Owens & Minor Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2025

There are 9 speakers on the call.

Operator

day and thank you for standing by. Welcome to the Owens and Minor fourth and full fourth quarter and full year twenty twenty four 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. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Jackie Marcus, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to the Owens and Minor fourth quarter and full year twenty twenty four earnings call. Our comments on the call will be focused on the financial results for the fourth quarter and full year 2024, as well as our outlook for 2025, all 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 that reflect our current views of Owens and Minor about our business, financial performance and future events.

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. Our expectations, beliefs, and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs, and projections will result or be achieved. 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. Any forward looking statements that we make on this call or in our earnings press release are as of today, and we undertake no obligation to update these statements as a result of new information or future events, except to the extent required by applicable law.

Speaker 1

In our discussion today, we will refer to non GAAP financial measures and believe they might help investors to better understand our performance or business trends. 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 Leonte, the Company's 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. 2024 was an important year for Owens and Minor, and I am pleased with the progress that we have made against the strategy we outlined at our Investor Day in December of twenty twenty three. As a reminder, we committed to optimizing our Product and Healthcare Services segment, leveraging our leading Patient Direct platform and building balance sheet flexibility through deleveraging. Within PNHS, we continue to see momentum in the broadening of our product portfolio, developing a streamlined and efficient manufacturing footprint and enhancing our distribution capabilities.

Speaker 2

Within Patient Direct, we continue to leverage our footprint and broad product offering to support home based care for millions of patients with chronic conditions. Those capabilities combined with the positive demographic trends and expanding home treatment options leaves us very bullish on the future of this business. Finally, we repaid $647,000,000 of debt over the last two years, which helps provide the financial flexibility to pursue the acquisition of Rotech, which we believe will drive long term shareholder value. As we mentioned in our press release published this morning, we have been actively engaged in robust discussions regarding the potential sale of our Product and Healthcare Services segment and are already well along in the process. Over the past few years, we have focused our capital reinvestment on the higher growth, higher margin Patient Direct segment.

Speaker 2

Accordingly, over the past eighteen months, we have considered many strategic options, while continuing to work to enhance the Product and Healthcare Services segment. The actions we have taken on realigning PNHS has made it a stronger entity and well positioned for future growth. We are excited and encouraged by the strong interest in PNHS business and ongoing conversations we are having in the process. In addition, the press release published this morning also mentioned that our Board of Directors has authorized the share repurchase program of up to $100,000,000 John will provide more detail later during his prepared comments. Regarding our planned acquisition of Rotech, we are awaiting a final decision from the regulators and we remain diligent in our planning process as we expect to close in the first half of twenty twenty five.

Speaker 2

We remain incredibly excited by the prospect of a united future together. It is our plan to leverage the existing Aphria platform we acquired nearly three years ago to improve service while delivering synergies through the optimization of our operations and interface with our customers. To the extent possible, we have been using the past few months to further understand the synergy opportunities and create the ability to expedite synergies post close. Based on what we already know and the work we have done to date, we now believe that our previously discussed cost synergy projections of $50,000,000 in year three is conservative in both terms of value and time. Before I discuss our performance in 2024 and our goals for 2025, I want to take a moment to commend our teammates at Owens and Minor.

Speaker 2

We saw many difficult and heartbreaking situations in 2024 and earlier this year, including the record setting hurricanes and historic flooding in the Southeast, the significant winter storms across the Midwest and Northeast and the devastating fires in Los Angeles. Facing these extraordinary circumstances, our teammates ensure that our customers and patients receive the critical and vital medical supplies they needed. I am incredibly proud of the team that we have assembled at Owens and Minor and that our teammates embody our core belief that life takes care. Now moving on to 2024, while we focused on our long term strategy, we also delivered mid single digit top line growth and 13% growth in adjusted EPS, while continuing to reinvest in the business to drive greater operational efficiencies, improve customer experience, expand our technology offering and set ourselves up for long term sustainable growth. Starting with Patient Direct.

Speaker 2

Our Patient Direct business outpaced market growth with mid single digit growth for the quarter and for the year. In addition, it delivered over $13,000,000 of incremental operating income year over year, while making significant progress with revenue cycle management and our Sleep Journey program, which helped deliver strong sleep supply growth for the year and the fourth quarter. The addition of sales teammates also helped us deliver double digit growth in many of our smaller categories. Finally, our investments in technology continued as we launched Byram Connect, a digital health coach to help manage diabetes. Overall, significant progress was made in 2024, but we still have ample opportunity for advancement as well as improvement across all of our therapy categories.

Speaker 2

And we remain excited about the future of Patient Direct. So now moving on to our PNHS segment. Our Products and Healthcare Services segment for the full year and quarter continued to show solid same store sales growth in our medical distribution division, partially offset by lower glove pricing. Next, I want to recognize that the PNHS team continues to make significant progress in capturing savings and subsequently reinvesting those dollars into driving even more efficiencies and improving our operations. During 2024, we have advanced our proprietary product portfolio, made progress with DC Automation, continued with the construction of new distribution centers and began the consolidation of our titting footprint.

Speaker 2

Overall, we made great progress related to our long term strategy to optimize our PNHS segments. As I look ahead into 2025, the team and I are keenly focused on these areas. One, we will focus on expanding our free cash flow to strengthen our balance sheet, invest in our business and support our stock as needed should it continue to be undervalued. Two, we will continue to be disciplined while driving profitable growth. Three, we will continue to take all steps to gain clearance from regulators.

Speaker 2

And upon approval, we will quickly begin the integration of Rotech into the Patient Direct segment. And finally, we will work through the process related to our Products and Healthcare Services segment. As I look forward, I'm excited to build upon the progress we made in 2024 to advance our long term strategy that we outlined at Investor Day in December of twenty twenty three. With that, I'll turn it over to John to discuss our financial performance in 2024 and financial guidance for 2025 in more detail. John?

Speaker 3

Thanks, Ed, and good morning, everyone. I will start with a review of our fourth quarter financial results and cover some of the key drivers and trends from last year and then dive into our outlook for 2025 in greater detail. Please note that during my remarks on today's call, I will discuss only non GAAP financial measures. All GAAP to non GAAP financial reconciliations can be found in the press release filed earlier this morning. With that, let's turn to fourth quarter results.

Speaker 3

Our revenue for the quarter was $2,700,000,000 up 1.5% compared to the prior year. The Products and Healthcare Services segment grew 0.5% overall compared to the fourth quarter of twenty twenty three. There was one more selling day this year compared to last year's fourth quarter, which accounted for the segment's growth. While same store sales in the medical distribution division have continued to grow nicely year over year, it was offset by lower blood prices and the knock on effects of the IV fluid shortages during the quarter. The IV fluid shortage impacted procedure volume and subsequently our sales volume to some of our distribution customers.

Speaker 3

Patient Direct revenue grew by 5% compared to the fourth quarter of twenty twenty three. Sleep supplies and diabetes once again demonstrated strong growth. As discussed in previous quarters, home respiratory therapies such as NIV and oxygen decline on a year over year basis. We expect these therapy categories to return to growth during 2025 and we saw encouraging signs toward this turnaround late in the fourth quarter. Gross profit in the fourth quarter was $580,000,000 or 21.5% of net revenue.

Speaker 3

Margin was essentially flat with last year's fourth quarter and expanded by 93 basis points compared to the third quarter of twenty twenty four and benefited from a $10,000,000 LIFO credit as inventory levels were meaningfully lower at December 31 compared to September 30. Our distribution, selling and administrative expenses for the quarter were 18.3% of revenue at $493,000,000 up from $457,000,000 in last year's fourth quarter when DS and A was 17.2% of revenue. The increase in DS and A was primarily due to increases in teammate benefit expenses and higher workers' compensation costs. Adjusted operating income was $95,000,000 in the fourth quarter, an $11,000,000 increase compared to the third quarter and $15,000,000 less than the fourth quarter of twenty twenty three. The year over year change in adjusted operating income can be attributed to modest revenue growth, which was offset by higher DS and A expenses.

Speaker 3

Interest expense for the fourth quarter was just under $36,000,000 down about $1,200,000 compared to the prior year's fourth quarter. This change was driven by a continuing debt reduction and was partially offset by less interest income earned versus the prior fourth quarter. Our adjusted effective tax rate was 26.5% largely unchanged from the 26.8% in the fourth quarter of twenty twenty three. Adjusted net income for the quarter was $43,000,000 or $0.55 per share compared to $54,000,000 or $0.69 per share last year. Adjusted EBITDA was $138,000,000 versus the $170,000,000 reported during the fourth quarter of 'twenty three.

Speaker 3

As previously disclosed earlier this month, we recorded a $3.00 $5,000,000 net of tax goodwill impairment charge in the fourth quarter. This non cash charge was primarily related to adverse financial market changes during the quarter and to a far lesser extent anticipated future changes in a capitation contract at the Apri division. We do not expect the assumed contract pricing change including the financial projections that were used in the impairment analysis to have a significant impact on 2025 results. And more importantly, nothing about our positive outlook for average prospects has changed because of this. We generated $71,000,000 of operating cash flow in the fourth quarter, primarily driven by changes in working capital.

Speaker 3

As often happens, our working capital management yielded better cash flow throughout the quarter than was represented on the last day of the quarter, which allowed us to reduce debt by $31,000,000 dollars For the full year, debt was reduced by $244,000,000 and we have paid down $647,000,000 in debt over the last two years, demonstrating those cash flow capabilities of the business and our commitment to reducing leverage. Now with the wrapping up of 2024 and start of the new year, we will provide guidance for the full year 2025. As a reminder, our guidance does not include any impact of the LoTeq acquisition, which we still expect to close in the first half of twenty twenty five. Also, our guidance shared here today does not include any potential sale of our Products and Healthcare Services segment and does not include any potential impact from future share repurchase activity. So with that for the full year 2025, we expect revenue to be in a range of $10,850,000,000 to $11,150,000,000 yielding a midpoint of even $11,000,000,000 Most of the growth will come from mid single digit percentage growth in our Patient Direct segment.

Speaker 3

Adjusted EBITDA is expected to be in the range of $560,000,000 to $590,000,000 with a $575,000,000 midpoint representing approximately 10% growth over 2024. Adjusted EPS has a guidance range of $1.6 to $1.85 per share and a midpoint of $1.73 representing approximately 13% growth. As we think about cash flow in 2025, we expect to see marked improvement from last year. We expect to have at least $200,000,000 available for further debt reduction in 2025. We believe this is a reasonable expectation as it would be the result of the $575,000,000 midpoint of our adjusted EBITDA guidance minus the midpoint of our gross CapEx guidance of $260,000,000 and interest expense of $140,000,000 as well as less cash expected to be spent on items included in exit realignment and acquisition related charges.

Speaker 3

Those items I just detail provide approximately $125,000,000 of cash flow and we believe another $100,000,000 can be taken out of working capital, a task we have demonstrated in the past that we can achieve. So the year over year cash flow improvement is expected to largely come from the adjusted EBITDA growth included in our 2025 guidance, the expected lower cash spend on items included in exit and realignment and acquisition related charges and the anticipated improvements in working capital management. We will remain diligent in our efforts to reduce debt levels and intend to use free cash flow to do so. There is no change to our goal of maintaining debt to EBITDA leverage between two and three times. And after the close of the VivoTech acquisition, we will work quickly to bring down incremental debt levels.

Speaker 3

As Ed mentioned, our Board of Directors has authorized a share repurchase program of up to 100,000,000 We will prudently manage between using cash flow for debt reduction, which remains our leading objective and share repurchase activity. However, with all of my shares currently so undervalued and especially so in the last few weeks, we believe share repurchase is a very sound use of cash flow. But thinking about how our full year guidance will trend over the course of the year and as is increasingly typical given the nature of our business, we expect at least 70% of the earnings and cash flow to occur in the last two quarters of the year with the fourth quarter being the strongest. We also expect the usual pattern of our first quarter being the lowest earning quarter and as we often see, we expect to be a net borrower during the first quarter. As a reminder, our guidance information and other key modeling assumptions were filed this morning under Form eight K and reside on the Investor Relations section of our website.

Speaker 3

I will now turn the call back to the operator for questions. Operator?

Operator

Thank you. Your first question comes from Kevin Allende with UBS. Your line is open.

Speaker 4

Good morning guys. Thanks for taking my question and thanks for all the details. I guess, why don't we start first with Rotech because I think when the deck came out, the eight ks came out, I think people were a little bit alarmed to see some of the trends at Rotech. And I just want to ask you, knowing what you know now versus knowing what you knew when the deal was announced, is there anything surprising in the Rotech results over the last year or so? I appreciate, Ed, you making the comment that there's cost synergies could be greater than the $50,000,000 income could come sooner.

Speaker 4

But when I just looking at the margins of that business and the growth of that business, is there anything there that's surprising different at all?

Speaker 3

Hey, good morning, Kevin. It's John. The answer to the question is no. There's no surprises in what we've seen. But I think people a lot of people forget that for all of us 2024 versus 2023 saw a significant impact of the 07/2025 legislation leaving and that had an impact on all of us.

Speaker 3

I think it's been stated Rotech has a little bit more exposure than we do to government reimbursement. So maybe a greater impact there. But I would say overall and now that we've got a little more clarity, we have a really active healthy dialogue with the Rotech team. We know how their year is ending up and no surprises whatsoever. That's very consistent with our deal model.

Speaker 4

Okay. That's helpful. If I can ask a follow-up on the free cash flow, I appreciate the $200,000,000 expected that you can redeploy back for debt repayment. You also have 100,000,000 share repurchase. Should we be thinking about those in conjunction?

Speaker 4

Like how should we think about that $100,000,000 of buyback? Is that the priority first or is it something over the course of time? And should we just assume the $175,000,000 to $200,000,000 of free cash flow goes to pay down debt and the buyback is more opportunistic. Just help me understand what how you're thinking about deploying that capital this year?

Speaker 2

Yes. So I think first primary objective of the business is to continue to pay down debt. That's extremely important. But in the same sense, should the stock continue to be meaningfully undervalued, we will be opportunistic on that also throughout the year. I think that's the way to think about it.

Speaker 4

Okay. Thanks. I'll go back in queue.

Speaker 2

Thanks.

Operator

The next question comes from Michael Cherny with Leerink Partners. Your line is open.

Speaker 5

Good morning. Thank you for taking the question. Maybe if we can just start on Patient Direct and some of the underlying trends. Don, you talked about mid single digit growth expectations on an organic basis over the course of the year. Can you parse that out a little bit in terms of what you expect to see on roughly speaking volume versus price versus market gains and market share gains?

Speaker 3

They want

Speaker 5

to try and get a sense on where you see this business evolving and continuing to position itself given your commentary about outgrowing the market in 4Q and the rest of 2024?

Speaker 2

Yes, maybe I'll start and then John can add some commentary to it. Look, I thought the Patient Direct business had a really strong year. I mean, if I think about it again, we had double digit I'm sorry, mid single digit growth in the business for the entire year as well as the fourth quarter. And not only that, we actually increased full year over $13,000,000 of op income. If I think about some of the areas where we've had some pretty good success, we've had really nice success continuing with growth in diabetes as well as in sleep supplies.

Speaker 2

The other area I touched on a little bit on my comment was we did add some resources and in some of the smaller categories we saw close to double digit growth in those smaller categories where we've added resources. The one area of we're still, I would say underperforming and to be completely direct on this, it's really in the home respiratory and NIV and oxygen space. It's an area where we're going to continue to focus on it in 2025 and look to make that actually a growth category for us, which then could help lift the entire business as a whole from an organic standpoint. But again, I think you look at our mid single digit growth for the year as well as the quarter relatively strong, we believe compared to the market and some strong pockets of where we're seeing where some of the investments we've made are starting to pay off like the Sleep Journey and some of the additional people we've added. John, I don't know if you want to add any more color?

Speaker 2

Yes.

Speaker 3

The only thing I would add Mike to your comment, broad strokes look at the big picture of the industry, the demographic tailwinds remain very strong for us in the entire space. And I think as you heard and seen from us and others, regardless of the therapies that keep coming out, we still see really good demand for our supplies and services. So broad based and I think there's plenty of share yet to be gained across all of us for years to come. And the bigger they tell once again from the demographics are just overwhelmingly positive for us.

Speaker 5

Appreciate that. And maybe a follow-up to Kevin's question regarding capital deployment and the buyback. Very much appreciate the dynamic of instituting a new buyback given the recent performance of the stock. That being said, you obviously talked about the beginning of the year being a use of cash component, assuming as you've said that the RoTeq deal closes, you'll be taking on a meaningful amount of debt near term as you work to pay that down. How should we think about the cadence potential, knowing it's not in guidance of the buyback against your cash flow needs?

Speaker 5

And why is $100,000,000 the right number given where you see the dislocation in the stock currently?

Speaker 3

Yes. From a Keynes perspective, Mike, I think we think about it. One, as Ed said, we all believe the stock is way, way undervalued right now. And so we didn't know if there's a better ROI out there than buying back our own shares. So Q1, as I mentioned, we tend to be a net debtor.

Speaker 3

Being a little more of a net debtor during the Q1 doesn't bother us that much. We're confident in the cash flow as we get throughout the year. So that would be initially a problem for us. And we'll just see how the stock performs. Keeping in mind, the rules around buyback and given our average daily trading volume, we couldn't get through it all that quickly anyway.

Speaker 3

But we wanted to be aggressive, the stock remains so oversold. And then as we think about overall cadence, the Y $100,000,000 as again, just given the market cap and where we are today unfortunately, and given what we see as the cash flow, as Ed said, debt repayment remains a priority given the market cap of $100,000,000 felt right. We believe the stock will rise, but obviously if we get through $100,000,000 and the stock isn't where we think it should be, the book is going to revisit a future consideration of greater value.

Speaker 5

It's helpful, John. Thank you.

Operator

The next question comes from John Stancill with JPMorgan. Your line is

Speaker 6

open. Great. Thanks for taking my question. Just want to quickly touch, I don't know if you framed it completely, but on tariffs, I appreciate the commentary changes by the day, but is there anything you can just help size impact essentially from Mexico based tariffs?

Speaker 2

Thank you. Yes. So again, I'll start and then John can add an additional comment at the end. So if you think about tariffs, so tariffs for us aren't as significant as they may be for other players in the industry. However, I think first of all, we got to be clear that as tariffs come in and increase our product costs, we're going to have to pass those on to the customers.

Speaker 2

Because in our P and HS segment business with margin profile as tight as it is, those are costs that we will have to pass on. If we think about impact overall on the business, the vast majority of our products are not made in China. So let's first take that off the table because that had the highest tariff increases last year with close to 100% on gloves coming through over this year combined with next year as well as significant on facial protection. So that's not an impact to us. We do make our products, we do make some of our products in Southeast Asia as well as in The U.

Speaker 2

S. And Mexico and Honduras. I think that's a pretty fluid situation. But if we think about it, our Mexican footprint is really in low single digits of what we make in our products that we sell through our P and HS segment. John, I don't know if there's any

Speaker 3

Yes, that's right. Put a little bit color on that. So you think about our Mexican facilities and what comes back into The U. S. Is about 1.5% of the total revenue of the P and HS segment.

Speaker 3

So as I said, really small exposure and very to both Mexico and China.

Speaker 6

Great. And if I can just slide one more in. The looks like SG and A is roughly flat as a percent of sales for 25% based on the guidance you have with gross margins and just EBITDA kind of stepping up relatively proportionally. Is there anything you should call out about how you're thinking about investment and kind of your SG and A spend for next year?

Speaker 2

Yes. I think from an SGA standpoint, it's we're going to continue to look at ways to optimize it, continue to look at ways to take costs out. But obviously, we can't impact our service to our customer base. So that's how we've thought about it as we get in go into 2025.

Operator

The next question comes from Daniel Grossley with Citigroup. Your line is open. Daniel, perhaps your line is on mute.

Speaker 7

Hi, sorry about that. Thanks for taking the question guys. Just a high level one on the P and H sale process, completely get that you're redeploying capital to higher margin, higher growth, the Patient Direct. But I'm curious why now is the right time to do this? And then as we think about a few years down the line, are you going to be 100% dedicated to patient direct or are there other areas you may look to deploy capital into?

Speaker 7

Thank you.

Speaker 2

Yes. I guess on the question why now, I mean why now really comes back to we had received inbound interest, so multiple inbound interest on the asset of our P and HS segment. In addition to that, then we worked with advisors as well as our board and the decision was made to say, okay, we've got this much inbound interest, let's look at a broader process, which we've done which that is what we've undertaken. And we thought it was important now to make sure that we disclose that this is in process as we move forward because of what we where we are in that stage of it. And the fact that one again significant inbound interest brought in the pot process that actually expanded the interest and we're moving through this now so that way we could have open dialogue about it, frank conversations with our customers, with our supplier communities, within our own internal teammates and be able to move this forward and reach decision within quickly versus trying to continue to slow walk this.

Speaker 7

And then as you think about kind of where do you deploy capital next, more so in the medium term, will you be dedicated 100% to patient direct or are you thinking about other areas of potentially getting into?

Speaker 2

Well, I think in the near term, should the transaction happen with our P and HS segment, we will continue to focus on paying down debt. Should the regulators we get through that with Rotech, it will be focused on our Patient Direct segment paying that debt down, optimizing that business as we move forward. I think we think about our longer strategy as we disclosed in 2023 in December, was we expect that PD business by 2028 to be a 5,000,000,000 revenue business through both organic growth and through acquisition. Whether we expand out into other areas that's yet to be determined.

Speaker 7

Got it. Okay. And then on your commentary around the $50,000,000 of cost synergy from the Rotech deal being conservative in year three. I'm curious if there's going to be any pull forward of that to years one and two and if there's any change in how you're thinking about accretion from the deal in year one and year two. I think previously you said it was neutral in year one and zero point one five dollars accretive in year two.

Speaker 7

Any change in how you're thinking about that?

Speaker 2

Yes. I think the way here's the way here's what we've done. I think this is it's important to really step back from this. So obviously, the process has been delayed months now. So during that period of time, we've really used these last few months to understand how the two businesses can work together within the guidelines of available information of what we can see and how we can have those conversations.

Speaker 2

Based on that, we actually believe that there are additional synergies and that the speed to getting them should be faster. Some of the work that would have been done had we closed back in October and November of last year, we were able to do some of that during this next period of time, which is why we think from a timeframe by the end of year three, we originally talked about $50,000,000 We think that that's actually light and we can bring it up forward. In year one, I think there's still some impact of as we look through things, there's still going to be some decisions that have to be made in year one that may not expedited in the first three to six months. But in that back half of that first full year is when we should start to be able to see that. And I think once we get the regulatory approval on this, we'll come back with adjustments on timing and as well as dollars on synergies and the impact it has on the overall financials.

Speaker 7

Got it. Thank you.

Operator

Your next question comes from Eric Coldwell with Baird. Your line is open.

Speaker 8

Thanks very much. First one on the Apria capitated contract. John, I heard you say that you don't expect it to have a overly material impact on 2025. So my question is, is that because the pricing change happens later in the year, so it's more of a '26 impact or just that the pricing change anticipated or maybe it's already in effect, is just not that material in aggregate. I'm just hoping to get more details on that as well as any discussion you can provide on the size of that contract or how much capitated revenue you have at Patient Direct today overall with the mix is?

Speaker 2

Maybe I can start and John can talk a little bit about in detail. So I think Eric, appreciate the question. Let's step back from this. So first of all, big picture wise in our Patient Direct business. Outside of this contract, we have very few capitated contracts.

Speaker 2

And overall in the industry today, capitation is really a smaller portion of the industry. So I think that that's got to be we accept that as a backdrop. I'm not saying that this is a small capitated contract. This is a large capitated contract. And I want to talk a little bit about our approach to this and it will tie into John's comments about the impact on 2025.

Speaker 2

So we've modeled in assuming either direction whether we retain it or not retain it relatively speaking. And when we go through a capitated contract or any contract for that matter in our business, we take an extremely disciplined approach to the contract negotiations and we look at all factors. We look at what's the service level that's going to be required to serve the customer. Where is our deleveraging point and where can we go to, till we get to the point where it starts to deleverage the business? When this contract, we had the luxury of having current volume and we know the trending of the volume.

Speaker 2

We know that as we see that it's increasing, it gives us us the ability to make sure we put a capitated contract out there that's fair and reasonable versus others that may not. And then let me talk a little bit about where this has had historically. We've had other capitated contracts. So there was another group that came out with a capitated contract and we did not win that contract. Others did win the contract.

Speaker 2

However, within a year or two, the service wasn't where it needed to be. And they came back and reopened it specifically in the state of California, they reopened it and we retained business and regained business on a fee for service type model. So I think when we go through this process, I try to paint that picture because of the discipline we take in putting together our bid and our offering. I think the other thing that benefits us overall on this is that rigor and discipline that we have within the business. So with that, John, maybe we can talk a little bit about how we look at '25 and say, okay, the impact '25, it's already baked into the numbers that we have and it's not going to have a meaningful impact

Speaker 3

for us. No, that's right. Obviously, we're two months into the year already under the current contract with the current the older pricing, if you will, Eric. These it's a large contract. The time to switch the switching costs on these things were very, very high.

Speaker 3

It take a lot of time. So the time to actually switch out under new contract, should we lose it, it'd take a long time to switch it out. And quite frankly, capitation contracts of this size have a lot of dedicated resources to them. So our ability to flex that and still serve the customer effectively is pretty well known. So we feel pretty good about the time included to if there is a change in pricing, if we were to lose the contract, we can pretty manage that fairly effectively.

Speaker 3

At the end of the day, we feel pretty good about what we've modeled in for this in 2025 and our ability to manage it, whether it's just lower pricing and or should we happen to lose it, everybody take the cost out.

Speaker 8

Fair enough. And then on the two segments for 2025 continuing ops guidance here. Can you give us any framework on what you're thinking for top line and EBITDA performance across the two segments? Any loose ballpark on growth margin profile?

Speaker 3

Yes. As I mentioned, I mean, if you're using the midpoint of revenue guidance, I think actually the bulk of that growth is going to come from Patient Direct. Patient Direct top line, we expect to be better growth wise than it was in 2024. You may recall back in our Investor Day, Eric, we didn't expect much in the way of same store sales in medical distribution going forward. We got a nice pleasant surprise on that in 2024.

Speaker 3

Not sure that will continue into 2025. So the bulk of the lift overall on consolidated basis will come out of Patient Direct. From an EBITDA perspective, I think you'll see margins improve a little bit at both segments, but not significant margin improvement for us either, maybe a little margin lift just given it is more room to grow in P and HS versus the Patient Direct. There will be a little bit of margin lift at the EBITDA line for both segments.

Speaker 8

And I know the way you treat LIFO charges and credit has an impact on your reported EBITDA. I think what was it a $10,000,000 credit this quarter if I'm remembering? Sorry, I'm talking

Speaker 3

about that. $10,000,000 credit for the quarter, it was basically flat to $1,000,000 it was a slightly 1,000,000 charge for the year. And we are expecting a relatively small charge in 2025.

Speaker 8

Okay. Can I keep going?

Speaker 5

Sure. You got the mic.

Speaker 8

All right. Sorry, apologies to the others. Would you be willing to share last twelve month adjusted EBITDA on the PHS segment? I mean, we've tried to ballpark an estimate, but there are clearly some uncertainties between what's reported in your filings versus what you give in your press releases and allocations of certain expenses etcetera. So I'm just curious if you could give us your framework of what LTM EBITDA was in PHS?

Speaker 3

I was framing that PHS is between 20%, twenty five % of the consolidated EBITDA.

Speaker 8

Okay. And yes, it's about in line. And then last one for me for now is, are you willing to talk about how your debt financing roadshow went? What you're anticipating for debt cost on Rotech? Is that changed from the expectations that were set in what was it July of last year?

Speaker 3

So one of the benefits of a release that was chucked full of news this morning is that we get all this information out into the markets. I think that will help us have more fulsome efficient conversations with the debt market. But right now, we're going to remain very flexible in the weeks ahead as that pre marketing effort went very well. I think we got very good receptivity. But as we get into the weeks ahead and actually begin to market, we'll remain open to different structures and expect basically a cost of debt that's still in line with the overall route tech deal model.

Speaker 8

Okay. Thanks very much guys.

Operator

The next question comes from Alan Lutz with Bank of America. Your line is open.

Speaker 7

John, you mentioned some encouraging signs in the fourth quarter around NIB and oxygen. Can you unpack that a little bit? What are you seeing or what did you see in 4Q early in 2025? And what needs to happen to get those categories back to growth?

Speaker 3

Yes. Alan, we did. We saw the starts in both for non invasive events and oxygen begin to pick up late. I think I've talked pretty publicly before, we got a little flat footed at the start of the year. Obviously, the requirements around reimbursement for those categories changed dramatically post pandemic.

Speaker 3

We're a little caught flat footed, really getting ourselves up and geared up from that and others in space have as well. So it took us a while to really adjust to that. And I think we're in a good spot now to begin to capture that growth. And that's important growth. As you talk about margin across that business, those categories are very high gross margin products.

Speaker 3

We like them a lot. We're good at it and we want to see that growth. So I will tell you, we didn't build we built some of that improvement into our twenty twenty five expectations. But the more we can accelerate that growth of those two categories, it will be just this upside to us.

Speaker 7

Thanks for that. And then last question from me, lower glove pricing has obviously been a focal point over the past few years. I guess, where are we in that cycle today and what's embedded in the guide for glove pricing in 2025? Thanks.

Speaker 2

At a macro level, yes, we have seen glove prices come down and a significant portion of what we did with our operating model realignment to reduce our cost structure and then helping offset a portion of that, but it still did hit the top line and did have some pull through effect. I think with some of the what we're seeing in the market right now is we're starting to see prices go the other direction. A good portion of that is related to tariffs that are driving that. So I would say we've somewhat leveled out on those glove pricing and there may be an opportunity as things proceed forward to actually look at price depending on input costs to adjust that based on those factors.

Speaker 5

Thanks, Ed. Appreciate it.

Operator

This concludes the question and answer session. I'll turn the call to Ed Pesicka for closing remarks.

Speaker 4

Yes. First of all, I want

Speaker 2

to thank everyone for joining on the call today. I also want to thank our teammates for an incredible 2024, some great accomplishments as we move through the year. I'm excited as we look forward into 2025. '20 '20 '5 is going to be an exciting year for our organization. And I look forward to sharing our progress with everyone on this call and the rest of the organizations later in the spring.

Speaker 2

So thank you everyone.

Operator

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

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Earnings Conference Call
Owens & Minor Q4 2024
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