Q3 2023 Owens & Minor Inc Earnings Call
Good day and thank you for standing by welcome to the Owens <unk> minor third quarter 2023 earnings Conference call. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today, Jackie Marcus Investor Relations.
Yeah.
Thank you operator, Hello, everyone and welcome to the Owens <unk> minor third quarter 2023 earnings call.
Our comments on the call will be focused on the financial results for the third quarter of 2023 as well as our outlook for 2023, 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 year to date.
Please refer to our SEC filings for a full description of these risks and uncertainties, including the risk factors section of our annual report on Form 10-K, and quarterly reports on Form 10-Q.
In our discussion today, we will reference certain non-GAAP financial measures and information about these measures and reconciliations to the most comparable GAAP financial measures, which are included in our press release.
And I am joined by Epitheca, President and Chief Executive Officer, and Alex Gruny Executive Vice President and Chief Financial Officer, I will now turn the call over to Ed.
Thank you Jackie and good morning, everyone and thank you for joining us today.
Our third quarter represented another strong indication that we are executing at a high level.
We generated high single digit top line growth in our patient direct segment and low single digit improvement in our products and health care services segment.
Our operational performance in the quarter was complemented by a significant reduction in our overall debt position combined with robust cash flow generation.
I'm incredibly proud of what the team has done thus far with our operating model realignment program and I'm excited about what the future holds for our organization.
Let's now look at the business in a little more detail starting with our patient direction.
The performance of our patient direct segment in the third quarter continued to outperform the market demonstrating the enduring strength of our go to market strategies and our service offerings.
This is evidenced in the strength of our new patient starts across most categories.
Patient direct segment continues to identify opportunities for growth, including investments in technology, expanding our commercial capabilities and footprints and identifying adjacent conditions and associated products.
There is significant opportunity in this space as we see more patients and providers preparing at home treatment options for chronic conditions, and we are well positioned to capture this opportunity.
Now, let's turn to our products and health care services segment.
For the second consecutive quarter, our medical distribution division saw year over year revenue growth of more than 5% driven by same store sales combined with net new wins.
And when excluding the impact of P. P sales grew at 8%.
We continue to face the saturation of P. P in various markets, including but not limited to health care government industrial and in in our National markets.
Which led to a 14% top line decline in our global products division when compared to prior year.
Finally, much of our operating model realignment program is focused on improving this segment through operational excellence and driving efficiencies in our manufacturing footprint and supply chain network.
In the nine months since we launched our operating model realignment program. Our team has done a tremendous job of positioning us to achieve or even exceed our target of $30 million of benefit in 2023, we are doing exactly what we said we would do when we launched this program.
Prove our operations generated savings reduce working capital and allow for future investments.
It should also be noted that the operating model realignment program not only continued to deliver economic benefits, but it has enabled us to reassess how we do business every day.
As a result, we are well underway to achieving the objectives. We established when we launched this program in the first quarter of 2023.
We've also made great progress with respect to our balance sheet, we paid down $188 million in total debt during the quarter with half a billion dollars in net debt reduction in the first nine months of this year.
With our healthy operating cash flow of $157 million in the quarter and over $600 million of operating cash flow in the first nine months of this year.
We remain focused on paying down debts, we took on to acquire Apria as.
As well as making further investments in our people products and processes.
These efforts are part and parcel with making Owens <unk> minor stronger.
Before I turn the call over to Alex I'd like to take a moment to address our recent update from the FDA regarding its April 2023 communication about certain O&M halyard facial protection products. We worked diligently over the last seven months with the F. D. A to provide extensive testing and performance data demonstrating that.
Our products provide the level of filtration and fluid resistance for which they are rated.
I am pleased to report that on September 29, the FDA updated its recommendation to confirm that the halyard facial protection products may be used in accordance with the product labeling for both particle filtration and fluid resistance. We are glad to bring this review to conclusion, which reaffirms the safety.
And effectiveness of our halyard facial protection products.
In conclusion, we continue to deliver on our 2023 commitments, including the strengthening of our balance sheets.
Paying down of debts.
The market, leading performance of our patient direct segment and the improvement of our medical distribution division with that let me turn it over to Alex Alex.
Thank you Ed good morning, everyone, let's dive into our third quarter performance.
On the top line, we posted total revenue of $2 $6 billion up nearly 4% from the prior year.
This uptick in revenue was driven by a 9% year over year improvement from our patient direct segment with strong revenue growth across many of our product categories led by sleep in diabetes, our two largest categories.
We also saw a 2% growth in our products and health care services segment compared to the prior year due primarily to revenue growth and non PPE product categories. We continue to see positive momentum in our medical distribution division, which helped to offset the decline in our products Division.
Our third quarter gross margin was $538 million or 28% of revenue.
Third to $513 million or 26% of revenue in the third quarter of 2022.
The changes in our gross margin can also be attributed to the strength of our patient direct segment and strong performance across most product categories.
Turning to expenses distribution, selling and administrative expenses for the quarter were $453 million, making up 17, 5% of revenue.
The rise in <unk> expenses was mainly due to the added cost of supporting $94 3 million.
Or three 8% growth in <unk>.
Net revenue when compared to the prior year.
This included a $15 $4 million increase in teammate benefit costs. However, these increased expenses were partially offset by productivity gains from the operating model realignment program and overall continuous improvement efforts.
GAAP operating income for the quarter was $24 million and adjusted operating income was $84 million Phs experienced a decrease in operating income from shifts.
And product sales mix and reduced demand for PPE.
Interest expense for the quarter was $38 million, which is a $2 million decrease from a year ago.
Driven by reduced debt, but partially offset by higher interest rates.
GAAP net loss for the quarter was $6 million or a loss of eight per common share adjust.
Adjusted net income for the quarter amounted to $34 million or <unk> 44 per share adjusted.
Adjusted EPS benefited by <unk> <unk>.
Due to a LIFO credit as a result of a $101 million reduction in our Phs segment inventory in the third quarter.
We had anticipated this benefit in Q4, but we were able to realize it a quarter early due to exceptional inventory management, while maintaining market leading service levels.
Adjusted EBITDA in the third quarter was $135 million with a margin of five 2%.
We continue to be well positioned to achieve $30 million of adjusted operating income benefit in 2023 from our operating model realignment program.
As well as exiting the year with a $100 million run rate move.
Moving to cash flow balance sheet and capital structure.
We continue to generate significant operating cash flow with $157 million this quarter, bringing the year to date totaled two $629 million driven by strong working capital management and profitability.
Our strong cash flow allowed us to reduce total debt by $188 million.
And net debt by $117 million during the third quarter. This.
This brings our year to date net debt reduction to have a $1 billion.
These actions brought our total debt to $2 1 billion in net.
Net debt to $1 9 billion.
And brought net book leverage to below four times at the end of the quarter.
Having delivered a solid quarter in Q3 in line with expectations and as we head into the fourth quarter, we narrowed our guidance for 2023 to reflect our confidence in patient direct and the operating model realignment program.
Balanced against the lack of visibility and caution we have around PPE product sales for the remainder of the year.
We are narrowing our full year guidance for revenue to be between $10 3 billion from $10 4 billion.
Adjusted EBITDA to be between $535 million and $555 million and adjusted EPS to be between $1 30, and $1 40.
As we begin to look ahead to 2024, we're excited about the prospects for our patient direct segment, where we plan to invest to ensure its future growth and market leadership.
We expect our Phs segment to continue on its path building on the benefits of our operating model realignment program to becoming a low cost provider with a broader proprietary product portfolio, while retaining our focus on the customer with.
With the combination of our growth outlook and planned investments, we expect 2020 for adjusted EBITDA and adjusted EPS to grow in the low double digits, we will elaborate more on this at our upcoming Investor day.
With that I'll now turn the call over to the operator for questions operator.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question today comes from the line of Kevin Kelly Endo from UBS. Your line is open.
Hey, guys. Thanks for taking my questions.
Appreciate it and congrats on the on the solid quarter.
How much visibility do we have in the business right now and we talk about patient direct when it comes to.
Impact from <unk>, which is certainly a topic and on the PPE demand, but just thinking about going forward do you feel that it is getting better you have better visibility of the same worsening. The left this year as you think about it.
Coming up to analyst day in a month and everybody is going to be focused on your long range plan and your guidance there.
And I'm just wondering how you feel about your own visibility into the business.
Got it thanks for thanks for the question Thanks for the comment upfront.
Here's the way, we think about the GOP ones for us, it's really business as usual and if you look at.
What we've seen even again in this quarter as we saw again double digit growth in both sleep and diabetes and those categories continue to be extremely strong for us. How you think about it we've got nearly over about 1 million new patients diagnosed with diabetes and African America every single year in <unk>.
And to that you still we still believe there is about 20 million Americans, who havent even been diagnosed yet.
OSA that habit. So you just think about the opportunity size out there I think the second aspect of it.
Really as we continue to manage and drive this business.
We recognize that you've got GOP that will help people, but it's not going to be a cure for everything.
We really think also that the market is somewhat overreacted to the PLP ones. So when you look at where we see it going we continue to see tremendous opportunity in two of our major categories diabetes and sleep.
The amount of people that haven't been diagnosed and are still up and the amount of people that are being diagnosed with those issues every year and we continue to see growth in that segment. So I guess, we see it a little bit different.
And then maybe others do.
Okay. That's helpful and if I can ask a quick follow up we had some news this week.
That CMS I guess is going to reinstitute.
A plan, which would cut DMA reimbursement I don't know if you guys have looked at that it starts one $1 24 could impact that.
Patient direct business have you analyzed that is it meaningful for you.
Any comments there would be helpful.
Yes. Thanks. Good morning, this is Alex Perry.
So we obviously followed as we follow this closely.
Yes.
I think what we're seeing is consistent with our assumptions and what we factored in for next year broadly I don't know if there's something you want to add yes, that's really it I mean, obviously that's already been factored in.
Theres still again, we also look at it there's still tremendous opportunity for growth.
I think you also have to look at our payer mix, which is much heavily later weighted to the private side payer than it is.
The public side payers. So that also mitigate some of that risk for us, but again, we think there's tremendous opportunity in that segment and we're working with our external suppliers too at the same time as well as expanding our portfolio.
Baked in already into assumptions for 2024.
Great. Thanks, so much that's super helpful. Thanks, guys.
Yes.
Your next question comes from the line of John Stanfill from Jpmorgan. Your line is open.
Great. Thanks. This is John on for Lisa.
Just wanted to walk through the global products business, maybe a little bit of color I think you said down about 14%.
In the quarter I guess, there are pockets of relative strength or weakness or they can speak to.
Yes, yes, if you think about the pockets of strength within the global products.
It's really all of the non PPE items. So if you think about some of the products, we make whether it's surgical infection prevention products. Excluding PPA, we continue to see strength there.
In our Medi choice brand products, we continue to see strength there. So it's really isolated to two <unk>.
Traditional or classic PPE, and then even within that there's mix between that whether it be faced protection gloves gowns and other aspects but.
The way to look at it is it's no more narrowly isolated in in PPE within all of our products. The rest of our us and IP products are doing well, our medical waste and a broader product population is doing well frankly.
Getting getting through the FDA.
Sure.
Noticed it's really helped us tremendously because now.
Obviously working with the FDA closely on this one it's now reopened up the opportunity for us to start to grow and so that portion of our facial protection too.
So I guess the short answer is it's really isolated to narrow to PPE within our global products Division.
Great and then just a quick one on gross margins it looks like Youll see another step up sequentially into the fourth quarter, which I imagine is lined up with seasonality, but is there anything to call out as we start to think about how gross margins will play out in 'twenty four.
Yes, Thanks John.
So the update to the guidance to 25% is consistent with where we thought things would be in Q at the beginning of the year and in Q1, we did we did take it down a bit in Q2, but.
Obviously, the gross margin is driven primarily by mix and it is factored into where we think we're going for next year. Obviously, we'll have more to say on that.
As we get into December at Investor Day.
Great.
And again, if you'd like to ask a question at Star one on your telephone Keypad. Your next question comes from the line of Daniel <unk> from Citi. Your line is open.
Hi, guys. Thanks for taking the question.
Nice improvement in product in terms of the EBIT.
Margin sequentially I think it was around 90 basis points, which was ahead of our expectations I'm curious if that was in line with your expectations or was it add.
And maybe if you can kind of dig into.
What drove that that improvement and then looking forward, obviously <unk> implies a pretty big increase in.
Sequential margin largely due to seasonality I'm curious if you can break out that margin improvement for <unk> between products and services and patient correct.
Sure. So absolutely it was what we assumed it would be if you think about how we've talked about the phasing of the year early on with profits continuing to rise during the year and having those what I'll call larger step function step changes from Q1 to Q2 Q2 to Q3 and Q3 to Q4.
Exactly how we planned it out and what's really driving that Theres. A couple of factors that are driving that product in health care services segment.
It's one it's the growth we're seeing in our medical distribution business. So that mid single digit growth that we've seen in the medical distribution business with share gains as well as new wins.
That combined with the next aspect of it which is the operating model realignment, which wasn't just tweaking it's more of a transformational change in how we do business and that has helped us.
Cost out of the business and helped us add more productivity to the business and it wasn't just the operating model realignment. It was our normal continuous improvement team that continue to drive implementation on that that's also helped and what was expected we knew as the year progressed as we put those programs in place that would take some time and now we're start.
To see the benefits of those were at the time, we hadn't anticipated and to the value we had anticipated.
So those are some of the key drivers of Westfalia.
What's helped us.
Drive that profit improvement.
Got it and you mentioned share gains as a as a driver of your core distribution growth.
More recently, I'm curious where we.
Those wins coming from are they from other large national distributors are smaller more fragmented distributed areas are they specific products, maybe just double click into where the share gains specifically are coming this year.
Yes.
It's primarily.
A mix of some smaller but really more of the larger or larger competitors.
And it's a mixed two ways, it's a mix of pure new wins.
Or that are.
That was one business from some of our competitors, but it's also expansion at current customers, where they may have been doing self distribution, along with us as their distributor partner and they've gotten out of self distribution for us to implement a model that can drive efficiency for them and really cost.
Savings.
The other thing I want to touch on that I didn't down the first the first question. You asked I think is important is really the other thing we've done and while this doesn't necessarily impact. The segment profit is what we've done by utilizing both continuous improvement in the operating model the operating model program.
Is the reduction.
<unk> in inventory and working capital that has driven a significant amount of operating cash flow and frankly has enabled us to pay down a significant amount of debt and we're talking close to half a billion dollars of debt paydown year to date. So those are some things. We've done that are also part of the operation monorail not alignment and.
Really strengthening of our <unk> segment business that translates into other parts of the P&L.
And your next question comes from the line of Eric Coldwell from Baird. Your line is open.
Thank you for the for the comments, especially the preliminary outlook on calendar 'twenty four.
Quickly trying to do some math on what low double digits means it looks like if I think of that as being somewhere in the call. It 10 to 12, a little over 12, maybe.
It looks like earnings per share comes in well below the street, but EBITDA comes in in line or maybe even above that.
I'm just curious is there something going on below the line here to pull the EPS down more while the EBITDA is actually looking okay.
Yes, Thanks, Eric good morning.
No.
There's nothing extraordinary happening this is consistent with how we see the business evolving so theres nothing nothing surprising there.
Okay.
And then with global products, the minus 14% due to PPE, but you say everything else is strong.
I really think we could use some additional help on mix within the segment I E. How much is PPE, where was that and then how much is the weighting of everything else, if youre down 14% and PPE is only a part of the segment that means PPE has to be down.
Substantially at this point, which.
To me is a bit surprising given some of the commentary were seeing from other distributors and some manufacturers say the glove companies in Asia et cetera, So I am hoping for a little more help with the mix within that segment.
Yes. So if you think about it if we think about the mix of the settlement last year in Q1, Q2, and Q3 were really record.
Really the first two quarters, even in the third quarter and this was really strong and recall in Q3 of last year a lot of our customers are ramping up for the triple damage at the time and taking on a significant amount of products.
And PPE.
<unk>.
During the peaks of Covid was a material portion of that segment.
I can see Eric is we have seen as I think about the drop that we've seen in in demand for PPE, we've seen that.
Her flattened out I would say.
And now as we start to move forward.
We're starting to overlap some of this next year as we start to overlap the I'll call. The decrease was stability in it.
We would expect that to somewhat flattened out as we go forward.
Okay and then.
On patient direct you highlighted some areas of strength you also said a couple of times strong new starts in most categories what were the categories, where you did not see.
Strong starts or where perhaps there was some pressure yes.
Yes, probably the one that continues is really the <unk> and the home respiratory home oxygen Niv, maybe you got some recall issues, but also in addition to that during Covid is that was a significantly strong business.
Niv as well as home oxygen Thats, the one area, where youre seeing it.
It's relatively consistent with what we've seen throughout the year, but other than that the bulk of the categories are doing really well and we decided just to call out two of them, which are our two largest categories that being sleep and diabetes, which again both grew at double digits.
Perfect and then last one for me I know, it's a lot but the.
The commentary, maybe some foreshadowing here on heavier investments.
When you say investments or are you talking about Capex are you talking about M&A.
Talking about operating expenses.
Building teams, adding sales Im just give us a sense on what what youre talking about with the with the investments looking into 'twenty four plus.
I will go into this in a lot more detail at Investor day, but it's really more around the operating side of the business. It's commercial it's.
Category management sourcing it's it's.
Those types of investments that are more operating related that will have payback as you go forward.
Okay. Thank you very much.
And there are no further questions at this time, Mr. Ed <unk> I turn the call back over to you for final closing remarks.
Well. Thank you operator first of all I'd like to thank everyone for joining us this morning.
As an organization in personal we were extremely excited about the work that we've done so far in 2023.
I also want to remind you about our upcoming Investor day, we hope you'll either join us in person because it'll be in Boston or virtually on Wednesday December six at 830 am Eastern standard time.
We'll be taking a deep dive in the areas and focus on our recent performance.
Our strategy.
Our opportunities and our vision for the future of Owens <unk> minor so with that hopefully we will see you December six and thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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