profitability, and we didn't wait until 2024 to begin executing on the strategy as we began to invest in both of our segments during the Q4. And finally, we launched our purpose and vision in the Q4, which will continue to solidify a results oriented culture at Owens and Minor. I'll provide additional comments on our long term strategy later in my prepared remarks, but now let me focus on 2023. When I reflect on our performance in 2023, I'm extremely proud of how our organization continues to perform against our objectives, and the proof of that hard work and strong execution is evident across our financial results.

Speaker 2

For example, in fiscal 2023, we generated over $740,000,000 of operating cash flow, which was an annual record for Owens and Minor. This cash flow performance helped to significantly strengthen our financial profile as we reduced debt by nearly $600,000,000 during the year. And this strengthened balance sheet will support many of the value creation initiatives included in our 5 year strategic plan. Next, during the year, we delivered more than $40,000,000 in operating model we delivered significant sequential improvement in key performance areas with adjusted EPS growing from $0.05 in Q1 to $0.69 in Q4 and adjusted operating margin improving from 1.9% in Q1 to 4.2% in Q4. While revenue declined 8% in Q1, it increased to a positive 4.1 percent in Q4 on a year over year basis.

Speaker 2

With our Patient Direct segment leading the way with full year 2023 organic revenue growth of nearly 10% and continuing to outperform the market, while remaining well positioned for further expansion as demand for home based care accelerates. So as you can see, we're excited about our business right now given the substantial flexibility we've established and the strong performance in 2023. Let me close with a quick summary of each segments. In terms of our market leading Patient Direct segment, we had an outstanding year. We grew the business double digits, continue to expand the overall profit contributions, further the integration of Aphria and began investing in additional growth initiatives.

Speaker 2

As we look forward, we maintain our belief that we can continue to outpace the market and expand our position as a true leader in home based care. In terms of our Product and Healthcare Services segment, during 2023, we utilized our operating model realignment program to lower our cost to serve, expand our profits and increase our cash flows, all of which have repositioned the business for long term success. Before I share my thoughts on 2024 and the future for Owens and Minor, I would like to turn the call over to our Chief Financial Officer, Alex Bruni, to discuss our financial performance and our 2024 guidance. Alex?

Speaker 3

Thank you, Ed. Good morning, everyone. Diving into our Q4 performance. On the top line, we posted consolidated revenue of $2,700,000,000 up more than 4% over the prior year. This uptick in revenue was driven by a nearly 8% year over year improvement in our Patient Direct segment, with growth across several product categories.

Speaker 3

We also saw 3% growth in our Products and Healthcare Services segment compared to the prior year. Notably, there was growth in both the Medical Distribution and Global Products divisions in the quarter. For the full year, we reported revenue of $10,300,000,000 up 4% year over year. Our 4th quarter gross margin was $570,000,000 or 21.5 percent of revenue, compared to $407,000,000 or 16 percent of revenue in the Q4 of 2022. Full year gross margin was $2,100,000,000 or 20.6 percent of revenue, up 2 21 basis points.

Speaker 3

Our gross margin improvement can be attributed to the growing contribution from our Patient Direct segment and the efficiency and productivity gains in the Products and Healthcare Services segment. Additionally, the comparison to the prior year was impacted by the non recurrence of the Q4 2022 inventory valuation adjustment of $92,300,000 Turning to expenses. Distribution selling and administrative expenses for the quarter were $457,000,000 making up 17.2 percent of revenue, in line with the Q4 of 2022. For the full year, DS and A expenses were $1,800,000,000 or 17.5 percent of revenue. The DS and A percentage of revenue reflects the growing contribution from Patient Direct, including a full year of Apria.

Speaker 3

GAAP operating income for the quarter was $60,000,000 and adjusted operating income was $111,000,000 For the full year 2023, GAAP operating income was $105,000,000 and adjusted operating income was $305,000,000 These results reflect a notable improvement in operating income, increasing by 2 12% and a 65% growth in adjusted operating income compared to the Q4 of 2022. Notably, both the Patient Direct and Products and Healthcare Services segments exhibited sequential increases in segment income from the 3rd to the Q4 of 2023. Interest expense for the Q4 was $37,000,000 a 10% decrease from the Q4 of last year, largely due to our significant debt reduction during the year. Interest expense for the full year was $158,000,000 a 23% increase from the prior year, driven primarily by the funding from the Apri acquisition in early 2022. GAAP net income for the quarter was $0.23 per share and adjusted EPS was $0.69 For the full year, GAAP net loss was $0.54 per share and adjusted EPS was $1.36 Adjusted EBITDA in the Q4 was $170,000,000 and for the full year was $526,000,000 or 5.1 percent of revenue.

Speaker 3

For the operating model realignment program, we delivered in excess of $40,000,000 of adjusted operating income benefit, exceeding our goals of $30,000,000 in the year and exiting the year with an annual run rate of over $100,000,000 Moving to cash flow and the balance sheet. We continue to generate substantial operating cash flow of $112,000,000 for the quarter and reached a full year total of $741,000,000 driven by robust working capital management and operating results. As a result of this significant cash flow, we reduced total debt by $49,000,000 for the 4th quarter and by $403,000,000 for the full year, bringing the balance to $2,100,000,000 at year end. In addition, we reduced net debt by 76 $1,000,000 in the Q4 and by $577,000,000 for the full year, bringing the balance to $1,900,000,000 Net book leverage was 3.5 times at the end of the 4th quarter. Now let's look at our full year 2024 guidance.

Speaker 3

Consistent with what we discussed on the Q3 call and at Investor Day, we expect net revenue to be in the range of $10,500,000,000 to $10,900,000,000 adjusted EBITDA to be in the range of $550,000,000 to $590,000,000 and adjusted EPS to be in the range of $1.40 to $1.70 Also, as previously discussed, we expect the earnings trajectory to follow our normal seasonal pattern throughout the year. To help somebody with their models, we'd expect that seasonality to lead to a roughly 1 third, 2 third split across the first and second halves of the year from an earnings perspective. And we'd expect to deliver improvement in each sequential quarter. Looking ahead, we remain committed to delivering the outlook for both segments, having outpaced market growth in our Patient Direct segment and delivered year over year profit improvement in products and healthcare services. As we enter 2024, we're excited to sustain this momentum and to continue on the initial phase of our 5 year strategy and investment plan, laying the groundwork for continued future success.

Speaker 3

I'd now like to turn the call back over to Ed for his thoughts on 2024 and Owens and Minor's role in the future of healthcare. Ed?

Speaker 2

Thank you, Alex. So again, we had great execution in 2023, and we remain laser focused on maintaining and accelerating our business momentum as we move forward in 2024. At our Investor Day in December, we shared our Vision 2028 plan and I outlined 3 key pillars that are critical to our future growth. These include accelerating growth in the high potential areas of the business, optimizing all of our businesses to drive stronger long term profitability and leveraging our strong balance sheet by investing across our platforms to drive long term value. In terms of the near term priorities that support these pillars, let's start with our growth engine and that's our Patient Direct segment.

Speaker 2

We have a proven commercial model across our core categories including sleep, home respiratory, diabetes, ostomy, urology and wound care. These are areas for investment as we fill geographic gaps, add commercial resources and invest in technology to improve customer satisfaction, grow revenue and expand margins. The technology investments will include e commerce enhancements in our patient management platform and innovative digital marketing. Overall, we will use technology to rethink the patient journey. Lastly, we'll focus to grow outside of our traditional areas and into adjacencies and other comorbid conditions.

Speaker 2

The results of these investments combined with continued strong execution will enable the Patient Direct segment to continue to grow above market rates, and we believe we can continue to do so by at least 200 basis points per year. Moving to our Products and Healthcare Services segment. We're going to optimize this business by better leveraging our scale, growing our proprietary product portfolio and expanding into adjacent markets and channels. As you can see from our results, we are already making progress in delivering on our promises. Andy and his team are investing where the customers find differentiation and they're taking costs out where they don't, ultimately lowering our cost to serve.

Speaker 2

They are also looking at our footprint to make sure our distribution and manufacturing costs are optimized. While lowering cost to serve remains a priority in PNHS, we are also investing to expand our higher margin proprietary product portfolio combined with investments to enhance the customer experience. And finally, we're investing in our business and our teammates for both short and long term. As I mentioned earlier, during 2023, we generated over $740,000,000 of operating free cash flow. That's a tremendous number.

Speaker 2

We also had over $575,000,000 in net debt reduction, another incredible milestone for our company. So with this momentum in mind, we are focused on deploying capital both thoughtfully and timely with a focus on supporting expansion, technology and investments in inventory to support new win implementations, enhanced service and portfolio expansion. We'll also continue to explore additional M and A to expand and scale our business. In conclusion, I'm incredibly excited about the momentum we're bringing into 2024, and I look forward to sharing our progress with all of you as the year progresses. I'd like to now turn the call over to the operator to open it up for questions.

Speaker 2

Operator?

Speaker 4

Thank you.

Operator

Your first question comes from the line of Daniel Grossleit from Citi. Please go ahead.

Speaker 5

Hi, thanks for taking the question. And it's good to hear that in P and HS it's both products and the distribution that's growing this quarter. I had a question just around PPE inventory levels at your clients and how that's shaping up for 2024. Some of the large hospitals have commented that they're going to they're hoping to save money on inventory this year. Curious how that may impact you?

Speaker 5

And then on the 3rd party distributors who are buying your PPE, any more clarity on how their inventory levels are shaping up?

Speaker 2

Yes. So I think probably the biggest factor, Daniel, well, first of all, Daniel, thanks for joining us this morning on the call. But I think the first factor is and you alluded to that and you said that front is we actually saw growth in both parts of the business this quarter, both product and healthcare services as well as patient direct. And if I think about the divisions within product and healthcare services, we have seen the I don't want to say the bottom, but we're starting to see we've seen it level out within our products business specifically. We're starting to see that while the demand has been consistent, we're now starting to see that slightly uptick.

Speaker 2

We do still have some customers that have some additional stock, and we're helping them burn through that. We've also done a nice job beginning to build through burn through some of our excess inventory during 2023. So, as we look into 2024, we expect that to start to ramp in the upward direction and provide some momentum. So, that's how we're thinking about the PPE specifically. There's some categories where we're seeing faster growth than other.

Speaker 2

I think surgical is a great example of that. We're starting to see demand for PPE escalate as people have burned through those products and we're seeing the surgery rates starting to slightly increase. So that's how we're seeing it from a qualitative standpoint.

Speaker 5

Got it. Okay. And then you kind of alluded to this as well at the end here, but one of the key initiatives of the model realignment plan is rethinking your manufacturing footprint, including potentially producing more products overseas. I'm curious if the current conflict in the Red Sea has changed, how you're thinking about your manufacturing footprint potentially keeping more sites in North and South and Central America or anything has changed?

Speaker 2

Sure. Just at a high level, I mean, one, we really haven't we didn't when we think of let me just step back a moment. When we think about where our manufacturing footprint should be, we don't think it should be in one specific geographic location. We take all the different circumstances and all the different issues that potentially can run as we look at it. If you look at our footprint today, it's primarily in the Americas, both North America, Central America, with the one exception is our gloves, which are in Thailand.

Speaker 2

And I think if we think about where our shipping channels are today, it really is not impacted by those issues that are in the market today because we're shipping really directly to the West Coast. And if we do, we go through the Panama Canal if we have to get to the East Coast. And we look at our shipping partners on the Panama Canal. We have preset slots that enable us to get through. We've seen about a 1 to 3 day delay at most within that.

Speaker 2

But generally speaking, we have our time slots, we have it lined up and it hasn't impacted us. As we think about the manufacturing footprint more broadly going forward, we'll continue to look at where does it create opportunities for us to get the products that we need at the right price that the customers demand and be able to service them. So I guess, overall, the current situation in Suez Canal is not impacting us because it's not a primary shipping channel for us. If we think about where we are today, primarily we have to use one of those canals, we use Panama Canal or we ship to the West Coast. And based on our footprint, it's a different footprint we have today.

Speaker 2

And as we go into the future, we'll take those things into consideration as we continue to remap out our manufacturing footprint.

Operator

Your next question comes from the line of Kevin Caliendo from UBS. Please go ahead.

Speaker 6

Good morning. Thanks for taking my question. I want to go through the EBITDA guidance for 2024 and just sort of understand what some of the assumptions are in there. First, how much is embedded for the cost savings realignment? You mentioned you were there was a run rate of 100,000,000 dollars exiting 2024 and I'm or excuse me, exiting 23.

Speaker 6

How much of that is sort of captured in the 550 to 590? And also, can you talk about the net headwinds or is there a net headwind from the DME POS benefit versus the 70 fivetwenty 5 rule?

Speaker 3

Maybe I can start and

Speaker 2

then Alex add some color.

Speaker 6

So let me just talk a

Speaker 2

little bit about the operating model realignment and the carry forward. And the bulk of that is going to end up in actually our profits or our earnings before the interest really earnings part of EBITDA. And one of the things I think we've tried to clearly state both at Investor Day as well as on some of our prepared remarks was the fact that the savings that we've gained from that in addition to the run rate we have, the vast majority of that is going to be reinvested back into the business. And we're pretty comfortable in the range where we are from we're going to be investing in that. And I'll talk about it in the 2 segments.

Speaker 2

The one is on the Patient Direct side. So we're aggressively adding commercial people because we believe with the proven commercial model we have, as we scale that up, that can drive long term growth. And we started adding personnel in the Q4, teammates in the Q4. We're continuing that in Q1 and Q2. What also should be noted is, if we're going to add 70, call it 70 plus teammates in the commercial organization on that side of the business, those teammates don't have a positive return or they break even after around 12 months and then they start to show very strong positive returns.

Speaker 2

So that's an example of taking some of that profit or savings and putting it into long term profit investments. The other thing in patient direct is really around focusing on sleep journey and making sure that we didn't have unique technology to capture and maintain our patients in that side of the business. So those are just two simple examples on that side of the business. The other aspect on the savings is again, pouring it back into investments and again not just pulling it through to earnings, but on product and healthcare services, it's really around a couple areas. It's around our investment in our category management And I think the thing that's important on that is, as a company, we've been talking for years about expanding our proprietary portfolio.

Speaker 2

We're putting in the infrastructure so that way we can do that. So there's significant investment being made in personnel to expand that proprietary product portfolio, understand the marketing, partnering with our customers and then the commercial front end of that. In addition to that investments in technology around some of our services we offer as well as in data analytics. So I say that as a backdrop because what I don't want the market to get confused on is we have operating model realignment that generated more than $40,000,000 of benefit this year, dollars 100,000,000 run rate that all of that is just going to get pushed through to the bottom line. We're actually taking that and reinvesting that in the business for future growth and future EBITDA benefits as we move forward.

Speaker 2

So that I think helps capture the earnings part of EBITDA. Alex, I think if there's any other highlights outside of that besides covering in the operating model realignment, how that carries through.

Speaker 3

Yes. Thanks, Ed. And good morning, Kevin. So on adjusted EBITDA, we are obviously working hard to deliver in line with our guidance last year and fell a little bit short frankly of where we expected to be. And so as we head into 2024, we do feel good about where we've reset for the year and it does reflect as Ed mentioned the investment.

Speaker 3

It also reflects some of the normalization of PPE pricing. So for gloves, for instance, at the end of 2023 and into 2024, we think that that sort of normalizes here in the first half of the year. So those are a couple of areas from a broad brushstroke standpoint. And then as we think about some of the more the complexities around LIFO and stock comp, we expect both of those to normalize this year, which should provide us greater visibility and just less volatility around adjusted EBITDA.

Speaker 2

And then I'll add one last comment on the 70five-twenty 5 comment is obviously legislation continues to be In addition to that, identifying ways to offset that at in addition to that identifying ways to offset that as we move forward throughout the year.

Speaker 6

Got it. Can I ask one quick follow-up? I know that was a long answer, but just in terms of free cash flow this year, I know you had some benefits from working capital in 2023 AR and the like. Would you expect the free cash flow sort of match what we did in or what you did in 2023 2024? Is there any directional guidance you can give us around maybe working capital if you don't want to give us the free cash

Speaker 7

flow numbers?

Speaker 3

Sure. Yes, Kevin, great question. So in 2024, we expect cash flow to normalize. We obviously had an extraordinary year in 2023. We expect to end the year with some debt pay down and just to be slightly north of the 3 times leverage.

Speaker 2

And then I'll just add one other comment as we start to see growth in our medical distribution and our global products business, whether that's through implementation of new wins, whether that's through expanding our proprietary product portfolio, we are going to make the appropriate investments in inventory. So that way as we scale and that business grows, we have the ability to service our customers. In addition to that, just so everyone understands the cycle of bringing on new proprietary products, Generally, you're going to have them in inventory before you start to sell them in the market. In addition to that, you want to make sure you bring in the right amount. So as that ramps, you don't have service issues.

Speaker 2

So there are going to be some investments in inventory in 2024 really related to 3 things. 1 is new win implementations. The second aspect of that is proprietary product portfolio expansion and third is ability to drive higher levels of service.

Speaker 6

Great. Thank you so much guys.

Speaker 2

And those are all good reasons to add inventory.

Operator

Your next question comes from the line of John Stansl from JPMorgan. Please go ahead.

Speaker 7

Great. Thanks for taking the question. Just kind of following up on that around the new SKU launches that you highlighted at Investor Day. It sounds like what you're saying is that, this is part of the driver for SG and A uptick and it will be more of a contributor in 2025. Is that the right way to kind of frame the significant investment you're making in product line expansion?

Speaker 7

Or should we think about it as a near term driver

Speaker 2

too? No, I think it's more of a long term driver. And I think I used 2 examples and one in both sides of this each segment. On the personnel adds and the teammate adds on the commercial side and our patient direct business, we know clearly that that's after 12 months or so that becomes breakeven and then highly profitable as it accelerates. So yes, on patient direct side.

Speaker 2

And then very similar on the product and healthcare services side of the business is in that in building out the teams to do that, that is going to be a capital I'm sorry, SG and A investment upfront with benefit as time progresses. Great.

Speaker 7

And then just going back to the Investor Day, you called out a new medical customer win, I believe. Can you just help qualitatively frame how that's contributing to the 2024 guide and what services are being sold there?

Speaker 2

Yes. That's one that should start to implement or should. It's going to be starting implementing in March. So next month, we'll start to implement that business. And that's going to we haven't quantified the dollar amount, but it's a meaningful win.

Speaker 2

It will end up that will end up being one of our top 10 customers overall once we put it into the system. And it is a combination of a portion of a customer, which we did have and then expansion in. So it's a meaningful win and that will begin in March. Great.

Speaker 8

And if

Speaker 7

I can just squeeze one quick one in at the end, more of a long term question.

Speaker 2

I

Speaker 7

know that in December there was some chatter around potential changes to CMS reimbursement for CGMs. Now I know only 20% of your patient direct revenue comes from government sources. How are you thinking about potential changes around CGM reimbursement from someone like CMS? Is that something as you think about patient direct business?

Speaker 3

Thanks, John. It's Alex Bruni. So, yes, this is certainly something we continue to watch. We noted the press release in November with the OIG looking into CGM reimbursement. They don't expect to have findings until 2025.

Speaker 3

So we'll continue to watch this space, but we don't expect any implications at this point for us.

Speaker 7

Perfect. Thank you.

Operator

Your next question comes from the line of Stephanie Davis from Barclays.

Speaker 4

So while I understand the ramp to the 2028 plan wasn't meant to be linear, the 2024 EBITDA guidance does imply a pretty healthy step up in the out years. So I was hoping you could help us bridge this and call any maybe one timers or areas of potential conservatism in order to get you there.

Speaker 2

Yes. I think, Stephanie, you're right. It's not linear. And we wanted to make sure that we talked about at Investor Day, we gave it 2028 full year, end of year target there. And part of it is the investments that are being made.

Speaker 2

Again, I used 2 different examples. Again, one is on the commercial aspect of what we're going to do in our Patient Direct business. The second aspect is some of the technology we're using in Patient Direct. Both of those are going to have benefits associated with them. And again, they're going to have benefits after they get implemented.

Speaker 2

So those are things that have meaningful paybacks 12 months plus out. I think very similar on the product and healthcare services business. We're absolutely right. If we think about the portfolio expansion, those are things that take time to develop. Again, it's something that Owens of mine has been trying to do for years, but you have to make sure you have the investments upfront.

Speaker 2

And part of what we're leveraging is the operating model realignment savings we have. We're redeploying that back into longer term investments like the product aspect. The other aspect is network rationalization and optimization. That's something that doesn't happen overnight. It's something that we're aggressively looking at right now.

Speaker 2

But we know that's going to take time to execute on and then that will provide material benefits as we get into the future. So that's why when we looked at our internal strategic plan for the 5 year period of time, we believe we're going to in 2024, if you look at our range, it provides, we think, pretty good reasonable returns, but also it's enabling us to make significant investments to provide those higher longer term returns.

Speaker 4

So if I had a bridge from here to your long term guidance, is the right way to think of this as 2024 is more of an investment year and then we'll start to see a step up in 2025 or is it being more of a gradual bridge as some of these things come through?

Speaker 2

No, I think probably your first assumption is closer. 2024 is more of an investment year, but it's still going to provide, if you just take the midpoint of our range, it's still providing double digit growth in EPS, adjusted EPS at the midpoint of our guidance. In addition to that, I think

Speaker 3

so what we're trying to

Speaker 2

do is balance that as we get into as we go through 2024 with the right investments for long term, but still providing the right level of returns in the short term. I think as you exit 2024 and there's still some things that are going to take longer, the network rationalization and optimization, that's something that will bleed into 2025. But as we continue to come out of 2024 and into 2025 and then continue to progress, you'll see that ramp accelerate in the out years even faster. And that's really been the beauty of what we've done with the operating model alignment program, is it's enabled us to take cost out, it's enabled us to drive improved cash flow and profitability and then take those dollars and then invest them in areas that may take a longer term to get a payback, but still not impact the short term returns, again, using taking the midpoint of adjusted EPS from 23% to 24% is still going to be a double digit growth. And then while we're still investing materially in the business for long term success.

Speaker 4

Super helpful. Thank you,

Operator

Your next question comes from the line of Eric Coldwell from Baird. Please go

Speaker 8

ahead. Thank you very much and good morning. I had a couple here. First on the commentary about cash flow normalizing in 2024. To be fair, I'm Ed, I'm not sure there's really been a normal year since you got to the company.

Speaker 8

I mean cash flow 114 in 2019, then it was 280, then it was 74, then it was 158, of course, this year was a blowout. What is normal? And do we just take the simple average of the 4 years before this year and call it 150 of free cash flow? Or is there a ratio you can share with us that you think is a normal ratio of some sort to get a better sense on this year?

Speaker 3

Yes. Thanks, Erica. This is Alex. Good morning. So definitely a fair question and a fair observation about not having a normal year.

Speaker 3

Cash free cash flow, operating cash flow in 2028. So I think as we see the impact of the investments that Ed has talked about this morning, we would expect to ramp up over the next few years to be in line with that. We think that, that reflects kind of a good goal of operating cash flow once our investments take place.

Speaker 8

So would 2024 be in theory, I know things can bounce around a lot and even calendar days can have an impact each year, but is 2024 in theory the low point and then a ramp up to that $400,000,000 in $28,000,000 pretty linear? Is that the process?

Speaker 3

I'm not sure it's exactly linear, but I think that's a fair approximation of how I would think about it.

Speaker 8

Yes. Okay. And then on EBITDA, I know there are some variables that are included in your EBITDA add backs that are probably next to impossible to precisely forecast. So definitely give some hall passes on that. But technically you did miss EBITDA by about $10,000,000 to $30,000,000 on the range for 2023.

Speaker 8

And I think a chunk of that was a lower LIFO charge add back probably than you expected in the Q4. I was hoping you could quantify that. And then for 2024 guidance, again, you said, LIFO would normalize and frankly just not sure what that means. What is the 2024 guidance inclusion for a LIFO charge or credit or whatever it is? And how does that compare to the absolute amount in 2023?

Speaker 3

Yes. Thanks, Eric. So, yes, on this complexity here. So just to kind of go back, when we reset or redefined the adjusted EBITDA in Q1, we talked about having $25,000,000 in 2022 and about $30,000,000 in 2023 combined for LIFO and Stockholm. That is roughly where we ended the year, although I will say our projections did fluctuate and so that was part of the difficulty in 2023.

Speaker 3

There was about $2,000,000 of LIFO in 2023 and about $23,000,000 of stock comp. We expect that to normalize in 20 24 and to be just north of $50,000,000 combined.

Speaker 8

$50,000,000 of add back?

Speaker 3

Yes.

Speaker 8

Okay. Thank you very much for that, Alex. And last one, I'm going to go a little away from the call here. We did recently notice a headline that the West Virginia University WVU Medicine deal has been delayed or at least some of the ramp, the build out of the site has been delayed by a year. Can you tell us what's going on there?

Speaker 8

And is that having any kind of an impact on the 2024 results or outlook?

Speaker 2

Yes, Eric, no impact at all. It's actually working with the contractor to get the facility built. That's the delay on the construction. It's still we've actually extended our long term deal with WBU And so there's zero impact on 2024. That business we've had for the last 2 years, it's been served out of another distribution center.

Speaker 2

It will continue to be served out of another distribution center until we get the facility completed. WVU has been an incredible partner to us and there would be no impact at all in 2024 because we are serving the business at another distribution center and it's just a matter of getting the new one up and running for them.

Speaker 8

Perfect. Okay, guys. Thanks very much for the answers.

Operator

And we have no further questions in our queue at this time. I will now turn the call back to Ed Casita for closing remarks.

Speaker 2

Thank you, operator. First of all, I want to thank everyone who joined us on the call today. Besides those on the call, I want to thank our teammates across the globe that have really worked tremendously in 2023 and to position us to where we are today. I also want to thank our customers, our patients, our partners as well as our shareholders. As we reflect on where we are, we firmly believe that we have the right team in place and even more than that, we have the right strategy.

Speaker 2

That strategy is going to enable us to continue the momentum that we've accelerated during the year as we saw tremendous progress from Q1 to Q2 to Q3 to Q4 and exited the year with strength. So as you can see, I'm pretty excited about where we are right now, but even more excited about the future. And I look forward to sharing our progress with you as the year progresses. So just again, thank you everyone for joining us today and look forward to talking again after the Q1 results. Thank you.

Operator

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

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Earnings Conference Call
Owens & Minor Q4 2023
00:00 / 00:00