Owens & Minor Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 2, 2024

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Owens and Minor Second Quarter 2024 Earnings Conference Call. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Jackie Marcus, Investor Relations. Jackie, you may begin.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to the Owens and Minor Second Quarter 2024 Earnings Call. Our comments on the call will be focused on the financial results for the Q2 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 am joined by Ed Paseka, Owens and Minor's President and Chief Executive Officer and John Leon, the Interim Chief Financial Officer and Senior Vice President of Finance and Corporate Treasurer. I will now turn the call over to Ed.

Speaker 2

Thank you, Jackie. Good morning, everyone, and

Speaker 3

thank you for joining us on

Speaker 2

the call today. It's been an exciting past few weeks here at Owens and Minor. Last Tuesday, we shared with all of you our definitive agreement to acquire Rotech Healthcare Holdings Incorporated. The addition of Rotech aligns with our strategy to strengthen and expand our existing patient direct business as one of the premier suppliers to support home based care. Combining our organizations allows us to improve our capabilities, broaden our reach and ultimately improve our service levels to patients, providers and payers.

Speaker 2

And furthermore, it accelerates our pace to achieve our long term patient direct revenue target of $5,000,000,000 by 2028, demonstrating our commitment to sustainable growth and driving long term shareholder value. Turning to our Q2 performance, it was business as usual for Owens and Minor as we hit our internal expectations with another strong quarter and made progress against our long term strategic goals we outlined during our Investor Day in December of 2023. The underlying strength of our business is evident with top line growth in both of our business segments and improved profitability. We are excited about the second half of twenty twenty four as we expect to outperform the first half of this year, a continuation of historical trends with strong back half performances. While John Leon, our Interim Chief Financial Officer will do a more thorough review of our financials, I would like to briefly highlight a few of our operational and financial achievements from the Q2.

Speaker 2

Our Products and Healthcare Service segment generated $2,000,000,000 in revenue, reflecting a 4% improvement over this time last year. Our Medical Distribution division's strong Q2 was the result of exceptional same store sales growth, enhancement in our supplier funding programs and the onboarding of new business wins. Our Global Products division also experienced some growth at the top line and further improvements in profitability. At our Investor Day, we outlined our plan to optimize the P and HS segment through 1, leveraging the scale of the channel profitability 2, growing our Owens and Minor branded product portfolio and 3, expanding into adjacent channels and markets. In our first two quarters of 2024, we are already making progress in these areas with a particular focus on driving greater efficiencies that in the Q2 reduced our manufacturing, transportation and distribution costs.

Speaker 2

These efforts combined with inflation mitigating tactics gave us the financial flexibility to reinvest in our business while also doing exactly what we said we would do, increasing the overall profitability of this segment. Our Patient Direct segment posted $660,000,000 in revenue in the 2nd quarter, a 4% year over year improvement, driven by strong growth in diabetes and sleep supplies. Our growth is even more impressive given the particularly strong second quarter we had this time last year. During the quarter, we continue to focus on our key initiatives along with our alignment on the commercial organization within the Apria division to improve growth in respiratory, oxygen and the sleep journey. By the end of the quarter, we began to see that alignment deliver improved growth.

Speaker 2

As a reminder, we typically see stronger performance from this segment in the second half of the year and we expect a similar outcome in 2024. From a longer term macro perspective, our Patient Direct segment has considerable tailwinds supporting our organic growth efforts. From a demographic perspective, there are an estimated 133,000,000 Americans who suffer from at least one chronic condition, with 40% of American adults suffering from multiple chronic conditions and many more still not yet diagnosed, particularly in diabetes and sleep apnea. These demographic trends make us excited about our Patient Direct segment despite the groundswell of support for weight loss medications. Moreover, we are not currently seeing an impact from the use of GLP-1s on our served patient population.

Speaker 2

The diabetic patients we serve are primarily type 1 or insulin dependent, which requires continuous glucose monitoring regardless of GLP-one use. With respect to sleep apnea patients, while GLP-1s may help some patients, there are still 80% of the population with sleep apnea that are not yet diagnosed. As I noted earlier, we announced our intent to acquire ROTEC, which will be an expansion of our Patient Direct segment. Rotech brings a wealth of expertise in respiratory and home medical equipment, aligning perfectly to deliver exceptional care, innovative solutions and top notch service levels for patients, providers and payers. Being just a few months into our long term strategic plan, we are progressing as expected in both segments.

Speaker 2

Our team has done a tremendous job in just the 1st two quarters since launching our Vision 2028 plan at Investor Day. From driving efficiencies, improving customer service, to building strong organic growth channels and the plan to add Rotech to our Patient Direct segments, all of which proves we're on the right path and only just getting started. We remain dedicated to achieving the objectives set forth during our Investor Day in December 2023 and our performance thus far reflects that commitment. I would now like to turn the call over to our Interim Chief Financial Officer, John Leon to discuss our Q2 financial performance in more detail. John?

Speaker 4

Thanks, Ned, and good morning, everyone. I will be providing an overview of our financial results and some key factors that drove our performance in the 2nd quarter, as well as our outlook for the remainder of the year. Our revenue for the quarter was $2,700,000,000 up 4% compared to the prior year with solid growth in both segments. Products and Healthcare Services grew 4% overall as compared to the prior year with 5% year over year growth in our medical distribution division as same store sales and net new customer wins drove the top line change. Patient Direct revenue of $660,000,000 was up 4% compared to the Q2 of last year.

Speaker 4

Major therapy categories like diabetes, sleep supplies and wound again had strong performance, although certain respiratory therapies such as NIV and oxygen were below expectations. Within Patient Direct, patient eligibility verification continued to regain momentum. However, a meaningful yet decreasing backlog of customers extended into the Q2. We should be clear of these onboarding timing issues as we move through the second half of the year. Gross profit in the second quarter was $544,000,000 or 20.4 percent of net revenue, reflecting margin expansion of 11 basis points as compared to the Q2 of last year.

Speaker 4

This improvement is largely the benefit of investments in efficiency and productivity over the last several months. Our distribution, selling and administrative expenses for the quarter were 469,000,000 dollars up from $455,000,000 in the Q2 of 2023. The increase is primarily due to sales growth as DS and A was just below 18% of revenue for both this year and last year. GAAP operating income for the quarter was 20,300,000 dollars up 87% year over year and adjusted operating income was $76,300,000 Adjusted operating income was up 23% year over year. Interest expense for the Q2 was $36,000,000 down 12% compared to $41,000,000 in the Q2 of 2023.

Speaker 4

This is largely due to the nearly one full term reduction in leverage in the last 12 months, partially offset by the impact of higher interest rates versus last year. In the Q2, we recorded a one time tax charge of $17,000,000 or $0.22 per share related to a recent decision associated with notices of proposed adjustments that we received back in 2020 2021. This was just communicated to us in late June of 2024. Due to the nature of this charge, this item is included in our GAAP to non GAAP reconciliations. The matter at hand, as we've discussed in previously filed SEC documents, is related to past transfer pricing methodology, which is no longer employed.

Speaker 4

There is an expected related cash payment to be made in the second half of the year in a range of $30,000,000 to $35,000,000 We believe the matter will be concluded without further impact to our financial results. Our GAAP effective tax rate reflects this charge and was negative 89.9 percent for the quarter. The adjusted effective tax rate was 28.9%. Our GAAP net loss for the quarter was $31,900,000 or a loss of $0.42 per share compared to the Q2 of last year when the net loss was 28,200,000 dollars or $0.37 per share. Adjusted net income for the quarter doubled to $28,200,000 or $0.36 per share from $14,200,000 or $0.18 per share during the Q2 of 2023.

Speaker 4

Adjusted EBITDA was $127,000,000 up 12% versus $113,000,000 reported in the Q2 of last year. Also we generated $116,000,000 of operating cash flow this quarter, a strong improvement versus Q1 of 2024. This will allow us to reduce net debt by $70,000,000 We anticipate a good cash flow generation year that will include typical lumpiness quarter to quarter and we remain intensely focused on cash flow generation. With respect to our current outstanding debt, we have $171,000,000 of a series of notes which is due in December of this year. Earlier this week, we gave notice to redeem those notes at par in September and we'll do so with cash on hand.

Speaker 4

We remain committed to delivering our 2024 guidance. We expect 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 with a midpoint of $1.55 per share and overall range of $1.40 to 1 0.70 Now as in prior years, we expect to see modest sequential growth between the 2nd and the 3rd quarters and greater sequential growth from the 3rd to the 4th quarter. And again, I want to remind you that this guidance excludes any impact of the Rotech acquisition. With that, I'll turn the call over to the operator for the Q and A session. Operator?

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Michael Cherny with Leerink Partners. Please go ahead.

Speaker 5

Good morning and thanks for taking the question.

Operator

My apologies. Can you press star 1 again please?

Speaker 2

Sorry, Michael, we lost you.

Speaker 4

Operator, why don't we move on to the next question and Mike will get back in line. Yes.

Operator

Michael, your line is now open.

Speaker 5

Hi. Can you hear me this time?

Speaker 2

We can, Michael.

Speaker 5

Okay. That was a first. We'll see if that happens again.

Speaker 4

Sorry about that. I don't know what happened.

Speaker 5

Yes. Called a Friday. That's right.

Speaker 4

I want to talk about some

Speaker 5

of the operational plans that you've had put in place, in particular the progress you made on the products and healthcare services side. As you think about the moving pieces on margins, you were kind of flat sequentially. Where are the biggest opportunities to expand in the back half of the year? Is it volume? Is it that unlocking of the backlog of customers?

Speaker 5

And how does the dynamics around the tariffs that are expected to go into place impact and not impact you relative to the sourcing side?

Speaker 2

Let me take those probably somewhat in reverse orders. From on the tariff aspect, it's going to have a minimal impact on us since significant portion of our products are manufactured in our own facilities, whether that's in the U. S. Or whether that's in Mexico, Honduras, so in the Americas. Our glove footprint is not in China.

Speaker 2

We have, as we've talked in the past about more than half of our gloves we're making in our own factories and those factories are in Southeast Asia, not in China. So it's going to have minimal impact really on our proprietary, our private label products. If I think about the levers we have in the back half of the year within our product and healthcare services, it's the continued execution on sourcing. As we've seen prices come down in overall, let's just take it main category of PPE, we've done a really good job continuing to source raw materials at lower rates to make sure that as those prices come down, our costs are coming down correspondingly with them. The other aspect of it is really in operational effectiveness in our P and HS segment.

Speaker 2

Continue to look at our footprint, continue to look at the right level of new advanced automation and technology in the warehouses to drive operating efficiencies. So we saw some of the improvement in this quarter in DS and A or distribution selling and administrative expenses. There's where the opportunities continue to lie. Longer term, if you go back to our strategy, really the longer term impact is the expansion of our private label or proprietary product portfolio that takes time as we build the product portfolio out and then continue to work with our customers to show the value of it. And then even further along the line is adjacency.

Speaker 2

So hopefully that helps talk about really how we're thinking about the impact of the tariffs, how we're thinking about using our continuous improvement and operating model to continue to drive operating efficiencies out and then some of the longer term and midterm opportunities.

Speaker 4

Thanks, Ed. If I can just ask a

Speaker 5

second one on cash flow.

Speaker 4

I know that was

Speaker 5

a big focal point earlier in

Speaker 4

the year when you gave guidance, you talked about some of

Speaker 5

the customer onboarding. Can you talk about the dynamics behind the reversal this quarter and how that should factor in, in terms of your cash generation versus use, over the course of the year, especially as you think through normalizing the onboarding of some of those large customer wins you had?

Speaker 4

Yes, Mike, it's John. So obviously, as you mentioned, we talked before about the need to add inventory for those onboarding activity and that could also slow down AR a little bit when you bring on large customers like we did in distribution. What you saw in Q2 was a little more lift in inventory, but that was offset by payables and payables kind of offset that pretty nicely. Like Q1, we also had the quarter end on a Friday, which is actually beneficial to our payables. And we have been pretty successful in driving out payment terms where appropriate with parties.

Speaker 4

So that combination is going to continue to help us out in the back half of the year. But people might also get the seasonality in the back half of the year, particularly in Patient Direct, which will have very well, it's very attractive cash flow as the year goes on. And their contractual allowances should drop as the year goes on as well. So I think we'll see more efficiency. Consequently, we'll see more efficiency in working capital around payables, we see those in inventory.

Speaker 4

And if you look at the seasonal list now, keeping in mind that what you're looking at is a point in time at the last day of the quarter. So we're actually more efficient in Q2 than we saw. For example, average inventory was lower than it was at the very end of the quarter. So we were able to get that cash flow and reduce debt. But I think as the year goes on, that working capital efficiency and then the seasonality business will drive pretty attractive cash flow compared to the first half of the year.

Speaker 5

So will you have meaningful cash flow conversion over the course of the year? I know that was a point of contention earlier in the year.

Speaker 4

We will do. I would be very disappointed if we didn't do quite a bit better in the second half than we've done in the first half. Got it. Thanks so much.

Operator

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

Speaker 6

Good morning, guys. Thanks for taking my question.

Speaker 3

First, can we talk a

Speaker 6

little bit, there's been a lot of interest around what's going on with shipping costs and how it impacts the channel. The tariffs are one thing, but the shipping costs have the ones that we can track anyways have risen dramatically. And I guess I'm trying to understand how it impacts you, how it impacts the industry. Does it help you that you're sure and does it make your products that are manufactured domestically more attractive? Just trying to understand the impact across channel.

Speaker 2

Yes. So it's primarily an impact on the PNHS segment, not necessarily in the Patient Direct segment. Yes, for those products that we're manufacturing nearshore, it has to create some level of an advantage for us. But again, I talked earlier that about half of our gloves were making our own factory in Southeast Asia and bringing them over. It's impacted us in a couple of different ways.

Speaker 2

As we started to see those rates start to rise, we have made some investment in incremental inventory coming over in advance of some of those larger increases that we're seeing in the marketplace. But ultimately, this is going to have a bigger impact on those that do primarily all of their sourcing or the vast majority of their sourcing from overseas. Look, it's a headwind that we know we have in the business. It's also part of how do we utilize our operating model to continue to try to offset that, whether it's advanced shipments prior to some of those increases, but also continue to look at different ways to more efficiently bring the product over. But it is going to create some level of a headwind in the business in the back half of the year.

Speaker 6

So what you're saying is you're trying to get product in sooner, maybe you're going to build up more inventory before it starts to affect as much as you possibly can and hope that customers will be willing to buy those sooner because they know the prices are likely to go higher. Does that in general?

Speaker 2

And it may not even necessarily them buy the product sooner. It's just to have a better landed cost on the product than

Speaker 4

not. Good.

Speaker 6

Maybe this is one for Jonathan. The patient direct ramp in the second half is there it's a little bit more than normal seasonality, it looks like to me. Can you just give us a little bit of comfort or rationale behind why that there will be this acceleration? I know there were investments, but if you can maybe go a little deeper on that, that would be great.

Speaker 4

Yes, Kevin. The biggest factor, as I indicated in my remarks, was that we're still dealing with the backlog in Patient Direct that frankly is a holdover from change that we probably underestimated because the extent of that impact in Q1 to Q2. We have a normal queue of people waiting for supplies all the time, but this is substantially larger than it would normally be. And those are primarily sleep patients. So it's a little more process associated with them.

Speaker 4

So if you factor that, we are catching up. There's a lot of manual effort going to that catch up, but we are catching up and we're clearing that backlog. So you take that combination then with the normal seasonality in the business, we're pretty confident in a much stronger second half.

Speaker 2

And I'll just add 2 other things as one is we clearly understood that when we added additional commercial resources, they would create some level of I'm going to call it disruption, but some level of impact in the beginning of the year here with the expectation that it takes about 12 months for them to provide a positive impact. So we'll see that as that progresses in the year. The other thing, if you look at Q2 year over year, last year Q2 growth rate was pretty strong. So those are some other factors that give us the comfort in the back half of the year and the growth.

Speaker 4

Great. Thank you, guys. Thanks, Kevin.

Operator

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

Speaker 3

Great. Thanks for taking the question. Just following up on the plan around Patient Direct. Is there just a way to frame, given you have some visibility into this backlog about how you think about the impact on patient direct top line growth? And then now that we're kind of a month into the Q3, is this something that you think now is this change is kind of coming in the rear view that will be more of a 3Q benefit?

Speaker 3

Or is this something that kind of could progress into 4Q?

Speaker 4

Yes, John. It's John William. It wouldn't help me think about it. So what happens, the eligibility verification process had become very manual very quickly. And we're doing a very good job of clearing that and getting better at that and bringing on new providers to help us with that process.

Speaker 4

A way to think about it, and I would call it back over at any point in time, there's a queue of 10,000 customers waiting for supplies and that we saw that into June growth was much as 50,000. So that is getting better now that we're getting to the 3rd quarter will continue to get better throughout the year. But that has certainly impacted the growth. And as I said earlier, a lot of it is predominantly sleep supplies and that's very attractive margin business that we're waiting to get online.

Speaker 3

Great. And then just kind of thinking about gross margins that have stepped down sequentially from the Q1. Now I normally think of this as kind of gross margin stepping up throughout the year. Is that kind of slight step down that you saw, is that more kind of attributable to the patient direct, I guess, mix shift? Or is there other factors you highlight about kind of what drove that?

Speaker 3

And then I would assume, giving reaffirmed guidance, we should just see a bit of a steeper ramp into the back half for gross margins. Is that kind of the right way to think about it?

Speaker 4

That is the right way to think about it. Yes, mix shift in patient direct can be meaningful, and we've thought that before that sleep and respiratory areas have higher margin, things like diabetes, which has been growing very nicely for us.

Speaker 3

Great. Thank you.

Operator

Your next question comes from the line of Stephanie Davis with Barclays. Please go ahead.

Speaker 7

Hey guys, thank you for taking my questions. Now that you've had a little bit of time to just have the market digest the Rotech acquisition announcement, I was hoping you could tell us about some initial feedback from your payer and provider customers and how they're thinking about the deal?

Speaker 2

Yes. I'll just talk a little maybe I'll start it at a high level. I think it's been clear the feedback has been that this is clearly in line with the strategy you talked about, about continuing to invest inorganically, specifically in the Patient Direct space, continuing to provide a better solution. It's still early on. So to get the patient and the payer feedback, that's still in process.

Speaker 2

But overall, it's been extremely positive. I think overall from a standpoint, we believe that this is going to ultimately provide a much better experience for the patient, the ability to focus on a single company to support them as well as be able to get their products hopefully potentially more efficiently. And then the same with the payers being able to have continue to work with us. So it's early on. I think we'll continue to gather that information, but that's where we are on it right now.

Speaker 7

And a follow-up on Patient Direct, you did call out some weakness in the quarter on NIV and oxygen. Could you call out any trends or if that's more of a one off with the owned business just given the exposure at Rotex?

Speaker 4

No, I would tell you what we've seen from now a couple of quarters now, Stephanie, we've talked about when we're not doing what we should be doing, expect to do in terms of growing, NIV and oxygen. I would call that unique to us. I'm confident saying that's unique to us and we have plans in place and working on that to remedy that in the back half of the year.

Speaker 7

Okay. Maybe some learnings from the new deal. Thank you much.

Speaker 4

Exactly. Exactly.

Operator

Your next question comes from the line of Daniel Groeslait with Citi. Please go ahead.

Speaker 8

Hi, thanks for taking the question. Let me go back to some comments you made around cash flow and that being meaningfully you expect that to be meaningfully better in the second half versus the first half. That would put you in kind of solidly positive free cash flow territory for this year versus your commentary last quarter where you thought you would be effectively flat or no free cash flow this year. So I'm just curious what changed in your thinking? Where are you outperforming your initial in the back half of this year?

Speaker 8

What's in the

Speaker 2

back half of this year?

Speaker 4

Well, yes, it does. First of all, Dave, it's John. Secondly, I would tell you the increased confidence in cash flow comes around our focus and the visibility into the working capital activities currently underway. We've talked about last couple of quarters about the inventory ramp and talked earlier about inventory being a little bit higher now for some shipping purposes getting ahead of that curve. But even throughout most of the second quarter, we saw inventory be pretty well moderating compared to Q1, We're in full a bit late in the quarter, but I think as we think about that and we get a little smarter about our AP and our AR and getting better terms from folks, I think we're pretty confident that cash will get better as the year goes on.

Speaker 4

We're seeing better collections on a regular basis that had a patient direct to the field.

Speaker 8

Got it. Okay. Okay. And there were some legal expenses this quarter, I think related to the Apria. Just curious what's driving that and if you expect to see increased legal expenses for the remainder

Speaker 2

of the year this quarter?

Speaker 4

No, nothing going forward. That was a one time settlement, an action that began before we bought Apria. So that has now been failed and behind us. So there'll be nothing else going forward associated with that. Okay, great.

Speaker 4

Thank you.

Operator

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

Speaker 9

Thank you very much. I apologize if I missed a couple of these. For some reason I've had a hard time with the connection here, just a little bit hard to understand some things. In 2Q, did you break out the difference between medical distribution growth and products growth that combined to got you to the 4%? Did you give the growth rate?

Speaker 9

No,

Speaker 2

we did not.

Speaker 9

Can you?

Speaker 4

Well, I think we said net distribution grew 5% and overall segment grew 4%. So, I think Okay.

Speaker 9

I didn't hear that. It's been a bad connection today. Yes. Okay. And then on the cash flow, I know you've given a number of reasons why it improves, but I still am not sure why the original guidance was flat and now it's so much different.

Speaker 9

What was it that you're just fundamentally managing the business differently or things you expected through Q1 up to the last call just they're turning out differently than you originally expected. It just seems like a very different conversation 90 days later than it was 90 days ago.

Speaker 2

I think that's fair, Eric. And I think it comes down to as one is focus As we continue to look forward, I think you've got better visibility now into forecasting of where we think it where the opportunities in the lever are. And then it's execution on some of the initiatives we have to drive working capital improvement. So that's those three major factors are where it is. It's the focus, it's improved forecasting and our ability to execute on some of those opportunities.

Speaker 9

Great. And I'll just going to go back to the medical distribution growth of the 5%. Would you be capable of breaking out how much of that growth was market versus new wins? Yes. Or was it same store versus new wins?

Speaker 2

Yes. I think it's if I think about the 2 of them, they're relatively consistent. I mean so what's hard to do is our same store sales, if we look at our same store sales, they're consistent with that 4% and then our wins are consistent to help move that up further. And then there's still some remnants of some other losses we've had in the past that are rolling out. So that's the way I would think about it is from that standpoint.

Speaker 9

Got it. Okay. Thank you very much. I appreciate it.

Operator

That concludes our question and answer session. I will now turn the conference over to Ed Paseka for closing comments.

Speaker 2

So thanks everyone and excited and thankful that everyone joined the call today. If we think about the future at Owens and Minor, we're extremely excited of what's yet to come in here. We continue to execute on our long term strategy. We continue to focus on our operating model. We continue to get excited about the potential and future integration and approval with the Rotech, rolling that into our patient direct business, which will provide, we believe, significant better service for our patients, providers as well as the payers and really pleased with the progress we've made to this point in time in our product and healthcare services business.

Speaker 2

So with that, appreciate the time today and look forward to talking again next quarter. Thank you.

Operator

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

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Owens & Minor Q2 2024
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