Q4 2019 Earnings Call

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Wins and minor conference call well begin shortly again, thank you for standing by.

[music].

Good morning, ladies and gentlemen, and want to Owens <unk> minors fourth quarter full year 2019 financial results conference call.

My name is Daniel when I will be your operator for today.

This time, all participants are in listen only mode.

We will be facilitating the question and answer session toward the end of this conference call.

If it anytime during the call you require assistance please press star.

<unk> zero and an operator, we'll be happy to assist.

As a reminder, in this conference is being recorded for replay purposes.

Now, let's turn the presentation over to your host for today's call Mr. Charles Graves. Please proceed mr. breeze.

Thank you operator, good morning, everyone and welcome to the Owens <unk> minor fourth quarter and full year 2019 earnings call.

I'm truck grazing on behalf of the team I'd like to read the Safe Harbor statement before we begin.

Our comments on the call today will be focused on financial results for the fourth quarter and full year of 29 team and our outlook for 2020.

All of which are included in the press release, we issued earlier this morning.

I'd also like to call your attention to supplemental slides related to our 2020 outlook posted on our website and the Investor Relations section.

Please note that certain statements made on this call are forward looking statements, which are subject to risks and uncertainties.

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 other than statements of historical facts.

Forward looking statement and include statements regarding our anticipated financial and operational performance.

Forward looking statements made on this call represent managements 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 assumed or implied by the forward looking statement.

The company has explained 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 reconciliations to the most comparable GAAP financial measures are included in our press release and our annual report on form 10-K.

The company will host an Investor day meeting for professional investors and analysts on Wednesday May Twentyth in New York City.

A registration link has been provided any investor relations section of the company's website and we look forward to saying you in New York.

This morning, I'm joined by its a FICO, our president and Chief Executive Officer, who will provide commentary on the fourth quarter and full year results and on our 2020 outlook.

And Andrew long, our executive Vice President and Chief Financial Officer, who will discuss our financial results for the quarter and full year and also provides additional insight into the 2020 outlook.

Now I would like to turn the call over the head start things off this morning, yeah.

Thank you Chuck and good morning, everyone and thank you for joining us on the call today.

Today I'm going to cover three main topics in my prepared remarks first the continued improvement in financial and operating performance for the third consecutive quarter in 2019.

Second our focus on disciplined reinvestment in our business in 2020 and building on the strong Foundation. We established in 2019, we believe the foundation in these investments will enable owns a minor could deliver double digit adjusted EPS growth beyond 2020.

And third the impact of Cobot 19 on our American based manufacturing and global supply chain solutions.

Let me start by reminding everyone that when it came onboard last March we committed to focusing on three things one changing the culture to have a high level of intensity with a laser focus on the customer.

To restoring our customer service levels to our historical industry, leading standards in three improving our financial performance and reinvesting into the business I'm pleased to say that we're honored our commitments on all three of these items now let me share a few details around these items I will start with our improved financial performance relate.

The two income cash flow debt pay down and investment.

That's committed during the third quarter earnings call I'm pleased to say that are trending sequentially income improvement continued in the fourth quarter.

Well adjusted operating income and adjusted net income per share improve sequentially in every quarter throughout 2019.

Adjusted EPS increase from two cents in Q1 to 10 cents. In Q2, then it increased to 20 cents in Q3, and finally, the 24 cents in Q4.

These improvements were driven by operational effectiveness revenue mix, along with seasonality of certain businesses.

But it's also important to note that not only did adjusted operating income and adjusted net income per share improved sequentially. It also improved year over year for the fourth quarter.

Moving to cash flow, we generated positive operating cash flow in the fourth quarter Acorda that typically is not as strong cash flow quarter for us due to the investments in yearend inventory by however, here's what we accomplished.

Generated 27 million of operating cash flow in the fourth quarter and looking at our cash flow with a broader ones. The combined operating cash flow from the second through fourth quarter was $227 million.

So how did we achieved these cash flow results over the past three quarters.

It was the result of positive return on investments in technology training process and people to drive improvement in our operations inventory planning in accounts receivable collection just to name a few.

We accomplished this while maintaining and improving service levels and improved our key working capital metrics.

The cash flow improvement just described enabled us to pay down debt deleverage the balance sheet as well as reinvest and position us for long term profitable growth here is what we've accomplished we reduced our debt over the last nine months and continue to make debt reduction a key priority.

In addition, we have been reinvesting in the business in a disciplined manner.

Capital investments totaled over 56 million in 2019.

Let me provide two great examples of capital investments that will provide long term profitable growth and increased customer satisfaction.

The first is the expansion of our United States manufacturing capabilities to produce non woven laminated fabric used in P.P. products, such as surgical gallons in masks.

This investment enables us to significantly control manufacturing and supply chain of critical products needed to protect patients and clinicians.

Second is the investment in enhance BDC capabilities in viral our home health care business.

This investment has assisted by room in achieving strong performance in one of the fastest growing segments of health care.

In addition to capital expenditures, we have made other non capital investments to improve our internal operations along with investments focused on solutions in service that deliver value and operating efficiencies to our customers.

We will provide examples in demonstrations at or May Twentyth Investor Day, We expect continued investment in 2020 that we believe will provide enhance long term sustainable growth.

Let me move onto customer service.

Focus on service levels continues.

I mentioned last quarter better service levels are now back to historical high levels.

I'm pleased to say that we finished the year on a strong note with continued improvement.

We will remain focused on customer service and we'll continue to drive additional initiatives to further improve and innovate.

Finally, I am pleased to say that our intense focus on the customer and cultural change leading with our humble mission to.

Empower our customers to advance health care, along with our ideal values are being woven into the fabric of our company.

The Michigan and ideal values provide clear direction on how we operate starting with the first value the letter I in the ideal values that being integrity.

I see this value demonstrated every day and it has been more evident in how we have worked during their current cobot 19 issue, which I will discuss later.

As I reflect on 2019 in close out the year I'm proud to say yeah. We did what we said we were going to do when it first came onboard in March of 2019 and in fact, we are ahead of my initial expectations in many areas.

To recap we have built a rock solid foundation for the business, which we can and will build on and 2020. We did this by successfully changing the culture the organization to be intensely customer focused with our mission and ideal values as our true north.

Assembling a world class leadership team.

Restoring our service levels to our storage industry, leading standards with a focus on continuous improvement.

Improving or financial performance, driven by operating efficiencies and investments.

And reinvesting for long term financial success.

Let me now move into 2020, well, we're only two months ended the year. We've already achieved two major accomplishments first in January we announced their intention to sell movie on so our European logistics business.

The sale will allow us to increase our focus and investment in our core U.S. based distribution products and service businesses well further deleveraging the balance sheet secondly.

We strengthened our financial position by improving or debt profile with the recently announced amendment to our credit agreement in the launch of our accounts receivable securitization facility.

This will provide us with the ability to reinvest in our business, allowing for long term success and double digit adjusted EPS growth beyond 2020, Andy will provide additional details during his prepared comments.

As we continue into 2020, we can't take our foot off the gas pedal and we won't we have great momentum in the business and we have to balance short term challenges with long term success.

And 2020, we will do several things first we will work aggressively to mitigate the impact of customer Nonrenewals, primarily from the first three quarters of last year.

We will do this through productivity improvements new customer wins in an ongoing mix shift into more profitable higher growth business second we will continue to generate cash flow and pay down debt.

Third and finally, we will reinvest in our business for a long term success in future growth.

We're not going to starve the business in pursuit of short term gains and risk the momentum we established.

We will invest with confidence because we have a strong leadership team that has proven the ability to drive operating efficiencies improve customer service and mitigate the loss of customers. Our investments will be made across three primary areas infrastructure technology and services.

Unlike the past these investments are based on many customer in <unk> interactions with our leadership team.

There is not a week that goes by where we do not have multiple meetings or meaningful conversations with our current or potential customers and what we're hearing from our customers is clear.

Customers are looking for value.

Customers are looking for flexibility and adaptability to customize a mix of service in products, rather than being forced into a Richard framework.

Customers are looking for risk mitigation and customers are looking for improvements in clinician and patient experience.

Our investments are aligned with what our customers want and need.

As we look at 2020 Holistically in from a financial standpoint, there are number of puts and takes.

As a result of these planned investments lost income associated with the pen divestiture of Movianto.

The impact of recent financing activity.

Past customer nonrenewals, partially offset by additional operating efficiencies portfolio mix shift and expected customer retentions in wins, we expect adjusted EPS to be in the range of 50 to 60 cents in 2020.

We believe that building on the strong foundation established in 2019 combined with the incremental investments we are positioned the company to generate sustainable double digit earnings growth beyond 2020.

Andy will provide additional color on her 2020 outlook.

Before I wrap up let me briefly discuss a couple of industry topics that have done in the headlines recently and I will start with Covance 19.

We're closely monitoring the coping 19 novel Corona virus situation.

We recognize olin's in miners important position in the global health care supply chain and we're committed to doing our part to support health care providers as they care for those affected and seek to stop the spread of the virus.

Well this is a fluid situation here are the actions we've taken to date.

We are taking care of our existing customers, we have adopted product allocation procedures to ensure to the greatest extent possible that are how your brand P.P. products are available to our existing customers. Additionally, when possible. We have worked with noncustomer providers, who have been unable to obtain sufficient P.P. products.

From their existing distributors are manufacturers.

We have swiftly ramped up our production of our P. PE products to meet the increased demand. While this ramp takes time and requires initial investments. We believe that we are well positioned to fill a portion of the demand that is resulted from supply chain disruptions.

It is important to note that a significant portion of our production capacity for these products is located in the Americas, which positions our supply chain favorably compared to others that source these products from Asia.

Our Americas based supply chain should allow for more reliable and quicker time to market.

And finally, we are taking care of our teammates we have a global workforce and I've taken steps to ensure the safety and health of our teammates and the integrity of our facilities and supply chain.

As evident from our actions, we take very seriously the reliance that our customers place on us and their responsibility to take care of their patients in this critical time, we're in constant in close communication with our customers our suppliers industry associations and government agencies to assess changing needs.

And to lend our supports.

We have and will continue to do our best to serve our customers, but the highest level of integrity and not exploit the kobin 19 situation.

It's 2020 progresses, we will update you on the impact of covert 19 to our company in financial results.

And finally, we would like to welcome to new members to our board of Directors, Mike referred in the former co CEO and director of prison Health was elected to our board in December of 2019, and Glenn being will join the board of directors effective Tomorrow going is a retired three started the tenant general in the U.S. Army with a strong background.

Supply chain and strategic leadership, I look forward to working with Mike and Glenn and no. They will make great additions to our board.

Thank you for your time today, and I'll turn the call over to Andy for a discussion of our financial results and outlook for 2020.

Andy.

Thank you Ed and good morning, everyone. Today I'll begin with a review of our fourth quarter and for your financial results comments on recent improvements to our debt structure and then discuss our outlook for 2020.

For purposes of today's discussion. Please keep in mind that results from our movie I feel business unit are now treated as discontinued operations. As we mentioned previously we expect this transaction to close in the first half of this year.

My comments today, unless otherwise indicated will be on a continuing operations basis.

For the fourth quarter net revenue was 2.2 billion compared to $2.4 billion for the prior year.

The change was primarily driven by lower net revenue in our medical distribution business, partially offset by increases in global products and certain global solutions business lines.

The change in medical distribution that revenue was primarily due to the previously discussed in active customer nonrenewals, primarily from the first three quarters of last year.

The resulting reduction in revenue will affect year over year comparable results for the majority of 2020 and is incorporated into our outlook that I will discuss later in my presentation.

Net revenue for the full year 2019 was 9.2 billion compared to $9.4 billion in 2018.

Gross margin of 13% in Q4 improved 125 basis points over prior year, primarily due to margin expansion in global products and each of our business lines within the global solutions segment, coupled with favorable product mix.

Distribution, selling and administrative expense of $254 million in the current quarter was $9 million lower than in Q4 2018, as a result of efficiencies net of investments to help drive future growth.

On a total company basis, adjusted net income for the quarter was $14.7 million or 24 cents per share.

2019 full year adjusted net income was $34 million or 56 cents per share.

On a constant currency basis, adjusted net income per share was 26 cents for the fourth quarter and 60 cents for the full year.

Now, let's review the segment results for the full year.

Mobile solutions revenue was 8.24 billion compared to $8.77 billion in the prior year.

As I've mentioned the customer Nonrenewals in our medical distribution business, partially offset by continued strong revenue growth in our home health care drove to change.

Global solutions operating income for the year was $84 million compared to $109 million last year. The driver of the change in operating income was primarily result of lower revenue is I've just described.

Turning to the global product segment net revenue was $1.43 billion compared to $1.1 billion last year, and operating income was $65 million compared to $76 million last year.

Net revenue includes an unfavorable foreign exchange impact of approximately $6 million.

Year over year revenue performance in this segment was favorably impacted by the Annualization of our Halyard acquisition, which closed on April Thirtyth of 2018.

Operating income was negatively affected by product mix incremental cost to support the acquired business and foreign currency, partially offset by favorable commodity price trends.

Now I'd like to discuss our cash flow the balance sheet and recent improvements made to our debt profile.

For the year, we generated $166 million of operating cash flow driven primarily by working capital improvements and increased operating income.

Over the last three quarters, we generated $227 million, an operating cash flow.

Typically the fourth quarter isn't as strong from a cash flow perspective, as we build inventory for the flu season and in preparation for manufacturing yearend holiday shutdowns to help ensure continuity of supply for our customers. Despite this we were able to generate operating cash flow of $27 million in the quarter.

Total debt was $1.56 billion at December 30, Onest, a reduction of $41 million compared sequentially to the third quarter and a reduction of $171 million over the last nine months of 29 team.

Now let me review several changes we've made to strengthen the financial foundation of the company.

Recently, we've taken three decisive steps to better position us for the future.

First as previously discussed we made the strategic decision to divest turn movianto business for a $133 million. The proceeds from this transaction will be used to pay down debt.

Second we amended our credit agreement to provide additional flexibility, which among other things includes our ability to enter into an accounts receivable securitization program. Finally, we executed this a our securitization program, providing us with access of up to $325 million of cash, which we can use the.

Further refinance debt.

These actions allow us to strengthen our balance sheet by ensuring that we have ample liquidity, while providing lower costs liquidity.

This stronger financial footing will enable us to continue to invest in the business, which in turn should result in an even healthier balance sheet going forward.

I fully expect in 2020, we will again generate good cash flow, which will enable us to fund the necessary investments in the business to build on the foundation established in 2019, while further reducing debt.

Next I'd like to spend a few minutes discussing our earnings outlook for 2020 of which is summary can be found in our modeling guidance schedules, which are posted on our web site.

It's important to clarify the for 2020, our guidance represents our expected financial performance on a continuing operations basis, which excludes are moving onto a business for all four quarters of 2020.

As you heard from Ed our adjusted EPS for 2020 is expected to be in a range of 50 to 60 cents.

Let me briefly discuss some factors that were considered in developing our guidance range.

Starting with the topline our outlook for revenue is in the $8.3 billion to $8.5 billion range. The main driver of this is the impact of previously discussed medical distribution customer non renewals.

As we've mentioned year over year Comparables for the first three quarters of 2020 are going to reflect the impact of business lost earlier in 2019.

Partially offsetting this headwind is our expectation of growth in our home health care and service businesses, while we have been and expect to continue to invest in growth. These investments take time to realize the benefits primarily due to the long lead times and winning and implementing new business.

We expect to realize the topline benefit of these investments in 2021 and beyond.

In terms of gross margin, we expect continued expansion from 12.25% in 2019, 2013% to 13.3% range in 2020 as a result of ongoing favorable mix towards higher margin business lines and the impact the favorable commodity pricing in our products.

Business.

Well, not specifically, calling out a range for distribution selling and administrative expenses you can expect to see a year over year reduction as we realize the benefits of our actions to improve the efficiency at how we service our customers to meet their needs.

Partially offset by our continued investments in the future of our business in areas, such as infrastructure technology and services.

Our 2020 forecast also factors in the expected impact, resulting from the changes in our debt profile that I discussed earlier, including interest costs associated with our amended credit agreement as well as the more favorable rates provided for in our new accounts receivable securitization facility.

During 2020, we expect to further reduce our debt levels in the range of $175 million to $185 million through cash flow generated by the business coupled with the proceeds received from the pending moving out for sale.

As a result, we expect interest expense between $93 million to $96 million for the year.

We believe the foundation, we have built in 2019 and plan to strategic investments. This year will enable olin's and minor to deliver double digit adjusted EPS growth beyond 2020.

I do want to emphasize that our projection for 2020 does not take into account the potential impact from the covert 19 situation given the number of variables and amount of uncertainty surrounding the so that.

As this plays out on the world's stage over the coming weeks, we expect to have a better estimate of the impact. This will have on our 2020 performance during our Q1 earnings call.

I'd also like to make a few comments about the expected calendarization of earnings as we move through 2020.

We expect our earnings in 2020 to be similar to the pattern. We saw in 2019 based on the impact of seasonality and the fact, the past customer nonrenewals will be reflected in our results, particularly in the first three quarters simply stated we expect our earnings to continued to be skewed to the second half of the here as we experienced in 2000.

The 19.

We also expect to begin to show year over year EPS growth on a continuing operations basis, beginning in Q3 of 2020.

Finally since this is my first opportunity to speak with you since joining the company I wanted to leave you with my initial impressions I am very bullish on olin's and minor the team here is as strong as any you will find and the core fundamentals of the business. Our rock solid of course, there was a lot of work to do and the team is.

Price in 2019 in laying the foundation for profitable growth and strong cash flow for years to come.

I am proud and delighted to be here, Thank you and with that ill turn the call back over to the operator to begin the Q and a session operator.

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

For your question husband answered or you wish to withdraw your question press pounds.

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

Hi can you hear me.

Yes, we can hey, good morning, So I have quite a few questions actually I might have to jump back in first off can you I know you're not explicitly building cobot 19 into guidance at this point, but could you give us your best guess based on what you see now as to whether the deposit money.

To date, the skew more negative in terms of supply chain disruption and investments you're having to make early or more positive in terms of potentially some ability to service customers that others can't service increased demand in the marketplace. So just.

What's your best guess at this point when you when you have to give us that future update.

I'll start this is at an all starting with Andy once had common effort to cancel.

I think the way, we think about his or several puts and takes we have to consider yeah. Let me just go through those with you. So you can understand how we're thinking about this so the first is what I call point of sale product change. So we have our distribution channel. The owns a minor medical distribution business that is that is distributing we're selling products may.

Manufactured by other people and we're seeing already starting to see material outages of product because those products manufactured and in Asia, China, specifically, whereas in that PPG products. So again masks and gallons we have the ability at that point of sale because the customer needs at the swap it over to a pro.

Got it that we manufacture in the Americas that really doesn't have a net revenue impact, but it does have a manufacturing margin impact because now we're able to sell product, where we have the manufacturing capabilities and others don't.

We are seeing incremental product sales to in the fact that through our not not are not through our distribution channel where customers and potential customers need products because of the stock outs from others, where we can actually.

Provide products that we manufacturers that actually has an incremental benefit to us from both revenue and margin standpoint.

You know the one thing that we look at though on the other side of as we don't know how long the situation is going to last so that's a factor that we really can't consider within here and then the other into put and take you got to think about is besides our traditional PPG products. There's other products that we don't manufacture that are being manufactured by us.

Others, and even to smaller extent some of our non personal protection products that are manufactured in China in the longer. This goes on that could have a negative headwind on revenue because nobody could fill those products.

On the investment standpoint, I will share with you we have ramped up extensively we have we have higher between 300 450 additional people in our facilities focused around ramping up facial protection, both and 95 in traditional air loop and surgical masks as well as gallons.

And rates. So we have ramped that up we have increased production on our current capacity to our equipment, we that idle equipment that we've now ramped up to that has a high front end investment cost and again the longer. This continues the more upside there will be for us.

So we believe that they're potentially as upside depending on the length of this but those are a lot of the factors that we're considering.

Let me turn it over to Andy if you want to add any additional color on that no and I think that.

Summarizes things very well.

Great.

Eminem take ticketing go with another one here somewhat related so obviously youre.

One of your bigger suppliers, but also biggest competitor in the public markets has had some well documented issues with quality prior to Corona virus, but also out of China.

Around their downs I am curious what impacts you've seen in the market from that and as it created any opportunities for you to get back and good graces with potentially with customers of of that that other manufacturer. Yes. So I think what's important on that is to understand our strategy around gowns.

This issue with gallons and even with Facebook traction and other products related to the cobot 19, one of here's what we've done we've taken an approach that we have we're here within our mission to enhance empower customers to advance healthcare. So we're going to first and foremost take care of those customers, where we have a.

Commitment to from from its really an integrity standpoint, so what we've done as we basically defined it and said hey, if you're an existing customer that is buying product from us youre going to get your allocation, which is basically your and your weekly amount based on annual basis, and you're going to get some in addition to that where we can fill the gap.

GAAP, we are actively doing that.

Both an existing customers first so again those that have committed we're making sure we on our commitment to fulfill all of those needs and then where we can help other customers. We are doing that and we're doing that aggressively.

And yes, we've had some positive feedback on the way we've handled it from a high level of integrity.

Specifically around gallons.

What we've done is again since we produce.

I think people need to understand this we produce the material. The nonwoven fabric is produced in the U.S.. So we have ramped that up substantially.

We then finish those products both in Mexico in Honduras, which means our lead time is days and weeks to get those products into the market versus months for those are producing them in China.

So we have ramped up our production on gallons by over 50% and it's going to continue to ramp higher on that that has provided us with flexibility to fill a portion of the void created by the gallon issue as well as fill a portion of the void by others. That's why we when I talked about the puts and takes some of that is just the pure point of sale.

Product change, where we were able to replace another brand with our brand and in some of that is actually coming from to where we don't have that revenue, where we're picking up additional share related to that.

That's great I'm going ask one more and then I'll turn it back in later on the customer losses in distribution I think we all we all knew they were out there it's not a new theme, it's a bit stuff that probably is.

To be fair you probably inherited some of the issues said when you joined the firm and we're living with the consequences later.

But it's a big number and I'm, just trying to get a sense on.

How many customers.

Did you lose maybe maybe it's one or two or three of the bigger customers that we should focus on.

What's the net impact of wins and losses, if you can give us that.

And then.

To the extent it to bears were right at the streets models for revenue were too high because of these losses, perhaps on the other side.

Margin, probably looks a little better than most people were thinking which is a nice offset.

And I guess my question there is the margin better because the large losses were extremely low margin accounts.

And or is it because of.

Hi, Rob and other benefits like commodity costs and overall mix on I'm, just trying to get essentially how impactful lease revenue losses really are for you and how hard it is to overcome.

That revenue shortfall from a profit standpoint, yes. So lot lot lot lot lot lot of lot of questions within that question. So let me try to piecemeal it out a little bit here, let me first talk about revenue loss and you're right. We had we had substantial revenue loss really in the first quarter second quarter, and even bleeding into the third quarter of.

2019, and from all the time I spent with customers the bulk of that was related to our poor service.

And fixing that has changed it substantially so if I look at 29 teen first three quarters are pretty tough we lost some major customers, we had non renewals of those of that customer, but some of that customer base.

If I look at the fourth quarter and into the first quarter so far.

That has moved buying an area. We have had we had a very strong fourth quarter and even into this year of significant customer renewals.

We continue to have a very robust pipeline going into 2020 and beyond probably more robust than we have have had in the past and really that comes down to a couple of different things. One is drastic improvement into service in our medical distribution business.

I think now with some of the market crisis, but customers are now recognizing that we provide is flexibility and adaptability as this market changes quickly. We provide is a very different supply chain in manufacturing solution that has ability to mitigate significant risk.

All of those things that improved service the ramp up of our production our manufacturing footprint. All have started to change that momentum I would say for us.

But yes, yes, you're right. The first three quarters of last year were tough and as I talked on multiple calls there is a lag when you lose a customer they announced that they are leaving it could take up to nine months for that customer to fully transitioned out and then you have the 12 month impact after that so.

That's the picture I want to paying around our medical distribution and the value we bring I talked our bottom home health care business continues to be strong and then let Andy going a little detail, but you know I talked a lot about this year about driving operating efficiencies in that business.

So when you look at our business the margin expansion relates not just to mix within the businesses. So each business has a different product mix as well as customer mix.

Also that operating efficiency has driven operating improvements in the business both at margin and in the SGN a.

And then lastly, I'll close on this is one of the things, we're doing and I talked a lot about in the prepared remarks is we're reinvesting in this business. We are going to reinvest to drive continued operating efficiencies and I can go through some of those in addition to that infrastructure that provide long term sustainable growth.

And frankly, we are focused on serving the customers and we've instituted a new go to market model, which is gaining significant traction or ready. So that's more of the description of what's happened with revenue where revenue is going that's more a description of why we see the margin improvement both from gross margin as SGN eight.

And what are the driving factors really it's around operating efficiency, it's around investing in those areas that have higher growth rates.

And that's really been the focus of it so with that I'll turn it over to Andy and he can maybe provide a little more detail that supports that.

Yes, Eric This is Andy just a quick comment to another just in reaction to the the absolute value or level of our guidance in terms of revenue keep in mind that this is the first quarter, where we're reporting our movianto business as discontinued operations and when we issue. Our 10-K later today, you'll be able to see what the impact of that is but.

I understand that Thats, probably 400 $450 million of revenue that has come out of our full year performance.

On a annual basis, just just noting that and then two I'll I'll add that put things in perspective in terms of how we're reacting as an organization to become more efficient more lean to react to that volume change.

As you look at 2018 to 2019 topline performance once you annualize our normalized for our.

Global the Halyard acquisition that took place in 2018, you'll see a revenue drop of about $600 million and you'll see that none of the resulting earnings per share change and that was about a 60 cents declined in the ballpark of 60 cents.

And you can see that with a similar change in revenue next year, you can see with efficiencies we've driven in the operation the improvements in gross margin that you've noticed that you've noted.

We're looking at a far less more like a single digit change in earnings per share. So I think that really demonstrates deficiencies we.

Late into the business and it positions us well for growth going forward.

Okay, guys I might have a few more at the end I'll, let others jump in thanks, so much. Thanks.

Thank you. Our next question comes from Michael Cherny with Bank of America. Your line is now open.

Good morning, and thanks for all the details so far.

I might be getting a bit ahead of myself related to the analyst day and some of the commentary, but since you add any sense you did introduce or the expectation for returned to double digit growth and 2021 beyond I guess, what do you need to see over the course of this year in terms of checking the box internally and execution in terms of.

The market dynamics, obviously krona virus will be a bit of an outlier in my perspective, but from what you can control and then the other base level to the market what are the checkpoints you need to see or whether checkpoints, we should be looking for to give confidence in that return towards double digit growth that you talked about.

Yes, so I'll start at the top line, what's the expectation is in our various businesses, whether it's our home health care business, our products business, our service business and our medical distribution business is that retention rate continuing to maintain where it's at right now and then beginning to start to see wins, both and all.

All three aspects are for aspects of our business home health care, our distribute our medical distribution as well as our service and our products.

Ill take the opportunity now to talk a little bit about one of the infrastructure investments we made that is.

As we've looked at driving Optum optimizing our business one area. We've actually invested in that is in our commercial organization. We've launched a new go to market strategy. In this was through spending a significant amount of time with our customers and one of the things that came became loud and clear from our customer bases hate owns a minor.

A complex company, we're struggling how do we work with all the different parts of the business, whether its home health care, whether it's our product manufacturing business, whether it's your classic acute care medical distribution or whether it's all the different services that you provide Q site pandemic, so weve and what we put together.

Enterprise solution, where now for our customer base. They have one person that can navigate through the whole company. We have one person that can sit down with that customer everyday understand their needs in their warrants as well as their goals and objectives.

That combined with the strong foundation, we built around great service again around the ability to provide flexibility and adaptability and during the one of the two recent crisis both around product availability, specifically, we were able to leverage some of our services.

That being our surgery track service and put together custom kits in several days to make sure that existing customers did not have surgeries that couldn't be performed because of outages of certain pp products.

So that's what internally. We're looking at is is to drive that double digit growth. The second thing is investments in technology like Maya Lam and Keysight Keysight spent around but we're enhancing mile EMS branding technologies will talk about it will demo would actually at the at the Investor Day, that's another way to too.

Helped drive operating efficiencies for our customers and lastly, as our internal metrics that we managing hold on service and initiatives to drive operating profitability and improved operating profitability within the business. Those are things you should look at during the year.

And that we're continuing to look at during the year team to keep driving that.

Understood and then maybe as you think.

And maybe I missed this in the comments I apologize.

Did you mention anything on the updating the performance of fusion five and how that factors into all of the.

Dynamics on that returned to growth going forward, yes, we didnt, we didn't talk specifically on fusion five in the prepared remarks, I think the way we're looking at fusion five orders I think the way we are looking at fusion five in 2020 is more of a net neutral type impact on the business.

In in as we continued its pretty at Thats also pretty fluid space right now and fusion five but what we did with fusion five was we took a hard look at our overall cost structure with infusion five we took a hard look at what contracts, we were willing to accept and what risk level, what risk level, we were willing to accept.

As well as the shared benefit and or risk on those contracts. So we we position that business that we're we're comfortable that in 2020, it should be a net neutral impact on our business.

Okay. Thanks, so much.

Thank you our next question Robert Jones with Goldman Sachs. Your line is now.

Great. Thanks for the questions I guess just to go back to the.

The operating income and I know theres, a lots of parse out here just given some of the things that are going on in the market. Some of the initiatives you guys. Obviously have embarked on internally, but if I think about the trend that you mentioned around sequential improvement in operating income.

And then we look at the guidance for 2020.

How should we think about the operating income performance in 2000 relative to the 2020 guidance.

If I adjust for things like Movianto on a year over year basis. It was this a trend that you thinking continue throughout 2020 or will some of the additional investments that you outlined.

Put pressure on on that trajectory of operating income growth.

Yes, no I think the way we characterize the fan.

This is Andy yes, I'll take that one so.

Fluid characterize it would be that.

As we moved from Q4 into Q1, we see a natural step down in the business as a result of just historical seasonality.

Q1 tends to be a resets in the business in terms of volume, particularly accentuated in our.

Home Health care business and then as we described in the fall in the in the prepared remarks, the impact of the loss business will also really.

Manifest in Q1, and we'll see than Q1 and that will be prevalent for about the first three quarters of the year.

And then as we move throughout the year.

I'm sorry in continued impact in Q1 would be the ongoing investments that that we're making in the business, but as we move through the year.

The impact of that the lapping of the lost business will correct itself as we get to the ended the year and normalize and then the investments begin to pay off and then again looking for.

Returned to some growth on the topline I think those will continue to.

Show the pattern in earnings that we had in 2019, what will also kind of described the shape of that curve for 2020.

Okay. That's helpful. And then I know you Didnt give specifics on this and maybe it'll come at the analyst day, but Andy in anything on free cash flow you highlighted that it was it's been pretty solid of late.

How are you thinking about free cash flow in 2020 relative to what we saw in 2019.

Yes, I believe that will still be able to continue to drive cash flow improvements from from operating activities.

The team has done a tremendous job with working capital in 2019, I believe that those benefits are sustainable and long term the nature in other words, not only do I think will not give those gains back, but I think we'll be able to build on those.

Some of the investments that we've made will actually a pay dividends in terms of our accounts receivable collections in making that more efficient. So we expect to see cash flow from that and as I mentioned overall net cash flow would be deployed both investing into the business and ongoing into our commitment to improving the balance sheet to paying down debt.

And that could be anywhere in the range from about 75 to 185 million of which you can expect a $133 million that come proceeds of our movianto divestiture.

Got it that's Super helpful. Then I guess, if I could just ask one more kind of high level qualitative one just given that it's it's such a focused in the markets.

And given your vantage point into into hospital volumes.

Yes, as you think about it we're talking to folks in the organization about you know really bad flu seasons of the past Yo would you say that you've noticed overall volumes you know in times of of heightened influenza as as incremental volumes within the hospital setting do you see more demand or.

No in those periods do you suspect it may be folks actually avoid the hospital in a bigger way.

Maybe postponing things like elective procedures and alike.

During those periods of kind of heightened heightened influenza.

Well here's what we've seen this is these are some of the variables. When the first question was asked.

By Eric It was really if you think about.

Flu season Cobot 19 in the other issues, we have right now in the market. These are variables that tough because here's what we're seeing we're seeing a substantial increase in demand for flu related products.

We believe that's partially because because flu season seems to be a little more severe this year. We're we see that partially because we have other suppliers and manufacturers that are stocking out because their products are made in Asia or China, they can't get them.

But then the other wildcard, which we see is where we don't know what is true demand and what is stockpiling. When you see a product from a certain customer go from a normal run rate of one to a normal run rate of Forex.

Thats when we have to put in our protocols to make sure. We don't have the complete allocation to somebody and then stock out for others. So thats why were focused on taking care of our existing customers shutting down other channels and our in our traditional channels and then continuing to balance out that allocation to all of our existing customers and then help.

And others with the excess where we can so we have not seen a slowdown outside of that we see our traditional business whether its elective surgery non elective surgery normal visits we have not seen nap slowdown, but what we have seen is the spike associated with those products that.

Our that our managers that are manufacturer for PPD purposes, again face protections gallons and drapes traditional staff apparel.

The other anomaly, we have seen but in a very very small sample I guess.

I would be demands in spikes for products that are produced in China that have nothing to do with pp. So those customers looking at San Okay. Heres products that are produced in China. Let me go in increase my ordering case that get shut down too. So it's again, what's nice is we have strong.

Strong protocols to protect the inventory to make sure that we can continue to provided to our existing customers. So I guess long answer to your question. You know, it's really what we've seen is kind of that base business continue but we have seen a spike in demand of pp related products, which.

We believe is partially because of flu, partially because a significant stock out by other manufacturers and competitors and then and then some level of stockpiling and then we're seeing small data points that say hey people know these products are manufactured in China, Let me see Viking get them in advance.

And just in case you know this extends for a period of time.

That's really helpful. Thank you for all that.

[laughter].

Thank you as a reminder, ladies and gentlemen that Star then one last question.

Our next question comes from Kevin Caliendo.

Hello.

Hi, great. Thanks for taking my call everybody.

Let's talk a little bit about the a our securitization.

Can you talk a little bit about the terms of that sort of what your costs to doing that is and how you expect to deploy that how quickly expected deploy that capital are there any restrictions around it can you talk a little bit more in detail around that facility.

Sure, Kevin and obviously everyone's aware that was just most recently we were able to put that together and that was part of our whole debt.

Debt realignments with that I'll, let Andy go through specifically the details around its.

And talk through that.

Sure. So our amended credit agreement provided us the allowance too.

Raise a.

Our securitization program of up to $350 million of which.

We chose to enter into an agreement to secure $325 million of secured debt to securitize or a are.

And really the I guess the.

Reasons behind that would be one.

Provides us with lower cost liquidity. So it does provide us with a favorable rate mix versus our existing debt.

And again, if it helps us.

It is with our debt maturity profile in terms of timing.

I would expect to deploy that overseas the or the next couple of months over the earlier portion of Q2 Q.

Q3.

Okay.

It's helpful.

In terms of customer losses.

It seems like everything.

It was really in the first three quarters of the year can you talk a little bit about customer losses or customer gains.

Maybe since.

The middle of the fourth quarter into your into March has there been any real meaningful.

[noise] share shifts in the industry.

Yeah, I would say traditionally.

The.

The ability to start to move business that really starts to pick up as you get into the first quarter here and as I stated earlier, so what we saw it really a binary change really in the fourth quarter and the now in a significant amount of retention.

We.

We haven't lost say, we haven't lost any major customers.

We have most of our customers winter, it's coming up for renewal or in advance of renewal retaining those.

And I will tell you our pipeline for opportunity is more robust than it is ever Ben I think a lot of that has to do with the amount of focus we have on our customers I think a lot of it has to do with the drastic improve service levels back to the industry, leading standards, which we have I think that has a significant amount to do with people understanding the value we bring.

And I think also part of this current crisis on Covidien product availability also continues to show the value of our manufacturing footprint all of those things are lining up significantly strong for us.

And we also recognize that it's a long window too as I talked multiple times from a timing RF hi goes out to an RFP to the award that could take almost a year process of letting the customer get to know you, especially for the every not the income bit talking about your skill set providing value in the inner.

From where it when they need help.

And then continuing to show them, an offering that makes it makes really two things that drives it improves clinician experienced in patient experience and mitigate risks and the drives value. So we see that.

In process and significantly in process right now where we are.

Great Thats, a one one quick one to end.

People have touched on this a little bit but.

Have you yet seen even as we enter into March yet seen any slowdown in demand for like surgical kits from in the hospitals I think one of the things were all wrestling with tiers as analysts is trying to understand how behavior is going to be impacted.

By regular consumers and I'm, just wondering if you're seeing any slowdown in the last week or two.

For elective procedures or surgical procedures inpatient procedures any of that kind of thing we have not.

We have not seen that as of now.

So our data showing us that we're not seeing.

Substantial decrease in CPT custom procedure trays for surgeries, whether its elective or non elective we have not seen that yet.

So that's only definitely data point I have as of right now.

Okay. Thank you so much.

Thank you and our last question just a follow up.

With Baird. Your line is now.

Hey, thanks very much.

Just just a maybe a couple of quick ones on the pipeline that you've mentioned a couple of times here for future opportunities I'm.

Curious and I know, it's early but does the current market turmoil supply chain disruptions out there does that allow you to.

I don't know, if I want to say fully but but notably shift the conversation from one of price.

To go no.

Service and integrity and confidence, yes, we'll look I think let me just share I think it's important to understand our approach on this for the current turmoil is one our number one values integrity.

And.

We have first and foremost made sure that those customers that we have contractual obligations and they've committed to us and we've committed to them. They are getting their products that they've always gotten from us.

Specifically around whether it's our owned distribution channel, whether its other distribution channels or whether its direct from our manufacturing then where we have the distribution relationship and they're having.

Whether its smaller significant stock out a product that we have capacity on.

We are working with them aggressively to backfill that and replace that with the products. We have and then thirdly outside of those that are committed to us from our channels, whether it's our buyer and home health care channel our medical distribution owns a minor channel.

We're going to work with those outside of it to help anywhere we possibly can.

The other thing we've done is we are honoring our commitments to whether it's a GPO and IDN contract pricing, we have not levered. It we have not bullied we have not done any of that you know because ultimately our value is around integrity and making sure. We service our customer base have we gotten significant goodwill from the ability to.

Well I would I would believe so.

But we have really been focused around our mission to serve our customers and look in our industry, whether it's us for our competitors ultimately our what we do is pretty humbling is we're here to serve healthcare to make sure clinicians can occur and work with patients. So in time and need we need to make sure. We're.

Working to have that common goal to not have any patient impacted and that's the way we've handled it.

Has the dialogue changed I would say yes.

Three or four months ago, if I would have talked about our manufacturing footprint our supply chain our ability that may not have had the same weight as it has today when I talked about our manufacturing footprint, our domestic supply chain, our ability to be flexible and quick by leveraging our Q site.

And our surgery track and some of our technology to make sure our customer is not impacted that dialogue has changed.

That is now recognized as as value to our customer base.

Both existing and potential customer base so.

Thats the way I would add Andrs Andrs answered Eric is that's the way we've attacked that Thats the way we've thought about it in a leading with our values on how we operate.

And really focused around the patient.

Got it I'm going to leave it there we've got a long time, thanks very much.

I appreciate it guys just.

I think Thats last call. So let me just make a couple of closing comments.

I am excited I'm excited to spend a great year of vendor by year now you know I'm pleased with the progress we've made since I joined watching the organization rally around our mission rally around our values.

Completely focused on the customer it's really helped us get a heck of a lot further than I thought we would be at this point in time Im excited and proud about our another strong quarter. We did we did what we said we were going to do and we did it.

With the rigor and discipline.

I'm extremely excited about the foundation, we built a heck of a foundation in 29 team that we can grow line, we have a great leadership team in place that knows how to deliver on results no has knows how to focus and we'll execute in 2020 and beyond we are clearly focused on long term, we're not going to be short term.

Focus we are going to continue to invest in in disciplined reinvestment in the business.

To provide long term growth, we actually believe long term profitable growth of double digit EPS beyond 2020, so extremely excited of what we've accomplished where we are and where we're going as a business.

And then lastly, I really look forward to see in many of you in the inner May Twentyth Investor Day in New York.

Is going to give you the opportunity to see the entire management team are good portion of the leadership team. In addition to that some of the investments we've made and why we show why why we believe and why they have added value to the business. So thanks, everyone. I look forward to talking over the next earnings call and seeing you at the May Twentyth Investor Day in New York. Thanks.

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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Okay.

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Okay.

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