Owens & Minor Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Owens and Minor First Quarter 20 24 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you.

Operator

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

Speaker 1

Thank you, operator. Hello, everyone, and welcome to the ONC Miner First Quarter 2024 Earnings Call. Our comments on the call will be focused on the financial results for the Q1 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.

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 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 on the call today. As I reflect on Q1, I am both pleased with our financial performance and encouraged by the continued progress we've made with our evolving operating model through the 1st 12 weeks of 2024. In addition, we were able to make investments related to our long term strategic plan we introduced in December of 2023, and these investments are ahead of schedule. We are also making operational investments to bring higher levels of service to our customers and ultimately the patients served.

Speaker 2

Finally, in Q1, we on boarded new customers in our medical distribution division, navigated the seasonality of our Patient Direct segment and overall met our internal expectations. While Alex will do a deeper dive into our financial performance and expectations for the remainder of 2024, let me review a few of our financial and operational achievements from the Q1. First, our Products and Healthcare Services segment posted a 3% year over year improvement in revenue, with our Medical Distribution division delivering mid single digit growth as a result of the on boarding of new customers in addition to attractive same store sales. In our Global Products division, we saw growth in our U. S.

Speaker 2

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

Speaker 2

However, we are currently working with change to ensure we capture the associated revenue and receive full payment for all services and products rendered. And I'm also very proud of our responsiveness to this issue to mitigate the impact to our company. More importantly, I'm even more pleased with our ability to successfully limit the potential disruption of our customers' ability to receive life saving products and supplies they need every day. At Owens and Minor, we believe life takes care and we felt it was our responsibility regardless of the obstacles to continue to process orders and make the essential deliveries as quickly and efficiently as possibly to provide continuity of care when it matters most. Turning back to our broader business, we entered the next phase of our operating model realignment at the beginning of the year with an emphasis on identifying and assessments and take actions related to improving our already well run Patient Direct segment.

Speaker 2

We are utilizing the operating model realignment to implement transformational opportunities to improve our business reimbursement and collection model and to gain efficiencies and grow profitability in areas such as our sleep supply customers. At the same time, in our Product and Healthcare Services segment, we have embedded past initiatives into our daily activity, while continuing to bring recently identified opportunities to fruition. Our segment leaders and I remain keenly focused on network rationalization and operational excellence, everything from optimizing our manufacturing footprint to our supply chain network. Throughout the company, these activities have taken meaningful investments and will continue to do so for the remainder of the year, but we believe they will result in greater profitable growth for years to come. Lastly, I'm encouraged by our year over year adjusted earnings improvement and many of our other key indicators.

Speaker 2

These improvements show the continued positive momentum and were in line with our expectations. Alex will discuss these financials in greater detail shortly. Our recent success demonstrates that we are on the right path and that our strategy is working. We all know there will be obstacles in the future and we believe that our focus to constantly improve the business will assist us in mitigating many of these obstacles, even those that we can't see today. We will remain focused on our long term strategy and our future as an organization built on excellence.

Speaker 2

At our Investor Day in December of 2023, we outlined the 5 year strategic plan, our vision for 2028, which is pillared by 3 key tenants accelerating growth, optimizing our business to drive long term profitability and investing in our business. While we are in the early innings, we are doing exactly what we said we would and we are seeing the results. I would now like to turn the call over to our Chief Financial Officer, Alex Bruni, to discuss our Q1 financial performance in more detail. Alex?

Speaker 3

Thank you, Ed. Good morning, everyone. I'll begin by providing an overview of our financial results and the primary factors that drove our performance in the Q1 of 2024. Our revenue for the quarter was $2,600,000,000 up 4% compared to the prior year. We generated top line growth in both of our business segments on a year over year basis.

Speaker 3

Products and Healthcare Services grew 3% with medical distribution growth in the mid single digits and in our global products division, we saw growth in our U. S. Proprietary product sales. Patient direct revenue was up 5%, which was partially impacted by the change healthcare cyber incident it slowed our ability to onboard new patients and renew eligibility for existing patients. Gross profit in the Q1 was $536,000,000 or 20.5 percent of revenue, compared to $497,000,000 or 19.7 percent of revenue in the Q1 of 2023.

Speaker 3

Our gross margin expansion of 79 basis points can be attributed to 3 things. 1st, the profitability expansion in the Products and Healthcare Services segment, driven by efficiency gains and the successful efforts of the operating model realignment program. 2nd, improved collections of patient direct sales. And third, patient direct sales growth, which carries a higher gross margin than products and healthcare services. Our distribution, selling and administrative expenses for the quarter were $478,000,000 making up 18% of revenue.

Speaker 3

The $29,000,000 year over year increase reflects higher variable expenses to support the growth in both segments, an increase in our teammate benefits and our decision to make incremental investments throughout the company for future profitable growth. GAAP operating income for the quarter was $10,000,000 and adjusted operating income was $57,000,000 Adjusted operating income was up more than 20% year over year and was driven by the overall improvements in the Products and Healthcare Services segment. The Patient Direct segment was impacted by expected investments in its future growth, regulatory reimbursement changes and to a lesser extent the change healthcare cyber incident. Adjusted EBITDA was $116,000,000 up $8,000,000 versus the Q1 of 2023. Interest expense for the Q1 was $36,000,000 a 16% decrease from the Q1 of last year, reflecting our prior work to reduce our total debt in 2023.

Speaker 3

Our GAAP effective tax rate was 19% and the adjusted effective tax rate was 29%. Our GAAP net loss for the quarter was $22,000,000 or a loss of $0.29 per common share. Adjusted net income for the quarter amounted to $15,000,000 or $0.19 per common share. The significant increase in adjusted net income was driven by the factors mentioned above. Shifting to our capital structure and considering the investments we continue to make as Ed outlined, cash flow generation and the change in debt levels reflected investments across the company, especially in inventory to support medical distribution, customer onboardings and to maintain high quality service levels.

Speaker 3

As of March 31, our total debt was $2,200,000,000 and net debt was $1,900,000,000 up about 3% from last year end. Through the remainder of 2024, we expect minimal net debt reduction as we make investments to drive long term profitable growth. We remain committed to delivering our 2024 guidance. As a reminder, we expect revenue to be in the range of $10,500,000,000 to $10,900,000,000 adjusted EBITDA 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 $0.70 Also, as a reminder, we expect seasonality to lead to a roughly 1 third, 2 third split across the first and second halves of the year from an adjusted EPS perspective, and we'd expect to deliver improvement in each sequential quarter. With that, I'll turn the call over to the operator for the Q and A part of the call.

Speaker 3

Operator?

Operator

Thank you. We are now opening the floor for question and answer Our first question comes from Michael Cherny from Leerink Partners. Your line is now open.

Speaker 4

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

Speaker 5

Sure. Yes. Mike, thanks for the question. On Unchanged Health, I mean, first of all, I think you got to recognize what Q1 is. I mean, Q1 is for Patient Direct probably the most complicated labor intensive quarter of the year as so many of the patients are changing insurance or payers, they're adjusting.

Speaker 5

So there's a lot of work associated with that. It had really, I would say, minimal impact on the top line, but it did have an impact on our collection. I'll also want to make sure that's recognized as Change has been an incredible partner. They have worked closely with us. We've worked through it.

Speaker 5

As we're coming through April, we're starting to see more and more of that work its way through the system. But it was a labor intensive process. And I think that's the thing that's important from an operating expense standpoint, significant labor intensive process to do things more manually that used to that were done receivables. But as we get through Q2, we expect most of that to work its way through the system.

Speaker 4

Got it. And if I could just ask one more on Patient Direct, a number of recent developments across the CPAP market in terms of the OSA surmount data from Lilly, in terms of the Philips proposed and I think accepted settlement or at least accrual relative to their CPAP devices. Anything you can provide us an update on how you see the development of your sleep franchise and all things CPAP against the backdrop of your multi year targets and anything that's changed as we see some of these incremental data points on hopefully getting this market back to both a normalization and potential for demand changes over time?

Speaker 5

Yes. I guess, when we look at it is, I mean, obviously, you've had Phillips with the issue that's out there publicly now. That's been and we think about it, Phillips products have been really on hold for over a year here. And one of the things we've been able to do is continue to partner with others to bring the right amount of inventory in, so that way we can hit the customers' need. So that hasn't had an impact on us because other manufacturers have stepped up and increased production.

Speaker 5

I think you'll continue to see that as we move forward. The demand and starts on sleep continue to be strong for us. That's probably that one along with diabetes are still our 2 fastest growing category, growing faster than the overall segment. So we anticipate that to continue. And we talked a little bit about some

Speaker 6

of the work we're doing in

Speaker 5

the operating model realignment specifically around sleep. I think that's important to make sure we understand the sleep journey better so that way we can continue to drive some strong growth in the future.

Speaker 4

Thanks guys.

Speaker 5

Our

Operator

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

Speaker 7

Thank you. Thanks for taking my question. I want to continue a little bit on Patient Direct. The margins operating margins year over year fell about 35 basis points, 36 basis points. I know you talked a little bit about investments.

Speaker 7

You just mentioned, how difficult it is in the quarter. I'm just I guess what I'm wondering is there any change of mix? Is there anything specific to that? Is there any way to think about how the margin should progress or if there was any one timer in there that would prompt the margins to decline year over year and what you expect margins in the business maybe, how we should think about the improvement or I know we expect sequential improvement every quarter in the overall business, but how should we think about margins in that business on a year over year basis?

Speaker 5

Yes. We've got a couple of different factors, I think, to consider there. One is, on Investor Day last year and even at the end of Q4 last year, we talked about this. So, one, we are making investments in that Patient Direct segment with a significant add of commercial resources. We talked about it back in December.

Speaker 5

We had our Investor Day and shared our 2028 strategy. And on that, we recognize 2 things happen when you do that. One is you do create some level of disruption as you're adding territories and expanding it out. In addition to that, the other aspect of it, we said that it takes about 12 months or so for those assets or investments to breakeven. So one of the things we should share is we're actually ahead of schedule on adding those resources.

Speaker 5

We think about it, we're trying to find the best assets to bring in the market or in our case our best teammates to add to the team. And we were able to find much more of those at a quicker pace than we thought. So we had a little bit extra expense associated with that. And then it was also, as I discussed in the last comment, some of the processing costs and the extra time that we had to put in to make sure we could get patients the product and get it out the door. That's another aspect around that.

Speaker 5

But ultimately, if you think about long term, it kind of goes to the first question, your question, we still remain extremely bullish on our patient direct segment. From the market space we're in, from our positioning, how well the businesses run, the investments we're making, not just looking at it in the short term, but looking at it from a long term. Those are the things that give us extreme excitement around it and the bullishness in it. I think the one other thing to remember is, we knew Q1 was going to be a little tough because if you look at it, we're coming over the last 2 years in Q1, that business grew at double digits. So we're coming over some of the office and strong, strong growth sequentially I'm sorry, annually over the last 2 years.

Speaker 5

But again, we're adding resources. We're doing what we need to do to deliver on that long term target and we remain extremely excited about the space.

Speaker 7

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

Speaker 5

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

Speaker 7

And just can you just remind me how do we think about the impact as that progresses over time? Does that mean higher gross margin or like what is the impact on that? I apologize for my ignorance.

Speaker 6

I'm sorry, Kevin. The question is what's the impact of what on gross margin? The difference between

Speaker 7

As the mix as the consumables start to grow faster, as you said, like the law of large numbers, consumables becomes a bigger part. I just wanted to understand and make sure I understood what the impact of that is on the margin is like the consumables versus

Speaker 6

Yes, so the outsized growth in the sleep supplies will be favorable to gross margin.

Speaker 7

Okay. Thank you.

Operator

Your next question comes from Daniel Crosswhite from Citi. Your line is now open.

Speaker 8

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

Speaker 6

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

Speaker 8

Got it. Okay. And as a follow-up, I had some more questions on the cadence of margin improvement, but on the P and H segment, I know you've got a large client that's in the process of onboarding. So I was hoping to get an update on that. And then also investments across that segment too.

Speaker 8

So would you

Speaker 5

be able to provide just

Speaker 8

a little more color on how you're thinking about those kind of big spend items this year and the cadence of TNHS improvement for the remainder of the year?

Speaker 5

Well, I'll take part of that one, let Alex add some color on it. So think about investments in P&HS. So there's a couple of different areas. We outlined at Investor Day and we're already in the process of investing in. One is in proprietary product portfolio expansion.

Speaker 5

So we brought resources in. Those are obviously operating expenses to continue to assess and onboard and bring in new additional expansion of new proprietary products. And one of the areas we've already launched is wound care, some additional of our own proprietary products in that space. In addition to that, from a commercial standpoint, looking to make the right investments in the commercial to beef up our external presence as well as to get closer to the customer and be able to provide more support there. The next aspect of it is both capital investment and operations.

Speaker 5

We talked about continuous improvements and it's really around optimizing our manufacturing footprint as well as our supply chain. Some of that technology is going to be invested with something simple as VisionPik to turn around and drive a higher accuracy of PIK, more efficiency within our warehouses to drive operating expenses. So there's capital expense associated with that, but then there's also the operating expense on the learning curve. And then really on margin, we anticipate margin as those things start to take hold to drive margin improvement within the business as the year and as this year and the future years progress.

Speaker 6

Yes, thanks. So maybe just add a little bit more color. Similar to Patient Direct, we've made investments in PHS as outlined from an OpEx standpoint. We've invested in commercial capabilities for instance. And so a lot of those are already factored into the run rate.

Speaker 6

And in parallel with that, we're driving a number of transformational efforts that we do expect to continue to drive margin as we move forward. And then again, we've got the normal seasonality where the increased top line and operating leverage we'd expect to drive some margin improvement as we head into the back half of the year.

Speaker 5

Let me put some little bit more facts behind that too. If you think about our 79 basis points improvement this quarter in gross margin and you think about what we talked about last year in the operating model realignment, one of the key things was sourcing. So we worked extremely hard to put together what I believe is a world class sourcing organization that now internally is providing the ability to go out and find raw material at a lower price and continue to be competitive. So as product prices are coming back down in pre pandemic levels, we have the ability to go out and drive additional sourcing to offset that, which is part of the reason why you saw the 79 basis points this quarter in margin expansion. And then on the other side of the house, there are some of the investments we're making on really, I'll call it the order to cash or cash collection cycle, continuing to work on that to drive margin expansion in our PD.

Speaker 5

So, but I want to make sure that everyone recognizes this. A lot of the work we did in the operating model realignment program is now embedded into the business. And a great example of that is sourcing and being able to see margin expansion. And then some of the transformational change we anticipate this year in Patient Direct around sleep and around order to cash are additional opportunities to drive margin expansion as the year progresses. Next question, operator.

Operator

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

Speaker 9

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

Speaker 5

Yes. I think at a high level, consider it right now in the I would call it the low to mid-90s and there's an opportunity for us to continue to pick that up and that's really what the focus is on. Q1 is a tough quarter obviously, there was a lot of complexity in Q1, but the anticipation is that we'll continue to get better as the year progresses.

Speaker 9

And Edward was that say a year ago or a few years ago? How has that ratio changed?

Speaker 5

I would say overall, Eric, it's relatively consistent and it gets difficult, right? If you go back and look at it from a Byram standpoint, when it was a We continue to be We continue to be able to drive some of the best practices across both of the divisions within the segment. And now we really after having digested the acquisition 2 years later, we believe there's an opportunity to take those best practice across both as well as reimagine a little bit to drive several points of improvement that are out there from an availability standpoint.

Speaker 9

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

Speaker 6

Sure. Alex, maybe you can dive into it. Thanks, Ed. Good morning, Eric. Yes, so we were referring there to the PHE relief on the 7525 funding.

Speaker 9

Got it.

Speaker 6

Yes. So just as a reminder on that, we had incorporated for either scenario playing out within our internal operating plan as well as our guidance. So we have levers to offset that, but that's what we're talking about there.

Speaker 9

And could you remind us on the magnitude? I think it was just a few million, right? But if you could remind us.

Speaker 6

It was not material, but we did not quantify it exactly.

Speaker 9

Okay. Go ahead, please.

Speaker 5

Eric, I think you think about it, when you're running the business, you know you're going to potentially have these headwinds, which you you continue to look at what contingency plans we have in place. And I think opportunities like we talked about earlier on the order to cash opportunities on the sleep journey and other things, our availability and the speed which we move in those can help mitigate those, which is why I think Alice's comment has been, we've contemplated those and we have the ability to make sure that we're focused on that.

Speaker 9

Last one for me. In PHS, you've obviously talked about the inventory step up to handle onboarding new customers. So it's clear that you have new large customers that need onboarding. At the same time, your other public competitor yesterday was future health system wins coming online later in their fiscal 2025. So over the next few quarters starting to onboard and the other large competitor that's private, but puts out a fair amount of press is also talking about a pretty constant stream of wins.

Speaker 9

So bottom line, I'm looking at the 3 largest players that make up the vast majority of the market all talking about wins. Who's losing? And what is the net win loss ratio in PHS? Are you overall gaining traction? Do you have some future business leaving?

Speaker 9

I'm just I'm curious what's really happening because I see all 3 of the big players talking about wins.

Speaker 5

Yes, I would say we're net winning right now. There is a bit of at times trading paint, I guess, but we are net winning on this. And I think we're being disciplined too on both wins. And as we talked about a year ago, there was some business that we've separated from because of the financial profile of it. So that's I think the way we've thought about it and the way we're going to continue to think about it is both discipline on both sides of it.

Speaker 9

Okay. Thanks very much. I appreciate the answers.

Operator

Next question comes from Stephanie Davis from Barclays. Your line is now open. Hey, guys. Thank you for

Speaker 10

taking my question. I wanted to ask another one on the Patient Direct business, just because you did mention that change had a minimal impact on that side of the world. But it did see a bit of deceleration. Should we think about a reacceleration of this as coming off of the tough comp? Or is it more going to be a function of a ramp up of some of your sales investments that you've made, which may make it a little bit more back half weighted?

Speaker 5

I think really the latter is a better way to think about it is, we know the investments that we're making are going to pay off. We've done it in a much smaller scale over the last 5 years. We are adding a person or 2 several here or there. This is a broader push. And so I think the latter is the way to think about this is that they start to take traction, you'll see the lift going out in towards the back half of the year.

Speaker 10

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

Speaker 5

Yes. Actually, Stephanie, you're absolutely right. Is that something we've discussed and it's something that's in process already, continuing to look at our in our patient direct. Again, we do an acquisition, one of the things we one of the tenants we had on the acquisition was don't confuse the customer right out of the gate. We don't want to have breakage and I thought we I think we did an exceptional job of that with acquiring Apria.

Speaker 5

Now you're 2 years in, you've kind of got it settled, you know exactly what levers you want to pull and one of those is making sure we have systems that can enable us to continue to grow, but enable us to have a stronger and more solid foundation. So that's exactly one of the an example of an investment and some of associated with that, which you can anticipate this year and into the next year. Obviously, we'll go in a little more detail of what's in the plan, but the anticipation is and process already is looking at that our systems to make sure they're solid and they can be leveraged and we can drive and they can help continue to drive growth as we scale up.

Operator

So putting that all together,

Speaker 10

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

Speaker 5

Yes, I think that's a pretty fair assessment. Yes. Very similar to last year too. I mean very similar to last year also because you then have the seasonality in the business. Think about last year, we had seasonality in the business.

Speaker 5

Think about last year, we had investments we were making upfront to drive operational efficiency. We saw those carry towards the back half of the year. So I think it would be relatively consistent.

Speaker 10

Great. Very helpful. Thank you much.

Operator

Next question comes from Alan Lutz from Bank of America. Your line is now open.

Speaker 11

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

Speaker 11

Thanks.

Speaker 5

Maybe I can start with some qualitative and Alex can bring a little more quantitative. And so the anticipation is that we continue to look to drive margin expansion throughout the year. Obviously, the sourcing and some of the other things are already embedded in the business. And some of those were embedded in the business in the end of last year, so think sourcing, for example. By the time we got to Q4 of last year, some of that sourcing was already in there and helped drive the back half margin expansion within there.

Speaker 5

So again, we're starting getting ready to start to overlap that. But the other projects like the order to cash process is another example of where we're going to be able to drive it. We should anticipate some margin expansion within the business for that. Continuing to get that overlap effect on sourcing is another example where we can drive margin expansion. But in the same sense, that's the other I don't want to call it a headwind, but the other side of the equation also is within products is a good example.

Speaker 5

We're continuing to see prices come back down closer to where we were pre pandemic. But as we're driving the cost out, we're able to neutralize that and mitigate that. We continue to work with our customers to help provide savings to them as many of our customers are continuing to look for that. So you think about as we think about it, we had a 79 basis points year over year improvement in this quarter. We would anticipate that we would continue to drive some level of improvement in the back half or the back three quarters of the year.

Speaker 5

Alex, maybe you can add a little more comments on that.

Speaker 6

Yes. Thanks, Ed. Yes, so on gross margin, as Ed mentioned, we do expect that to continue to improve throughout the year. There are the 3 key drivers here on products and healthcare services side. The main driver is the sourcing savings that's driving improvement within our cost of goods sold.

Speaker 6

And then on patient direct, there's the 2 drivers. 1, just margin expansion driven by the improvement in collections that we've talked about in our investments in revenue cycle in general. And then we've got favorable mix essentially between patient direct and products and healthcare services. So insofar as patient direct is growing faster than products and healthcare services that will drive gross margin expansion overall for the company. And so if you look at just the normal seasonality of the business in both segments as we get into the back half of the year with top line growth and operating leverage that will also aid with margin expansion as we get towards the end of the year.

Speaker 11

Great. Thank you. And then just a quick model question. I see a $50,000,000 gain on a sale. Can you just provide some commentary on what that was?

Speaker 11

Thanks.

Speaker 5

Yes, but it wasn't a total of 50, but the biggest one was the home office sale.

Speaker 6

Yes, we did have a gain of $7,400,000 on the sale of our home office here in Mechanicsville, Virginia. And that hit ENR.

Speaker 7

ENR. Got it. Thank you.

Operator

Our next question comes from Michael Cherny from Leerink Partners. Your line is now open.

Speaker 8

Michael, are you there?

Speaker 4

Hi, can you hear me?

Speaker 5

Yes, we got you, Michael. You got back in line for a second.

Speaker 8

Sorry. 2nd set of questions, Michael.

Speaker 4

I wasn't even muted, which I usually do is a mistake. Is there any way you can give us some directional color given you don't formally guide on cash flow? The reason I ask is you mentioned the dynamic of net debt staying steady over the course of the year. I know the CapEx investments are spelled out. Just would have thought there'd be a little bit more of a cash build given the reiterated EBITDA.

Speaker 4

So just curious if there's any moving pieces in the middle of that conversion you can give us some color on?

Speaker 5

I'll start just on a directional. I think at a high level, one is we're making investments in inventory to bring on new customers continue to drive service. I want to make sure it's clear that there's opportunity there as the year progresses. When you bring on a big new customer, you have a tendency to add a significant amount of additional inventory because you want service from day 1 to be impeccable. And as we learn them and they learn us better, there is an opportunity to tweak that down a little bit.

Speaker 5

I think also from a receivable standpoint, that what that what we have today, the timing on how we can tweak those may take maybe sooner rather than later. And then on CapEx, I think the expectation is as we continue to see growth in areas like sleep, we're going to need CapEx and as we continue to put some automation and other technology to drive efficiency, there's going to be some capital deployment as the year progresses. So that's more qualitative of how we're thinking about it as well as where there is potential levers and or opportunities as the year progresses.

Speaker 4

Okay. So I assume free cash flow will be positive for the year though. Is there any framework we can use relative to history even if it's less baked in the inventory build?

Speaker 6

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

Speaker 6

And this obviously reflects our investments that we're making from an OpEx standpoint as well as CapEx as well as some of our transformation efforts that are hitting exit and realignment. So our expectation is that where our net debt is right now is roughly where we would exit the year and then obviously leverage is a function of our adjusted EBITDA guidance at the end of the year.

Speaker 4

Okay. Thank you so much.

Operator

As of right now, we don't have any questions. I'd now like to hand back over to Ed Pesicka for final remarks.

Speaker 5

Thank you and thank you everyone for joining on the call. Before I make some closing business comments, I'll make a personal comment. I want to shout out Centerra Health. We think about our purpose, life takes care. Less than 2 days ago, our daughter and son-in-law delivered their first daughter and brought her into the world and our first grandchild.

Speaker 5

So Centerra Health and Centerra everybody there, the experience was exceptional. So to the clinicians and all the support staff, thank you. With that, as you heard as you did hear today on the call, the team and I, we are extremely excited about 2024, a year where we're continue to make investments to drive long term growth. I also want to thank our teammates across the globe. I want to thank our customers, our partners and of course our shareholders.

Speaker 5

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

Operator

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

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Earnings Conference Call
Owens & Minor Q1 2024
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