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Owens & Minor Inc (NYSE:OMI)
Q2 2019 Earnings Call
Aug 7, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Owens & Minor Second Quarter 2019 Financial Results Conference Call. My name is Brian, and I will be your operator for today. [Operator Instructions]. I would now like to turn the presentation over to your host for today's call, Mr. Chuck Graves. Please proceed, Mr. Graves.

Chuck Graves -- Director, Finance and Investor Relations

Thank you, operator. Good morning, everyone, and welcome to the Owens & Minor Second Quarter 2019 Earnings Call. I'm Chuck Graves, and 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 second quarter of 2019, which are included in 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 with historical facts, 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 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 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 reconciliation 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 Pesicka, our President and CEO, who will provide commentary on the business through the first half of the year; and Robert Snead, EVP 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?

Edward A. Pesicka -- President, Chief Executive Officer, Director

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 Owens & Minor. Since I spoke with you last quarter, I've continued to focus on our customers by placing rigor on 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 continue to be validated that our customers value: one, our ability to be flexible, to adapt quickly and to customize solutions to solve their challenges; two, our integrated solutions and services across the continuum of care that helps our customers mitigate risk, increase value and improve the commission's experience; three, our ability to move at a speed equal to the pace of an industry that continuously 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 in 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 only 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 are 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 Vizient 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 Byram 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 healthcare. 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, Fusion5 and currency. I will discuss the impact of customer nonrenewals and Robert will comment on Fusion5 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, will continue to affect our revenue growth in the second half of 2019 and into 2020.

It is important to understand that 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 focus and selling of our value proposition and now we are also playing offense. Secondly, from an operating income standpoint, we're working to mitigate the 2019 impact of the previously mentioned customer nonrenewals. We are doing this through productivity improvement and revenue mix shift to faster growing and more profitable business in addition to many other mitigating actions that we are 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 Byram business, creates a path to mitigate headwinds and allows us to confirm our narrowed range of $0.60 to $0.70 for the full year. You may recall that I mentioned in the last earnings call 4 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, the 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 talents 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 and teammates. The initial steps are currently being taken around the 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 a discussion of our second quarter results. Robert?

Robert K. Snead -- Executive Vice President & Chief Financial Officer

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 and then 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 higher contributions and continued strong growth from Byram. 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 Halyard on April 30, 2018. Halyard 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 $0.18 per share and adjusted net income for the quarter was $6.2 million or $0.10 per share. On a constant currency basis, adjusted net income per share was $0.11 and $0.13 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 expectation. 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 in Byram and manufacturer solutions continue to have a positive impact, which have been offset by revenue decreases in 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 Fusion5. These headwinds were partially offset by growth from Byram and our manufacturer solutions business. Turning to the Global Products 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. In 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 30 and this represents a $60 million reduction compared to the first quarter. As we 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 Fusion5.

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. Fusion5 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 Fusion5's experienced management team, proprietary technology platform, care pathway protocols and prior experience with CMS' value-based bundled payment program. A large portion of Fusion5's 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 6-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 under way. Our degree of success in adding new customers will both expand the potential of this business and require additional on-boarding 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 $0.60 to $0.70, 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'll turn the call back over to the operator to begin the Q&A session. Operator?

Questions and Answers:

Operator

[Operator Instructions]. And our first question would come from the line of Erin Wright from Credit Suisse. Your line is now open.

Erin Wright -- Credit Suisse -- Analyst

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?

Edward A. Pesicka -- President, Chief Executive Officer, Director

Sure. So a couple of factors that are narrowing the range. I think the first thing is the effect of tax rate. That has an implication on why we narrowed the range. So we just looked at what we had anticipated the tax rate to be to where it is. That alone is about $0.05 on the EPS range. I think the second thing really is we talked about Fusion5. So Fusion5 is having an impact also versus what we originally planned. Now that's really related to timing of getting data from the government as well as making sure, being a relatively new business for us, being somewhat conservative on how we're recognizing that. And then -- but the positive I really want to think about here and talk about is the overperformance in the rest of the business that's going to far offset that -- or partially offset that, I should say.

That being in our core distribution business, that being in our products business and that being in our Byram home healthcare business being able to continue to offset any of the timing issues related to the Fusion5. So that's the way we're thinking about it going forward. Regarding why, I guess, there's a ramp, a couple of different things. One is we're looking at the continued performance and strong performance in our Byram home healthcare business. Secondly, just the normal seasonality of our business in the fourth quarter typically is our strongest quarter due to that seasonality. You get healthcare plan deductibles, which once they're achieved, you 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 we're probably underselling a little bit is the strong improvement in our operating performance, just focused around productivity improvement and operational improvement. That's why -- that's how we're thinking about it going forward. I don't know, Rob, if you want to add anything.

Robert K. Snead -- Executive Vice President & Chief Financial Officer

The only thing I'd add is just to echo the comment on Fusion5. That business also was a significant ramp, particularly on the fourth quarter even though our, as Ed mentioned, our overall outlook for the business is lower than what we originally anticipated. It's for good reason and that business will continue to have a ramp throughout the year.

Edward A. Pesicka -- President, Chief Executive Officer, Director

And I'll add one last thing, too. And that's, we don't talk about it, is really our European and U.S. business, that being the Solutions businesses in Europe continues to improve. We see sequential improvement in that business, and we expect that to continue to drive sequential improvement also to the operating profit level.

Erin Wright -- Credit Suisse -- Analyst

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 and TSAs and where we kind of stand today with Halyard?

Edward A. Pesicka -- President, Chief Executive Officer, Director

I'll let Robert talk about the TSAs as well as commodity pricing, and maybe I'll comment at the end on the general business performance.

Robert K. Snead -- Executive Vice President & Chief Financial Officer

Sure. From a TSA, I'll 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 on track with or ahead of expectations that we had relative to the process. So tremendous effort from our teammates on the Global Products side and Europe Corporate as well to support that process. In terms of the commodity, when you think about last year and when you think about this 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 toward the end of the fourth quarter. What we saw in the first quarter was a -- from a year-over-year perspective, a minimal but slightly -- slight benefit, and we noted that. That was a little bit better this quarter than it was last quarter. And depending on where things go at the back half of the year, we're hoping to have third favorable comparables for the third and the fourth quarter. But obviously, it remains to be seen where things fully shake out.

Edward A. Pesicka -- President, Chief Executive Officer, Director

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. We continue to drive the initiatives of driving that growth of our self-manufactured products through our own channels as well as outside of the channels.

Erin Wright -- Credit Suisse -- Analyst

That's helpful. Thank you.

Operator

Thank you. And our next question will come from the line of Robert Jones with Goldman Sachs. Your line is now open.

Jack Rogoff -- Goldman Sachs -- Analyst

Great. Thanks for taking my questions. This is Jack Rogoff on for Bob. Can you guys talk about the process of renewing Vizient through 2021 after recently extending it through 2020? And then, did the contract terms have any meaningful changes worth highlighting?

Edward A. Pesicka -- President, Chief Executive Officer, Director

Yes. So the contract terms didn't change. They're consistent with where they are. And I think the philosophy I have always is if there's an opportunity continue to extend relationships and agreements, you do that proactively, not necessarily always reactively. So it's consistent terms and we have another year. During this quarter, we negotiated another year out into 2021.

Jack Rogoff -- Goldman Sachs -- Analyst

Got it. That's helpful. And then on Fusion5, I just wanted to ask about the competitive landscape. Have you seen any uptick in competition? I'm specifically thinking about Cerner's partnership with Nava Health going after the same target market?

Edward A. Pesicka -- President, Chief Executive Officer, Director

We'll talk a little bit about a couple of things. So the competitive landscape we think is relatively consistent. One of the things we've seen though, which is very, very encouraging is the fact that we're in the second round of sign-ups. We actually are able to sign up multiples of what we had in the first round. So we've seen increased interest in our Fusion5 business as we went through this past -- in the past few months, the second round of sign-ups. So that's where we're right now with that business.

Robert K. Snead -- Executive Vice President & Chief Financial Officer

Yes, that interest in it, we still need to work through that and that was contracts with customers. So what we ultimately win and secure is still not yet known. But at least the interest level, as Ed mentioned, improved from the first round to the second round. So we're encouraged by what we've been able to accomplish in a fairly short period of time with the team that we have.

Jack Rogoff -- Goldman Sachs -- Analyst

Great. Thanks.

Operator

Thank you. [Operator Instructions]. Our next question will come from the line of Lisa Gill with JPMorgan. Your line is now open.

Anne Samuel -- JPMorgan -- Analyst

Hi. It's Anne Samuel for Lisa. I'm thinking maybe you could give us an opinion on where you stand on your private-label mix versus your target and then how we should just think about the margin impact as you increase that mix.

Robert K. Snead -- Executive Vice President & Chief Financial Officer

I'll give you a little bit of a context from a mix perspective, then Ed can talk about, as he mentioned a minute ago, some of our efforts there. If you look at, just as a rough proxy, our Global Products as a percent of our business pre-elimination, it's around 15%, and post-elimination, that's around 10%. And that has, from a year-over-year basis, improved. So I'll let Ed comment on sort of the...

Edward A. Pesicka -- President, Chief Executive Officer, Director

And it's the way we think about the products. It's not necessarily private-label, but all the brands that we manage, whether that's MediChoice, whether that is Halyard and our other brands. We kind of look at it not as private label, but what are brands that we have managed. The other thing we're looking at is to continue to evolve 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 manufactured products or key external manufactured products. And that's really the way we're looking at it, both leveraging our ability to manufacture both private-label products or mirroring that up with leading external brands to take to the market to best fulfill what the customer needs.

Anne Samuel -- JPMorgan -- Analyst

Very helpful. 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?

Edward A. Pesicka -- President, Chief Executive Officer, Director

Yes. So revenue growth, I think we talked about -- so one of the things I talked about 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 the removal cycle, I guess, is long. So we're going to start to see the impact of that here in the fourth quarter. We're at -- what 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 operational effectiveness in driving productivity in our operations to offset that revenue loss.

And the revenue loss, it wasn't the highest-margin business that we lost and the ability to drive variable cost, 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 to the top line. So the short answer is yes, we're going to have revenue headwinds, but we have various levers that we have pulled in and we're going to continue to pull to offset that at the bottom line and continue to execute in our strategy in the business.

Anne Samuel -- JPMorgan -- Analyst

Very helpful. Thank you.

Operator

Thank you. [Operator Instructions]. And next question will come from the line of Kevin Caliendo with UBS. Your line is open.

Analyst

Hey guys. Thanks for taking my questions.This is Greg Caestilon [Phonetic] for Kevin Caliendo. Just want to follow up on the securitization that you have in your credit agreement. Any update there you can provide, your sort of cash flow perspective?

Robert K. Snead -- Executive Vice President & Chief Financial Officer

No. No update at this time. That is something that we mentioned before. 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 factor in our thinking, but no specific update at this time.

Analyst

Okay. That's fair. And then just as a follow-up. There is a press release you had a few Board exits this morning and then one addition. Anything you'd comment on there as to why they left or what we should be thinking about around that?

Edward A. Pesicka -- President, Chief Executive Officer, Director

No. Yes. So a couple of different things. One is we added Mark Beck to the board and Mark has strong operational and manufacturing and healthcare experience, which really helps us add that aspect to the Board. And the reality is, both Stuart and Barbara were at that point where they're ready to do some different things, and they've been a great help to us and the Board 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.

Analyst

Thanks guys.

Operator

Thank you. This concludes our question-and-answer session for today. I would now turn the call back over to Mr. Pesicka for his closing remarks.

Edward A. Pesicka -- President, Chief Executive Officer, Director

So thanks, everyone, for joining the call. I really wanted to talk -- close with a couple of different comments 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 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've been able to pull, faster growth in our higher-margin, high-growth business, enabling us to obviously get the top line grow sequentially, but more importantly, the bottom line 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 specific operating cash flow. Third, we talked 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 deleveraging the balance sheet and continuing to focus on improved operating results. We talked about the Vizient contract. I think that says we want to continue to proactively work on renegotiating deals where all possible. And then lastly, our Byram business.

Our Byram business had a strong quarter, continue to have strong quarters and it is overachieving 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.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Chuck Graves -- Director, Finance and Investor Relations

Edward A. Pesicka -- President, Chief Executive Officer, Director

Robert K. Snead -- Executive Vice President & Chief Financial Officer

Erin Wright -- Credit Suisse -- Analyst

Jack Rogoff -- Goldman Sachs -- Analyst

Anne Samuel -- JPMorgan -- Analyst

Analyst

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