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spk10: Thank you, Operator. Hello, everyone, and welcome to the Owens and Miner Second Quarter 2024 Earnings Call. Our comments on the call will be focused on the financial results for the second quarter 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. 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-K 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 Pesica, Owens and Miner'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.
spk04: Thank you, Jackie. Good morning, everyone, and thank you for joining us on the call today. It's been an exciting past few weeks here at Owens and Miner. Last Tuesday, we shared with all of you our definitive agreement to acquire RoTek Healthcare Holdings, Inc. The addition of RoTek 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. And furthermore, it accelerates our pace to achieve our long-term patient-direct revenue target of $5 billion by 2028, demonstrating our commitment to sustainable growth and driving long-term shareholder value. Turning to our second quarter performance, it was business as usual for Owens and Miner. 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 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 2024 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 second quarter. Our products and healthcare service segment generated $2 billion in revenue, reflecting a 4% improvement over this time last year. Our medical distribution division's strong second quarter 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 PNHS segment through, one, leveraging the scale of the channel profitability, two, growing our Owens and Miner branded product portfolio, and three, expanding into adjacent 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 second quarter reduced our manufacturing, transportation, and distribution costs. 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 million in revenue in the second quarter, a 4% -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. 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 million 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. The diabetic patients we serve are primarily type 1 or insulin dependent, which requires continuous glucose monitoring regardless of GLP-1 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. Rotec 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. Our team has done a tremendous job in just the first two quarters since launching our Vision 2028 plan and investor date. From driving efficiencies, improving customer service, to building strong organic road channels, and the plan to add Rotec to our patient direct segments, all of which proves we are 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 second quarter financial performance in more detail. John?
spk06: Thanks, Ed. And good morning, everyone. I hope you provide an overview of our financial results and some key factors that drove our performance in the second quarter, as well as our outlook for the remainder of the year. Our revenue for the quarter was $2.7 billion of 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% -over-year growth in our medical distribution division, as same sports sales and yet new customer wins drove the top-line change. Patient direct revenue of $660 million was up 4% compared to the second quarter of last year. Major therapy categories like diabetes, sleep supplies, and wounds again have strong performance, although certain respiratory therapies such as NIV and oxygen were below expectations. Within patient direct, patient eligibility and patient verification continue to regain momentum. However, a meaningful yet decreasing backlog of customers extended into the second quarter. 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 million, or .4% of net revenue, reflecting margin expansion of 11 basis points as compared to the second quarter of last year. 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 million, up from $455 million in the second quarter of 23. It increases primarily due to sales growth as DSMA was just below 18% of revenue for both this year and last year. Gap operating income for the quarter was $20.3 million, up 87% year over year, and adjusted operating income was $76.3 million. Adjusted operating income was up 23% year over year. Interest expense for the second quarter was $36 million, down 12% compared to $41 million in the second quarter of 2023. This is largely due to the nearly one full term reduction in leverage in the last 12 months, partially set by the impact of higher interest rates versus last year. In the second quarter, we recorded a one-time tax charge of $17 million, or 22 cents per share, related to a recent decision associated with notices of proposed adjustments that we received back in 2020 and 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 -non-gap reconciliation. 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. There is an expected related cash payment to be made in the second half of the year in a range of $30 or $35 million. We believe the matter will be concluded without further impact to our financial results. Our gap effective tax rate reflects this charge at a negative .9% for the quarter. The adjusted effective tax rate was 28.9%. Our gap net loss for the quarter was $31.9 million, or a loss of 42 cents per share, compared to the second quarter of last year when the net loss was $28.2 million, or 37 cents per share. Adjusted net income for the quarter doubled to $28.2 million, or 36 cents per share, from $14.2 million, or 18 cents per share, during the second quarter of 23. Adjusted EBITDAO was $127 million, of 12% versus $113 million, reported in the second quarter of last year. Also, we generated $116 million of operating cash flow this quarter, a strong improvement versus Q1 of 24. This allows us to reduce net debt by $70 million. We anticipate a good cash flow generation year, but that will include difficult lumping this quarter to quarter, and we remain intensely focused on cash flow generation. With respect to our current outstanding debt, we have $171 million of a series of notes which is due in December of this year. Earlier this week, we gave notes to redeem those notes at PAR in September, and we'll do so with cash on hand. We remain committed to delivering our 2024 guidance. We expect revenue to be in the range of $10.5 to $10.9 billion, adjusted EBITDAO to be in the range of $550 to $590 million, and adjusted EPS within midpoint of $1.55 per share, in an overall range of $1.40 to $1.70. Now, as in prior years, we expect to see modest sequential growth between the second and the third quarters, and greater sequential growth from the third to the fourth quarter. And again, I want to remind you that this guidance excludes any impact of the Road Debt Gap position. With that, I'll turn the call over to the Operator for the Q&A session. Operator?
spk01: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, again, press star 1. Your first question comes from the line of Michael Cherney with Lear Rink Partners. Please go ahead.
spk09: Good morning, and thanks for taking the question.
spk01: My apologies. Can you press star 1 again,
spk09: please? Sorry, Michael, we lost you.
spk06: Operator, why don't we move on to the next question, and Michael, get back in line.
spk01: Michael, your line is now open.
spk09: Hi, can you hear me this time? We can, Michael. Okay, that was a first. We'll see if that happens again. Sorry about that. I don't know what happened. Yes, call it a Friday. That's right. I want to talk about some of the operational plans that you've had put in place, in particular the projects you made on the product 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? And how does the dynamics around the tariffs that are expected to go into place impact or not impact you relative to the sourcing side?
spk04: Let me take those somewhat in reverse order. On the tariff aspect, it's going to have a minimal impact on us, since a significant portion of our products are manufactured in our own facilities, whether that's in the US or whether that's in Mexico, Honduras, or in the Americas. Our glove footprint is not in China. 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 a 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 and overall, let's just take the main category, 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 PNHS segment. Continue to look at our footprint, continue to look at the right level of new, advanced automation technology in the warehouses to drive operating efficiencies. So we saw some of the improvement this quarter in DS&A, our distribution, selling, and administrative expenses. There's where the opportunities continue to lie. Longer term, if we 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. 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.
spk09: Thanks, Ed. If I could just ask a second one on cash flow. I know that was a big focal point earlier in the year when you gave guidance, you talked about some of 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?
spk06: Yeah, 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, and 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 certain parties. So that combination is going to continue to help us out in the back half of the year. People might also get the seasonality in the back half of the year, particularly patient directs, which will have 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, constantly see more efficiency in working capital around payables, receivables, and inventory, and then we'll go to the seasonal lifts. Now, keeping in mind that what you're looking at is the appointed time at the end 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 the seasonality of business will drive pretty attractive cash flow compared to the first half of the year.
spk09: So will you have meaningful cash flow conversion over the course of the year? I know that was the appointed contention further in the year.
spk06: We will do, I would be very disappointed if we didn't do quite a bit better the second half than we've done in the first half.
spk09: Got it. Thanks so much.
spk01: Your next question comes from the line of Kevin Kellyando with UBS. Please go ahead.
spk05: Good morning, guys. Thanks for taking my question. First, can we talk a 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 of the ones that we can track anyway 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 the channel.
spk04: Yes, it's primarily an impact in a P&HS segment, not necessarily in the patient direct segment. Yes, for those products that we're manufacturing near shore, 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 different ways. 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.
spk05: 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 in hopes that customers will be willing to buy those sooner because they know the prices are likely to go higher. Is that in general?
spk04: And it may not even necessarily then buy the product sooner. It's just to have a better landed cost on the product than not.
spk05: 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 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. Yeah,
spk06: the biggest factor, as I indicated in my remarks, we're still dealing with the backlog in patient direct that frankly is a holdover from change that we probably underestimate to the extent of that impact of 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 profit associated with them. So if you factor that, we are catching up. There's a lot of manual effort to go into that catch up, but we are catching up and we're clear to 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.
spk04: And I'll just add two other things. One is we clearly understood that when we added additional commercial resources, that 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. Great. Thank you guys.
spk01: Your next question comes from the line of John Stansel with JP Morgan. Please go ahead.
spk03: Great. Thanks for taking the question. Just following up on the point 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 third quarter, is this something that you think now is, you know, changes kind of coming in the rear view that will be more of a three Q benefit or is this something that kind of could progress into a four Q?
spk06: Yeah, John, John Williams. It wouldn't help me think about it. So what happens, you know, the eligibility verification process has become very manual very quickly. And we're doing a very good job of clearing that, getting better at that and bringing in new providers to help us with that process. A way to think about it, and I would call it a back up, 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. We're getting to the third quarter, continue to get better throughout the year. So that has certainly impacted the growth. And I think there are a lot of it is predominately sleep supplies. And that's very attractive margin business that we're waiting to get online.
spk03: Great. And then just kind of thinking about gross margins that I stepped down sequentially from the first quarter. Now, I normally think of this as kind of gross margins stepping up throughout the year. Is that that kind of slight step down that you saw that more kind of attributable to the patient direct, I guess, mixed shift? Or is there other factors you highlight about kind of what drove that? And then I would assume, given your reaffirmed guidance, we should just see a bit of a steeper ramp into the back half for gross margins. That's kind of the right way to think about it.
spk06: That is the right way to think about it. Mixed shift in patient direct can be meaningful. And we've talked about before that the sleep and respiratory areas have higher margins, things like diabetes, which has been growing very nicely for us. Great. Thank
spk09: you.
spk01: Our next question comes from the line of Stephanie Davis with Barclays. Please go ahead.
spk02: 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'd tell us about some initial feedback from your payer and provider customers and how they're thinking about the deal.
spk04: Yeah, I'll just talk a little. Maybe I'll start 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 in organically, 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. 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 to be able to get the product hopefully potentially more efficiently. And then the same with the payers being able to 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.
spk02: And a follow up on patient direct, you did call out some easements in the quarter on NIV and oxygen. Could you call out any trends or if that's more of a one off with the own business, just give them the exposure at Rotex?
spk06: No, I would tell you what we've missed now a couple quarters now, Seth, and 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 that's unique to us and we have plans in place and working on that to remember that in the back half of the year.
spk02: Maybe some learning from
spk01: the New Deal. Thank
spk02: you much. Exactly.
spk01: Your next question comes from the line of a Daniel Grosslight with Citi. Please go ahead.
spk08: Hi, thanks for taking the question. I want to 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 expectations? And I just wanted to confirm that that cash flow commentary also contemplates that $30 million plus payment in the back half of this year.
spk06: Well, yes, it does. First of all, Dan, it's John. Secondly, I would tell you the increased confidence in cash flow comes around our focus and the visibility into the work and capital activities currently underway. We've talked about last couple of quarters about the inventory ramp and talked a little bit 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 moderated compared to Q1, ramp a little 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. We're seeing better collections on a regular basis. I had a patient direct this year. Got it.
spk08: Okay. Okay. And there were some legal expenses this quarter, I think, related to the to the apria. Just curious what's driving that. And if you expect to see increased legal expenses for the remainder of the year, that's
spk06: just this quarter. Nothing going forward. That was a one time settlement and action that began before we bought apria. So that has now been settled in behind us. So there's nothing else going forward. So let's do with that.
spk08: Okay, great. Thank you.
spk01: Your next question comes from the line of Eric Coldwell with Barrett. Please go ahead.
spk07: Thank you very much. I apologize if I missed a couple of these. I for some reason, I've had a hard time with the connection here. Just a little bit hard to understand some things in QQ. 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
spk08: the birth rate? No, we didn't. We did not.
spk07: Can you?
spk06: Well, I think we said that distribution grew 5% and overall segment group 4. So I think.
spk07: Okay. I didn't. Yeah, I didn't. I didn't hear that. It's been a bad connection today. 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. What? It 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 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.
spk04: I think that's fair, Eric. And I think it comes down to is one is focus. You know, as we continue to look forward, you know, I think you've got better visibility now into forecasting of where we think is where their opportunities in the lever are, you know, and then it's execution on some of the initiatives we have to drive working capital improvement. So, you know, that's those three major factors are where it is. It's, you know, the focus. It's improved forecasting and, you know, our ability to access our ability to. Execute on some of those opportunities.
spk07: 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? Yeah, I think it's the same store versus new wins.
spk04: Yeah, I think it's, you know, if I think about the two of them, they're relatively consistent. I mean, so what's hard to do is, you know, our same store sales. If we look at the same store sales, they're consistent with that 4%. And then our wins. You know, 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. Got it.
spk07: Okay. Thank you very much. I appreciate it.
spk01: That concludes our question and answer session. I will now turn the conference over to Ed Posika for closing comments.
spk04: So thanks everyone. And, you know, excited and thankful that everyone joined the call today. Now, if we think about, you know, the future, it owns a minor. We're extremely excited of what's yet to come in here. You know, we continue to execute on our long term strategy. We continue to focus on our operating model. You know, we continue to get excited about the potential and future integration and approval with the Rotex. 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 health care services business. So that appreciate the time today and look forward to talking again next quarter. Thank you.
spk01: This concludes today's conference call. Thank you for your participation and you may now disconnect.
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