Q2 2019 Earnings Call
Charlie once again, please remain on your line your conference call will begin momentarily. Thank you.
Good morning, ladies and gentlemen, and welcome to the Owens <unk> minor second quarter 2019 financial results Conference call. My name is Brian and I will be your operator for today at this time all participants are in a listen only mode. We will be facilitating a question answer session towards the end of this conference call. If at any time during the call you require assistance. Please press star followed by zero and opera I'd be happy to assist you. As a reminder, this conference is being recorded for replay purposes I would now turn the presentation over to your host for today's call Mr. Chuck Graves. Please proceed mr. graves.
Thank you operator, good morning, everyone and welcome to the Owens <unk> minor second quarter 2019 earnings call I'm, John Gray and on behalf of the team I would like to read the Safe Harbor statement before we begin.
Our comments on the call today, we will be focused on financial results for the second quarter of 2019, which are included on our press release.
And quarterly report on Form 10-Q .
Please note 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 other than statements of historical fact are forward looking statements.
And 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 uncertainties and other factors that may cause our actual results to differ materially from any results predicted assumed or implied by the forward looking statements.
The company has explained some of these risks and uncertainties in its SEC filings.
Including in the risk factors section of its annual report on Form 10-K , and quarterly report on Form 10-Q .
Except as required by law or the listing rules of the New York Stock Exchange the company expressly disclaims any intent or obligation to update any forward looking statements.
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 .
Participating on our call. This morning are Ed to SIGA, our president and CEO , who will provide commentary on the business through the first half of the year.
And Robert need SVP, and Chief Financial Officer, who will provide details on the second quarter results and additional insight into our business performance.
Now I would like to turn the call over to Ed who will start things off this morning.
Ed.
Thank you Chuck and good morning, everyone. Thank you for joining us on the call today.
Robert will discuss our financial results in a few minutes, but before that I would like to take some time to discuss my thoughts on our key strategic.
Operational and commercial aspects of the company. After my first full quarter at owns and minor.
Since I spoke with you last quarter I have continued to focus on our customers by placing rigor around our service levels, while also dedicating time to structure and strategy.
Meeting with our current and prospective customers remains a top priority and this is beginning to pay off as I discussed last quarter. My initial impressions continued to be validated that our customers value one our ability to be flexible to adapt quickly and to customize solutions to solve their challenges.
To our integrated solutions and services across the continuum of care that helps our customers mitigate risk increase value and improve the clinicians experience.
Three our ability to move at a speed equal to the pace of an industry that continues to evolve and fourth a high level of service.
Regarding these areas, we continue to improve our operating metrics around safety service and productivity due to an intense focus training and improved analytics.
Let me share a simple example around just one of these that being safety.
Through focus and training, we have reduced the distribution center workers compensation claims by approximately 40% in the first half of 2019 compared to prior years.
This reduction in workers' compensation claims has not only reduced operating expenses, but it has also allowed us to keep well trained and healthy teammates on the job, thereby resulting in improved service.
Productivity and quality.
In addition to the safety example, we are executing on numerous other initiatives to enhance our operational performance, which have and will improve our financial performance.
I've already mentioned the safety example to show how we are managing and operating the business with a much greater intensity and focus.
The combination of customer focus service improvement productivity and enhanced teammate engagement has resulted in improved results for the second quarter when compared to the first quarter and we are working diligently to continue that progress in the third quarter and beyond.
Let me share some of the positive items from the second quarter sequentially from the first quarter of 2019 to the second quarter of 2019, we saw growth in both revenue and adjusted operating income we achieved revenue growth of 1%.
And adjusted operating income growth of more than 20%.
Secondly, we generated $90 million of operating cash flow in the second quarter.
This cash flow was driven by improvements in operating income and working capital management.
Specifically, we were able to improve all major working capital metrics, while maintaining and improving service levels.
Third we reduced our debt in the second quarter by $60 million as compared to the end of the first quarter as we remain committed to continue to deleverage the balance sheet.
Fourth as discussed last quarter, we renewed the vision contract through August 2020.
I'm pleased to inform you that we have extended this agreement for yet another year through August 2021.
Fifth our buyer and business continues to be a strong performer exceeding internal expectations, both sequentially and compared to prior year. This business is well positioned in one of the fastest growing segments of healthcare home health care and finally, we continue to exceed our internal operating plan on a year to date basis.
And while this quarter had many positive results there are still some challenges and headwinds ahead of us related to the impact of previously disclosed customer nonrenewals fusion five in currency.
I will discuss the impact of customer Nonrenewals and Robert will comment on fusion five and the impact of currency.
The customer Nonrenewals, we experienced in 2018 and in the first half of 2019, including the large customer discussed in Q1, we will continue to affect our revenue growth in the second half of 2019 and into 2020.
It is important to understand the selling cycle and the impact into 2020.
Here's the way the sales cycle works when a customer comes on board or makes a decision to move business away. It can take up to 180 days or more before the business begins to transition.
Once the revenue change begins it will impact our comparable results for the next 12 plus months.
However, I'd like to note several positive things one we have begun to neutralize the net customer nonrenewals due to material service level improvements in our distribution centers.
A high level of customer focused.
And selling of our value proposition and now we are also playing offense.
Secondly from an operating income standpoint, we are working to mitigate the 2019 impact of the previously mentioned customer Nonrenewals. We're doing this through productivity improvements and revenue mix shift a faster growing and more profitable business. In addition to many other mitigating actions that we're taking.
While the headwinds exist, we continue to identify levers that have driven and that we believe will continue to drive improved performance of our acute care distribution channel and solution businesses.
This improved performance coupled with a strong performance in our Byron business creates a path to mitigate headwinds and allows us to confirm our narrowed range of 60 cents to 70 cents for the full year.
You may recall that I mentioned in the last earnings call for areas that we need to prioritize.
To stabilize our business. So let me provide an update on our progress first I challenged our team to drastically increase our intensity, while maintaining a high level of attention on serving our customers.
As previously noted in the second quarter of 2019 that continued customer focus along with improved service and emphasis on productivity and improved teammate engagement has resulted in improved operating results.
Secondly, I recognize the need of our organization to develop improve and upgrade.
As noted in our recent announcement of leadership changes.
We have been upgrading talent in key areas and we have been successful in bringing in world class talent to the organization as well as promoting from within.
These teammates have a deep healthcare experience and a history of delivering on commitments developing teams and demonstrating a high level of accountability.
Third we collect a vast amount of data to serve our customers. This data is now being used while being combined with first hand customer feedback to prepare a strategy that is focused on providing efficiency to our traditional customer base, while focusing on growth segments of healthcare and finally, we are instilling a high level of accountability and authority to honor our commitments to our customers stakeholders in teammates.
The initial steps are currently being taken around a process that enables enhanced ownership of our customer relationship to leverage the entire enterprise.
I will provide additional color on these initiatives in the coming quarters.
Thank you for your time today, and now I'll turn the call over to Robert for discussion of our second quarter results.
Robert.
Thank you Ed and good morning, everyone.
Today I will begin with a review of our second quarter results, including a discussion of segment results have been share additional details regarding our outlook for the second half of the year.
For the second quarter consolidated revenues were $2.5 billion, an increase of 1.1% compared to prior year.
For the first six months consolidated revenues were 4.9 billion, a 2.4% increase compared to last year.
On a constant currency basis quarterly and year to date revenues grew 1.4, and 2.7% compared to prior year.
The increases in revenue included how your contributions and continued strong growth from borrower as with last quarter.
These were partially offset by lower distribution revenue from customer Nonrenewals largely caused by service issues that occurred prior to 2019.
As a reminder, we acquired Howard on April Thirtyth 2018, how your sales from January through April of 2019 were 255 million net of $71 million of intercompany sales.
The net loss for the second quarter was $10.5 million or 18 cents per share and adjusted net income for the quarter was $6.2 million or 10 cents per share.
On a constant currency basis, adjusted net income per share was 11, and 13 cents for the second quarter and year to date, respectively.
As we mentioned last quarter, our expectation for the second quarter adjusted earnings per share.
To be in the mid to high single digits. So these results were above our expectations.
Now, let's turn to our segment performance for the quarter.
Global solutions segment revenues for the quarter were $2.2 billion compared to 2.3 billion in the prior year.
Revenues improved slightly compared to the first quarter.
Year over year revenue growth and Byron and manufacture solutions continued to have a positive impact which have been offset by revenue decreases and our distribution business.
Segment operating income for the quarter was $19 million compared to $24 million last year.
The decline resulted from lower revenues ongoing distribution margin pressure higher transportation expenses and increased expenses to develop new customer solutions, namely fusion five.
These headwinds were partially offset by growth from Byron and our manufacture solutions business.
Turning to the global product segment for the quarter revenues were $364 million compared to $280 million last year, and operating income was $18 million compared to $22 million last year.
Results were negatively affected by softness in organic sales and margin pressure, partially offset by expense control and favorable commodity price trends.
Now, let's turn to cash flow and the balance sheet.
As we mentioned last quarter, we expect working capital management to be a positive contributor to cash flow for the full year.
And the second quarter, we generated $90 million of operating cash flow driven primarily by working capital management and increased operating income compared to the first quarter.
Consolidated long term debt was 1.6 billion at June Thirtyth, and this represents a $60 million reduction compared to the first quarter.
As we've mentioned previously deleveraging the balance sheet is a top priority for the company.
Last quarter, we highlighted one of our investments in new solutions called fusion five today I'll provide a bit more detail on this business, including an update on how it's progressing and how it's factoring into our guidance for 2019.
Fusion five is principally focused on helping providers navigate the new world of value based care and we have been successful in attracting an initial base of customers.
We believe this is due to fusion fives experienced management team proprietary technology platform care pathway protocols and prior experience with CMS is value based bundled payment program.
A large portion of fusion funds expected revenues for 2019 and beyond is expected to come from savings achieved under the new CMS bundled care program referred to as BPCI advanced.
We expect to receive program results from CMS in the fourth quarter for the initial six month period of the program, which ended in March of 2019.
Due to the newness of this business and the structure of the program. The initial revenues are difficult to predict we expect our ability to forecast this business to improve over time as the program matures.
During this year CMS allowed a second round of customer sign ups to the program, which is currently underway.
Our degree of success in adding new customers will both expand the potential of this business and require additional onboarding expenses in 2019.
Now, let me share some additional details regarding our outlook for the year.
For 2019, the company is narrowing its adjusted net income per share range to 60% to 70 cents, which excludes the impact of currency.
As I mentioned last quarter, we expect improvement over the course of 2019 with the bulk of earnings late in the year.
For the third quarter, we expect adjusted EPS in the upper teens.
Overall, we are pleased with our second quarter results and the progress we are making.
Thank you and with that I will turn the call back over to the operator to begin the Q and a session operator.
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 you wish to enjoy your question press the pound key.
And our first question will come from the lab Erin Wright with Credit Suisse. Your line is now open.
Great. Thanks, I guess can you discuss some of the primary factors attributable to the narrowed guidance range. Given what was I guess performance that was seemingly better than anticipated and some of the factors that are contributing to the ramp up into the fourth quarter. Thanks.
Sure.
So a couple of factors that are that are nearing range. I think the first thing is the effective tax rate thats have an implication on while we narrowed the range.
If you just look at what we had anticipated the tax rate to be to where it is that alone is about a nickel on the on the EPS range.
I think the second thing really as we talked a little about fusion five so fusion five is having an impact also versus what we originally planned and thats really related to timing of getting data from the government as well as making sure that being in a relatively new business for us being somewhat conservative on how we are recognizing that.
And then but the positive I really want to think about here and talk about is the over performance in the rest of the business Thats been will far offset that to a partial offset that I should say.
That being in our core distribution business that being in our products business and that being a buyer home health care business.
Being able to continue to offset any of that timing issues related to fusion five.
So that's the way we're thinking about it.
Going forward regarding why I guess theres a ramp.
Couple of different things. One is we are looking at the continued performance and strong performance in our in our buyer in home health care business.
Secondly, just the normal seasonality of our business in the fourth quarter typically is our strongest quarters due to that seasonality you got health care plan deductibles, which ones. They are achieved we see an increase in utilization of our products.
Flu typically has creates a tailwind in the third and fourth quarter and the other thing, which will probably under selling a little bit is the strong improvement in our operating performance just focused around productivity improvement and operational improvements Thats why were that's why that's how we're thinking about it going forward.
Robert if you want to add anything below one thing I'd add is.
Just to echo the comment on fusion five of that business also has a significant ramp, particularly on the fourth quarter, even though our as Ed mentioned our overall.
Our outlook for the business is lower than what we originally anticipated. It's for good reason and that business will continue to have a round.
For the year.
And I'll add one last thing too and Thats, we don't talk about it is really our European and us business that that being the solutions businesses in Europe continues to improve we've seen sequential improvement in that business and we expect that to continue to drive sequential improvement also to the operating profit level.
Okay. That's helpful and then thinking about Halyard can you discuss some of the underlying performance there.
Some of the dynamics around commodity pricing trends in key assays in where we kind of stand today with.
With how your thanks.
Our robertex talk about the TSA as well as commodity pricing and I'll, maybe I'll comment at the end of the general business performance.
Sure from a TSA ill take that part first we continue to either achieve or exceed the timing that we originally set out in terms of the transition so.
We're we're on track with or even slightly ahead of the expectations that weve had relative to that process. So on tremendous effort from from our teammates.
On a global product side, and your corporate as well to support their process.
In terms of the commodity when you think about last year and the the when you think about those on a year over year basis commodities took a pretty big uptick in the first half of the year last year and were sustained through the third quarter and then came down some towards the end of the fourth quarter.
What we saw in the first quarter was a from a year over year perspective of minimal.
But slightly slight benefit we noted that that was a little bit better.
This quarter than it was last quarter and depending on where things go in the back half of the year, we're hoping to have very favorable comparables for for the third and the fourth quarter, but obviously remains to be seen where where things fully shakeout.
And then just from a general business perspective, we're seeing more and more closely working between the classic distribution channel as well as the global products business and continuing to drive the initiatives of driving that growth of our self manufactured products through our own channels as well as outside of the channels.
Okay. That's helpful. Thank you.
Thank you and our next question will come from the line of Robert Jones with Goldman Sachs. Your line is now open.
Great. Thanks for taking my question. This is Jack rub off on for Bob.
Can you guys talk about the process of renewing fizzy and through 2021. After recently extended through 2020 and ended the contract terms of any meaningful changes worth highlighting.
Yes, so the contract terms or didn't change their consistent with where they are and I think the philosophy I have always is if theres an opportunity to continue to extend relationships and agreements seat you will do that we will proactively not necessarily always reactively. So its consistent terms and we have another year. During this quarter, we negotiated another year out into 2021.
Got it Thats helpful. And then on fusion five I just wanted to ask about the competitive landscape have you seen any uptick in competition on specifically thinking about cerners partnership with Navajo else going after the same target market.
Yes.
Talk a little about a couple of things so so.
Kind of landscape, we think is relatively consistent.
One of the things we've seen no which is very very encouraging is the fact that we in the second round to sign sign ups, we actually were able to sign up multiples of what we had in the first round. So we've seen increased interest in our fusion five business.
As we went through this past setting in the past few months the second round of sign ups. So thats, where we are right now of that business.
Thats interest in it we still need to work through that and comp establish contracts with with customers. So what we ultimately win and secure is still not yet known.
But at least the interest level of as Ed mentioned improved from the first round to the second round. So we're encouraged by.
Within our accomplish in a fairly short period of time with with the team that we have.
Great. Thanks.
Thank you and just as a reminder, ladies and gentlemen to ask the question over the phone Star and then one.
Our next question will come from Lisa Gill with Jpmorgan. Your line is now open.
Hi, its any samuel on for Lisa.
I was hoping maybe you could give us an update on where you stand on your private label mix versus your target and then how we should just think about the the margin impact as you increase that mix. Thanks.
I'll give you a little bit of a context from a mix perspective than Ed can talk about.
As I mentioned a minute ago some of our efforts there and if you look at.
Just as a rough proxy are proud of our global products as a percent of our business pre eliminations its around 15% postum eliminations at around 10% and that has from a year over year basis improved so ill, let ed comment on sort of and I think the way we think about our products is not necessarily private label, but all the brands that we manage.
Whether that's Mehdi choice whether that is halyard.
And our other brands, we kind of look at it now so private label, but what are the brands that we have had we manage.
And the other thing we're looking at is to continue while to grow that also continue to partner with key external suppliers and we brought in a new person to run our supplier management side of the business.
To make sure that category by category with category management, we have the best possible products to offer to our customer base, whether that's our own manufacturer product of key key external manufactured products and that's really the way we're looking at it.
Both leveraging our ability to manufacture or private label products.
Or nearing that up with leading external brands to take to the market to the best fulfill what the customer needs.
Very helpful. Thanks, and then maybe just one more kind of piggybacking on the guidance question just as we think about the ramp in 2019 earnings to the back half how should we think about just the cadence of revenue growth within that particularly kind of relative to the first half.
Yes, so revenue growth I think we talked about so one of the things I talked about in my in my comments upfront was we did have a large customer loss in the first half of the year.
We do recognize that the sales cycle and in the removal cycle I guess as long. So we're going to start to see the impact that here in the fourth quarter, where we're at we're at war I really focus on is we recognize we're going to have some of those revenue headwinds, but what we're seeing right now in our ability to do some of the the operational effectiveness in driving productivity in our operations to offset that revenue loss.
And the revenue loss it wasnt will be direct that wasn't the highest margin business that we lost and the ability to drive variable costs drive productivity grow faster in those higher margin growth segments are enabling us and have us have a path forward to offset that revenue growth at the top line. So the short answer is yes, we're going to have revenue headwinds, but we had various levers that we have pulled and we're going to continue to pull to offset that at the bottom line continue to execute in our strategy in the business.
Very helpful. Thank you.
Thank you and just as a reminder, ladies and gentlemen asked a question that is star and then one.
One moment.
And our next question will come from the line of Kevin Kelly Endo would you be S. Your line is now open.
Hey, guys. This is Rick yes are we on for Kevin Kelly Endo, Thanks for taking my questions.
Just wanted to follow up on the securitization that you have in your credit agreement.
Any update there you can provide just for a cash flow perspective.
No no update at this time, we know that it's something that we've mentioned before we we are looking at and considering as we think about our capital structure. We're actively working on different options to both manage it as we go forward and to manage our interest rates and so that is a but as a factor I thinking but no specific update at this time.
Okay Fair and then just a follow up there was a press release you had a few board exits. This morning, and then one addition.
Anything you could comment on there as to why they left or.
What we should be thinking about around that.
No.
Yes, so a couple of different things one is we added mark back to the board and Mark has strong operational and manufacturing and healthcare experience, which really helps us add that that aspect to the board and the reality is.
Both Stuart and Barbara we're at that point, where they are ready to do some different things and they've been a great help to this end the board through here and it was actually a planned departure. So we knew in advance that that was planned which enabled us to bring in Mark and we'll continue to look at opportunities to strengthen our board too.
Great. Thanks, guys.
Thank you. This concludes our question and answer session for today.
I would now turn the call back over to Mr. Pacifica for his closing remarks.
So thanks, everyone for joining the call you know I really wanted to talk to close with a couple of different comments and and one of the things I see is how much I'm excited to where we are in the progress we had in the second quarter I know I've talked about this in the opening comments, but there was a lot of positives that we saw in this quarter just going through them and the fact that sequentially as a company. We saw revenue growth of 1%, but more importantly, we were able to drive adjusted operating income growth of more than 20% and again that goes back to the levers, we're being able to pull.
Faster growth in our higher margin higher growth business, enabling us to obviously get the top line growth sequentially, but more importantly, the bottomline growth of over 20%.
Secondly, what we did and I thought we did extremely effectively was we generated 90 million of cash flow in the second quarter that being specifically operating cash flow third we talk about debt, we were able to pay down in the second quarter $60 million of debt compared to where we ended the first quarter at and that's again continue to focus on working capital continue to focus on de leveraging the balance sheet and continuing to focus on.
On improved operating results, we talked about the vision contract I think that says we want to continue to proactively work on renegotiating deals were at all possible and then and then lastly, our Byron business. Our Byron business had a strong quarter continues to have strong quarters and is over achieving their internal operating plan, which really leads me to the last point, which is our internal operating plan. If I think about where we expected to be from an operating standpoint at this point in time. We're ahead of that and the expectation is continue to look at levers we can pull to maintain the performance of the business.
So I look forward to catching up with everyone.
Again as well as in the next quarter and I'd like to wish everybody a great day. Thank you.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program you may all disconnect.
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