Owens & Minor, Inc.

Thank you, Operator. Hello, everyone, and welcome to the Owens & 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 report on Form 10-Q. In our discussion today, we will reference certain non-GAAP financial measures and information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release. Today, I'm joined by Ed Pasica, Owens & Miners 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.

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 & Miner. Last Tuesday, we shared with all of you our definitive agreement to acquire Rotec Healthcare Holdings Incorporated. The addition of Rotec 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 & 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 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 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, enhancements 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&HS segment through, one, leveraging the scale of the channel profitability, two, growing our owns and minor branded product portfolio, and three, 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 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% 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. 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 Rotech, 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. Our team has done a tremendous job in just the first two quarters since launching our Vision 2028 plan at Investor Day. From driving efficiencies, improving customer service, to building strong organic road channels, and the plan to add road tech 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 second quarter financial performance in more detail. John?

Thanks, Ed, and good morning, everyone. I will be providing 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, 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 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 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 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 20.4% 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 2023. The increase is primarily due to sales growth, as DS&A was just below 18% of revenue for both this year and last year. Gas 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 in 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 offset 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 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. 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 GAAP effective tax rate reflects this charge and was negative 89.9% for the quarter. The adjusted effective tax rate was 28.9%. Our GAAP net loss for the quarter was $31.9 million, or a loss of $0.42 per share, compared to the second quarter of last year when the net loss was $28.2 million, worth $0.37 per share. Adjusted net income for the quarter doubled to $28.2 million, worth $0.36 per share, from $14.2 million, worth $0.18 per share, during the second quarter of 2023. Adjusted EBITDA was $127 million, up 12% versus the $113 million reported in the second quarter of last year. Also, we generated $116 million of operating cash for this quarter, a strong improvement versus Q1 of 24. This will allow us to reduce net debt by $70 million. We anticipate a good cash flow generation year, but 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 million 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 will 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 EBITDA to be in the range of $550 to $590 million, and adjusted EPS with a midpoint of $1.55 per share and 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 Rotech acquisition. With that, I'll turn the call over to the operator for the Q&A session. Operator?

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 LearRink Partners. Please go ahead.

Good morning, and thanks for taking the question.

My apologies. Can you press star 1 again, please?

All right, Michael, we lost you.

I'll move on to the next question, and Mike will get back on line. Yep.

Michael, your line is now open.

Hi, can you hear me this time? We can, Michael. Okay, that was a first. We'll see if it happens again. Sorry about that. I don't know what happened. Yeah, 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 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? 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?

Let me take those probably somewhat in reverse orders. 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 U.S. or whether that's in Mexico, Honduras, so 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, you know, within our product and healthcare services, you know, it's the continued execution on sourcing. You know, as we've seen prices come down in overall, let's just take a main category, PPE, you know, we've done a really good job continuing to source raw materials at lower rates to make sure that, you know, as those prices come down, our costs are coming down correspondingly with them. You know, 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 and technology in those warehouses to drive operating efficiencies. You know, so we saw some of the improvement this quarter in DS&A, or distribution, selling, and administrative expenses. You know, there's where the opportunities continue to lie. You know, 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 mid-term opportunities.

Thanks, Ed. If I could just ask a second one on cash flow. Yeah, 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?

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 also slowed 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 tables 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. Keep in mind, we'll also get the seasonality in the back half of the year, particularly patient direct, which gets 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, confidence in more efficiency in working capital around payables, receivables, and inventory. And then we'll look at the seasonal list. Now, keeping in mind that what you're looking at is the appointed 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 of the business will drive pretty attractive cash flow compared to the first half of the year.

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

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.

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

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 anyways have risen dramatically. And I guess I'm trying to understand how it impacts

you um how it impacts the industry does it help you that you you're sure and does it make your products that are manufactured domestically more attractive just trying to understand the impact across the across the channel yeah so it's primarily an impact in a pnhs segment not necessarily in the patient direct segment um you know yes yes for those products that we're manufacturing near shore you know it has to create some level of an advantage for us But again, I talked earlier that in about half of our gloves, we're making our own factory in Southeast Asia and bringing them over. It's impacted us in a couple of 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. You know, but ultimately, you know, 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. You know, it's also part of how do we utilize our operating model to continue to try to offset that, whether it's, you know, advanced shipments, you know, prior to some of those increases. but also continue to look at different ways to more efficiently bring the product over. But, you know, it is going to create some level of a headwind in the business in the back half of the year.

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, you know, 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 correct?

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

Maybe this is one for Jonathan. The patient direct ramp in the second half, 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, Kevin, the biggest factor, as I indicated in my remarks, was that we're still dealing with a backlog in patient direct that, frankly, is a holdover from change that we probably underestimated to 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 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.

And I'll just add two other things. One is we clearly understood that when we added additional commercial resources, they would create some level of, you know, I wouldn't 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. And 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.

Thanks, John. Your next question comes from the line of John Stancil with JP Morgan. Please go ahead.

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, um about how you think about the the impact on 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 since change is kind of coming in the rear view that will be more of a 3q benefit or is this something that kind of could could progress into into 4q

Yeah, John, William. The way to help you 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 and getting better at that and bringing on new providers to help us with that process. A way to think about it, and I wouldn't call it a backup, but at any point in time, there's a queue of 10,000 customers waiting for supplies, and we saw that into June grow to as much as 50,000. So that is getting better now. We're getting to the third quarter. We'll continue to get better throughout the year. So that has certainly impacted the growth. And as I said earlier, a lot of it is predominantly sleep supplies, and that's a very attractive margin business that we're waiting to get online.

Great. And then just kind of thinking about gross margins, they step down sequentially from the first quarter. Now, I normally think of this as kind of gross margins stepping up throughout the year. Is that kind of slight step down that you saw, is that 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. Is that kind of the right way to think about it?

is the way we think about it yeah mixed shift and patient direct can be meaningful and we've thought that before that sleep and respiratory areas have higher margins things like diabetes which has been growing very nicely for us great thank you your next question comes from the line of stephanie davis with barclays please go ahead 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.

Yeah, 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 in organically, specifically in the patient direct space, continuing to provide a better solution. You know, it's still early on, you know, we, you know, so to get the patient and the payer feedback, you know, that's still in process. But overall, it's been extremely positive. You know, I think overall from a standpoint, we believe that this is going to ultimately provide a much better experience for the patient. You know, the ability to focus on a single company to support them as well as to be able to get their products hopefully, you know, potentially more efficiently and And then the same with the payers being able to, you know, continue to work with us. So, you know, it's early on. I think, you know, we'll continue to gather that information, but that's where we are on it right now.

And a follow-up on patient direct, you did call out some news 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 given the exposure at Rotex?

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

Okay. Maybe some learnings from the New Deal.

Thank you much. Exactly. Exactly.

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

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. You know, 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.

Well, yes, it does, first of all, Daniel. It's John. Secondly, I would tell you the increased confidence in cash flow comes around the focus and the visibility into the working capital activities currently underway. We've talked about this a 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 moderated compared to Q1. We ran 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.

Got it.

Okay. I'm sorry. We're seeing better collections on a regular basis out of patient directives, too. Got it.

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

No, nothing going forward. That was a one-time settlement of an action that began before we bought APRIA. So that has now been settled and behind us. So there will be nothing else going forward associated with that.

Okay, great.

Thank you.

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

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?

No, we did not.

Can you?

Well, I think we said that distribution grew 5% and the overall segment grew 4%, so I think... Okay.

Yeah, I didn't hear that. It's been a bad connection today. Yeah. okay um and then um on the uh uh 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 uh through Q1 up to the last call just they're they're turning out differently than you originally expected it just seems like a a very different conversation 90 days later than it was 90 days ago I think that's fair Eric and I think it comes down to is one is focus um 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 And then it's execution on some of the initiatives we have to drive working capital improvement. So 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.

Great. And I'm 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 probably same store versus new wins.

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 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. Got it.

Okay. Thank you very much. I appreciate it.

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

So thanks, everyone. I'm excited and thankful that everyone joined the call today. If we think about the future at Owens & Miner, 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 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 healthcare services business. So with that, appreciate the time today and look forward to talking again next quarter. Thank you.

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