Q3 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to all went to mine or third quarter 2019 financial results Conference call. My name is Gigi and I will be your operator for today.

I'm all participants are in listen only mode. We will be facilitating a question answer session toward the end of this conference call.

At anytime during the call you require assistance. Please press star followed by zero.

Operator, we'll be happy to assist you as a reminder, this conference is being recorded for replay purposes I would now like to turn the presentation over to your host for today's call Mr. Chuck Graves. Please proceed mr. grades.

Thank you operator, good morning, everyone and welcome to the Ellington minor third quarter 2019 earnings call I'm chunk grades and on behalf of the team I'd like to read the Safe Harbor statement before we begin.

Comments on the call today will be focused on financial results for the third quarter 2019, which are included in the press release, we issued earlier this morning.

We will also be discussing certain organizational changes, which were included in a separate press release.

No that certain statements made on this call are forward looking statements, which are subject to risks and uncertainties.

These forward looking statements are intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act of 1995.

All statements made on this call today.

Doesn't statements of historical facts are forward looking statements that include statements regarding our anticipated financial and operational performance.

Forward looking statements made on this call represent management's current expectations and are based on information available at the time such statements are made.

Forward looking statements involve numerous known and unknown risks.

Certainties and other factors that may cause our actual results could differ materially from any results predicted assume or implied by the forward looking statements.

The company's explain some of these risks and uncertainties in the SEC filings, including in the risk factor section of its annual report on Form 10-K , and quarterly reports on Form 10-Q .

Except as required by law or the listing rules of the New York Stock Exchange the company expressly disclaims any intention or obligation to update any forward looking statement.

Additionally, 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 and our quarterly report on Form 10-Q .

I'm joined this morning by Ed Pacifica, our President and CEO , who will provide commentary on the third quarter results and outlook for the business as well as recent organizational changes.

And Mike Lowery, SVP, Chief Accounting Officer, an interim Chief Financial Officer, who will discuss our third quarter results.

And John Leon SVP and Treasurer.

Now I would like to turn the call overhead who will start things off this morning, Ed. Thank you Chuck Good morning, everyone and thank you for joining us on the call today.

After spending significant time with our customers supplier partners and teammates since joining no one's in minor earlier this year.

It became clear we need to make changes to strengthen the alignment of our organization with the needs and demands of our customers in the marketplace.

This morning, I announced deals changes, including Mark disaster, as Chief Commercial Officer, Dr., Chuck I'm, the Chief operating officer.

Our new structure will speed decision, making enable us to more quickly and efficiently provide the best solutions in the industry and more closely integrate the needs of our customers.

Mark and Jeff and our entire team remain keenly focused on serving our customers and on our ongoing productivity and efficiency initiatives to drive operating improvement for the benefit of all of our stakeholders.

In addition, I'm pleased to welcome Andy along to our team is Chief Financial Officer, I have known Andy for many years, including working closely together at Thermo Fisher scientific he is a dynamic leader with deep financial acumen and skilled in a wide range of business models, including distribution manufacturing and services.

Variance in health care life Science, Biopharma and industrial sectors.

I also want to thank Roberts need we appreciate Roberts long and unwavering commitment to owns a minor and as a willingness to assist in this important transition.

So let me move on to that results in performance or the third quarter.

I will provide my perspective on the third quarter performance and Mike Lowery will discuss the third quarter financial results in detail in a few minutes.

We had another successful quarter I'm excited to announce that we had back to back orders with significant sequential improvement here or just a few of the highlights from the third quarter.

First we saw continued sequential growth in both operating income and EPS compared to the previous quarter.

Our operating income grew 57%, while adjusted operating income grew 15%.

Related P.P.S. net income per share increased by 20 cents, while adjusted net income per share increased by 10 cents, both increasing by 100% or more.

Second we continue to generate strong operating cash flow, we generated $110 million worth of operating cash flow in the third quarter alone and the combined second and third quarter operating cash flow was over $200 million.

These cash flow results were driven by improvements in both operating income in working capital management.

And I'd like to emphasize that we were able to improve key major working capital metrics.

While at the same time improving service levels.

Third I'm pleased to report that we continued to strengthen our balance sheet.

We reduced our debt by $72 million in the third quarter and over the last two quarters, we have reduced debt by more than $130 million.

Based on that yes, it should be clear that we are committed to de leveraging the balance sheet.

In addition to the debt reduction we had invested nearly $40 million in capital improvements in the business. So far this year along with many other incremental non capital investments.

Fourth we continue to improve our service levels as a matter of fact, our service levels and our back to the historical high levels of that owns in miner is known for.

To better understand this let me share a few examples with you.

First our shipping accuracy is now nearly 99.9%. So let me put this into perspective, if you would order products from owns in minor everyday for nearly three years, you would receive an incorrect product or quantity only one over that period of time.

Next we are proactively working with our external supplier partners on initiatives such as advanced shipping noticed with pallet level information along with other initiatives. This collaboration has resulted in improved in bound scheduling and receiving which factors into improved productivity and improvement of both fill rates and on time delivery.

This strong performance and consistency of our service gives us confidence that many of the past service issues have been resolved. However, we will continue to drive additional initiatives to further improve and provide innovative services and Sip.

Firearm continues its strong performance in the fast growing home health care segment.

As you can see these five items just discussed it is clear that our teammates are actively embracing our focus around serving our customers and driving productivity, resulting in improved profitability and service.

Well I'm pleased that the positive momentum in the business, we must continue to maintain or diligence and focus that we have displayed over the past two quarters to mitigate the impact of customer Nonrenewals infusion five.

For the remainder of the year and into 2020, we will continue to focus on profit improvements to offset revenue headwinds related to the previously discussed customer non renewals. In fact this quarter, we began to feel the revenue impact of the large customer exit mentioned in the first quarter and we expect to see additional impact from this customer exit in the fourth quarter and then next.

Sure it's comparisons.

We will continue to mitigate this impact through productivity improvements new customer wins in an ongoing mix shift into more profitable higher growth businesses.

In addition, as we've mentioned previously timing of revenues related to our early stage value based care management business fusion five continues to be a variable and we expected to have an impact of six cents per share on our 2019th annual financial guidance, Mike will provide additional details in a few minutes.

You May recall I mentioned, the last earnings call four areas that we need to prioritize to stabilize and grow our business.

So let me provide an update on our progress.

First I continue to challenge our team and myself to drastically increase our 10 city, while maintaining a high level of attention on serving our customers.

Appointing marks back or is the chief commercial officer as an example of the importance of customer focus.

Mark will be responsible for aligning Owens <unk> minor go to market strategy enhancing the company's ability to adapt to the changing healthcare landscape and offer the best and most relevant solutions in the industry.

However, I want to be clear I.

I would personally continue to make customers a priority I will not let up.

We'll continue to engage in significant interaction with our customers, including customer meetings quarterly business reviews, and RFP presentations, we as an organization will continue to listen to our customers deliver on our promises and never take customers for granite.

Second as evidenced by our announcement today, we've been successful and bringing in world class talent into the organization as well as promoting from within as appropriate.

Last month today as an example of our ability to continue to bring in this level of talent as well that structure more streamlined organization capable of executing our strategy, while increasing the speed of our decision making.

Doing so enables us to more quickly and efficiently provide the best solutions in the industry and more closely integrated with the needs of our customers.

Third the vast amount of data that we collect is now being used to drive operational efficiencies profit improvement along with improved in innovative services to best serve our customers. We will discuss this more into future quarters.

Finally, we're instilling a higher level of accountability and authority to honor our commitments to our customers stakeholders in teammates.

In closing I am pleased with the positive momentum in the business looking forward and excluding fusion five we expect sequential improvement trends from this quarter to continue into the fourth quarter, albeit at a much slower pace. In addition, we expect the appropriate use of working capital to invest in both holiday and.

Where we buy to provide assurance that in first quarter of 2020 service will remain at the required levels. Also we expect continued customer focus with diligence around productivity initiatives to drive operating improvements in our core businesses. The distribution channel a product manufacturing, our home health care and our acute care services.

Yes.

Well, we are ahead of the long term recovery plan I envisioned when I joined in March we recognize that there are still significant amount of work ahead.

We will not take our customers for granted and we will provide the highest level of customer focus while maintaining industry leading integrity.

Finally, I'd like to take this opportunity to welcome Mark back and Bob Henkel to the owns and linerboard their leadership experience and operational expertise will add depth and perspective to our board.

Thank you for your time today and I now turn the call over to Mike for a discussion of our third quarter results and outlook for the rest of the year Mike.

Thanks, Ed Good morning, everyone today ill start with a review of our third quarter financial results and then comment on our outlook for the year.

The third quarter revenue was 2.4 billion decrease of 2.7 per cent compared to prior year year to date revenue was 7.34 billion.

0.7% increase compared to last year.

Foreign currency had a negative impact on revenue growth of 30 basis points for both the quarter and year to date.

The decline in the third quarter was from lower global solutions revenue, partially offset by growth in the global product segment.

As a reminder, we're quite how you're on April Thirtyth 2018.

Higher sales from January through April 2019 were 255 million net of 71 million of intercompany sales.

I will provide further comments regarding revenue a bit later when discussing segment results.

Net income for the quarter was 1.2 million or two cents per share and adjusted net income for the quarter was 12.2 million or 20 cents per share year to date. Adjusted net income was 19.3 million or 32 cents per share.

On a constant currency basis, adjusted net income per share was 22 cents for the third quarter and 34 cents here today.

Let's look at our segment results for the third quarter.

Global solutions third quarter revenue was 2.15 billion compared to 2.24 billion in the prior year. This decline was primarily in our distribution business, partially offset by strong revenue growth and Bauer and solid growth in or manufacturer solutions business in Europe .

The distribution revenue decline was primarily from customer nonrenewals, including the initial impact of the large customer transition that was mentioned earlier this year.

We expect this transition will be completed during the fourth quarter, which will be a headwind for the balance of the year 320 20.

Segment operating income for the quarter was 26 million compared to 24 million last year. This increase was primarily from gross margin expansion consistent with the change in their revenue mix among our business lines, partially offset by increased expenses to support revenue growth in these business lines.

Turning to the global product segment.

Third quarter revenue was 360 million compared to 350 million last year and operating income was 17 million compared to 28 million last year.

Operating income was negatively affected by revenue mix margin pressure and foreign currency, partially offset by favorable commodity price trends.

Let's turn to cash flow in the balance sheet.

The third quarter, we generated 110 million of operating cash flow consistent with the second quarter operating cash flow was driven primarily by working capital improvements and increased operating income in fact 200 million operating cash flow within generated over the last two quarters.

As Ed mentioned in the fourth quarter is typically not as strong from a cash flow perspective due to seasonal impacts on working capital as we build inventory for the flu season and for the holidays to ensure continuity of supply for customers.

Total debt was 4.61 billion at September Thirtyth, representing a reduction of 72 million compared to the second quarter and we have paid down 130 million of debt in the last two quarters deleveraging. The balance sheet continues to be one of our top priorities. Overall, we're pleased with a third quarter results in the country.

Any progress, we're achieving quarter after quarter and operations working capital management and debt reduction.

Let's turn to our outlook for the rest of the year and the catalyst where guidance adjustment, which is fusion buys revenues.

During last quarter's call we mentioned the following related diffusion fats revenue.

First a large portion of fusion fast projected revenues are based on savings achieved under the CMS bundled care program known as BPC its fast.

Second we expect it to realize revenue associated with the first six month period of the program during the fourth quarter of this year and third. These initial revenues are difficult to predict and this has indeed the case.

To date CMS is not releasing information necessary to record the savings based revenue during the fourth quarter.

Therefore, we are left to estimate left fusion fab revenue in the fourth quarter and this will have a negative impact to our previously issued 2019 financial guidance about six cents per share.

In summary, the company now expects 2019, adjusted net income per share gun is to being a range of 60 to 65 cents, which excludes the impact of fusion fab and foreign currency.

Thank you with that I'll turn the call back over to the operator to begin the QNX session operator.

Ladies and gentlemen, if you wish to ask a question. Please press star followed by one or your Touchtone telephone. If your question has been answered or are you wish to withdraw your question Press pound. Your first question comes from Aaron right from Credit Suisse. Your line is now fan.

Great. Thanks, how should we think about the impact from the large customer loss that you previously announced I guess, how much of it in the quarter and then how should we think about the quarterly progression of that impacted when will we fully lapped that impact I guess in next year. Thanks.

Yes, Thank you Aaron.

So what we should think about it is we in the third quarter, we began that because business began moving away that'll completely finish out in the fourth quarter and then it will continue to last in through next year.

So that's really the way to think about it.

What we've done as we've continued to look at ways.

Not necessarily in the short term to offset the topline, but continuing to drive different productivity initiatives to mitigate the impact on the bottom line of that.

Okay, Alright, Thanks, and then on fusion side can you breakdown, what the revenue impact is and how we should be I'm, just trying to figure out how we should model that over the next few quarters here and how much of it it's a timing issue versus.

Not in how we should think about that into 2020.

So so fusion five really has a very has a minimal impact on on revenue.

The way the way to really think about it is on modeling. It is the fact that we're actually waiting for the government that CMS to provide us the data and the information in a reconciliations really for the first group of data that being the episodes of care that we handled between October of last year in March of this year that should be coming soon.

Some time in December potentially and I think from transparency wanted to open we disclose the fact that we the timing of that may be delayed it's already been delayed several times. So thats really whats related to that six cents per share is really the timing in our ability to do the reconciliation, but going back to the initial part of the question from a top line that has very that.

Minimal impact from a revenue standpoint on the topline.

Okay. All right that's helpful. Thank you.

Thank you. Our next question is from Lisa Gill from JP Morgan. Your line is now fan.

Hi, any samuel on for Lisa.

We look to 2020, I guess could you just give us a little bit of color on how to think about headwinds versus tailwind as we build out our model. If you know between lapping the fusion five and currency anything else to think about thanks.

Yeah. So I think as you start to think about 2020 on this and I've already talked about the nonrenewal of a large customer about an impact for really the first three three quarters plus.

In the 2020.

But I think when you think about 2020, it's going to be the continuation of of looking at driving mix I'm from a bottom line standpoint, driving mix shift continues to drive productivity in the business.

Starting to win business and recognizing the fact is when we win business. It does take several quarters of time, there is a delay in the lag until that business starts to translate into revenue for us because of the transition time periods. So I think the way to think about that is that larger customer nonrenewal continues on through the first three quarters of next year.

Great. Thanks, and then some occurrence you you know looking at the full your guide the 66 five cents how much currency is being excluded for that for the full year.

Hi, guys I'll, let Mike take up so for the third quarter, we had a a two cents impact with from currency and actually year to date. It was that same adjustment there was nominal foreign currency impact for the first half the year and air project.

Actions indicate that a currency will be about two or three cents a share in the fourth quarter as well and that would be a headwind, but again it is difficult to predict but.

Your expectations at this point.

Okay, great. Thank you.

Thank you.

Ladies and gentlemen, if you wish to ask a question. Please press star followed by one on your Touchtone telephone. If your question has been answered or are you wish to withdraw your question Chris Pound. Our next question is from Robert Jones from Goldman Sachs. Your line is now open.

This is Jack on for Bob Thanks, guys I'm, just looking out to 2020 and other on on that how are you guys thinking about the Byron business and if you could provide just any detail or numbers around the opportunity. There I think you guys like that as a good guy this quarter.

Yes. So byrom continues to perform we expect the business to continue to perform in the next year you know the benefit of that business has been continued to provide topline growth, but also the profile of that that impacts us because it has the mix shift of that business actually helps us overall from a profitability in the company.

And then we don't historically haven't disclosed individual business units and or segments of our business individually.

And just a more tactical thing any thing worth flagging, just on like commodity input costs and flew as we approach the ended the fiscal year.

Yes, so we're anticipating fluid to be your traditional flu season here in the fourth quarter.

And then commodity impact that we saw in the third quarter, we expected to be relatively consistent into the fourth quarter.

So we don't expect any major significant differences in that between Q3 in Q4.

Awesome. Thank you.

Thank you, ladies and gentlemen, if you wish to ask a question. Please press star followed by one on your Touchtone telephone.

Question has been answered or are you wish TRID withdraw your question press the pound.

[noise] [noise] and our next question is from Kevin Caliendo from you via your line is now.

Hey, guys just break away on for Kevin Kelly Endo, Thanks for taking my question.

Could you comment a little bit on the acute care volume trends during the quarter a competitor.

In the market said that there's some strong utilization coming.

In Threeq and just want to get your taking what you've been saying in the marketplace.

Got it from that standpoint, well first of all thanks, Brett for the question from that standpoint, you know we traditionally in our business. If you look at it you do see a ramp up in the third and fourth quarter as people get closer to their full deductibles. So we anticipate that and we see that in our base business that up in our acute care business that lift as people get to there for the full deductible. So we saw.

Some of that in the third quarter, and we expect consistency with that going into the fourth quarter.

Yeah.

Great. Thanks.

Thank you.

There are no further questions at this time I will now turn the call back over to Mr. at CECO his closing remarks.

So I thank everyone for the time this morning as that close out in a very very pleased with this quarter and the fact that we were able to significantly improve earnings per share.

By increasing it by more than 100% and I don't want it to be overlook the amount of work that's been done on both the balance sheet, an operating income, enabling us to drive significant paydown of debt reminding everyone that we pay down $130 million a debt in the last two quarters and generated nearly 200 million of operating cash flow both from working capital.

Management as well as operating profit improvement in into the second and third quarters combined enabled us to pay down that debt as well as invest in operating initiatives that we have in place I look forward to talking to everybody in the <unk> after the fourth quarter and thanks for the time today.

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