Hello. My name is Jean-Louis. Welcome to the Owens & Minor First Quarter 2023 Earnings Call. I will now turn the conference over to Jackie Marcus of Investor Relations. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to the Owens & Minor First Quarter 2023 Earnings Call. Our comments on the call will be focused on the financial results for the first quarter of 2023 as well as our updated 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 and could cause actual results to differ materially from those projected or implied here today. Please refer to our SEC filings for a full description of these risks and uncertainties including the Risk Factors section of our annual report, Form 10-K and quarterly reports on Form 10-Q. In our discussion today, we will reference certain non-GAAP financial measures. Information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release. Today, I'm joined by Ed Pesicka, President and Chief Executive Officer; and Alex Bruni, Executive Vice President and Chief Financial Officer. I will now turn the call over to Ed. Ed?

Thank you, Jackie. Good morning, everyone, and thank you for joining us on the call today. To start, I am pleased with the performance of the business and the team's execution through the first quarter of the year as we took the necessary steps to initiate the realignment of our business, improve our overall cost structure and leverage our strengths. And here are just a few examples. One, in the first quarter, we generated $158 million of cash from operations. This is a testament to the execution of our strategy and delivering on our commitment to further strengthen our financial profile. Having the ability to produce cash flow at these levels will allow us to allocate capital towards debt reduction and pursue initiatives that promote growth, innovation and commercial excellence. Next, our operating model realignment program is on track to meet our target of $30 million of adjusted operating income in 2023, and we are confident that we will achieve significant long-term profit improvements and cost savings from these efforts. I'll outline these efforts in a little more detail further in my prepared remarks. Next, our Patient Direct segment continues to outpace the market and deliver significant margin expansion as the strength of the Byram and Apria brands continue to accelerate. And finally, we have already paid down $117 million of debt in the first quarter, which aligns with our focus on debt reduction and further improving our balance sheet, and we expect continued strong debt reduction throughout the year. Now I will provide a closer look at our segment performance, and I'll start with our Patient Direct segment. The Patient Direct segment had another strong quarter as it continued to outpace the market as revenues grew by 10.4% year-over-year on a pro forma basis. In addition, it should be noted that we again achieved double-digit growth in nearly all of our major product categories. The continued strong revenue growth was driven by: one, the proven commercial model with a comprehensive focus on the patient, provider and payer; two, an expanding use of technology to improve overall service and satisfaction; and three, the powerful combination of the Apria and Byram brands. As expected, when we completed the Apria acquisition just over a year ago, the addition of Apria has significantly improved our already strong Patient Direct offering by broadening our product categories, expanding our services, increasing our footprint and deepening our payer and provider relationships. And we expect our Patient Direct segment to continue to deliver growth for the total company as serving the patient in the home continues to grow at a rapid pace. This rapid pace growth is due to demographics, such as an aging population and the rise in the number of patients with chronic conditions, an increase in available home treatments and the growing acceptance of patient care in the home. It is these industry dynamics, combined with our Patient Direct strength and fierce execution that leaves us thrilled about the future prospects for Patient Direct and the expectation of continued positive momentum. Now moving on to our Product & Healthcare Services segment. Our Product & Healthcare Services segment declined year-over-year, primarily due to extremely difficult comps coming off the tailwinds of COVID-related sales in the prior year and continued headwinds related to destocking of PPE in the current year. This significantly impacted both revenue and margin in our Global Products division. However, excluding the year-over-year impact of distributed PPE products, our medical distribution division delivered mid-single-digit growth for the quarter. This growth was a result of stronger same-store sales, along with the implementation of new wins offset by previous losses. We are pleased with the continued progress being made by our Medical Distribution division. And finally, related to Product & Healthcare Services segment. You may be aware of recent communications from the FDA regarding certain of our facial protection products. We are actively working with the FDA to address this issue and during this process, we'll remain focused on customer safety and transparency. Moving on to our Operating Model Realignment program. I am thrilled with the progress that has been made since the launch of this initiative about eight weeks ago. It is progressing well, and I'd like to take a moment to provide a brief update on the four key components of the program. First, sourcing and demand management, which includes direct materials, indirect materials and purchased finished goods. The goal of this work stream is to aggressively reduce acquisition costs and minimize waste. I am pleased with the progress made to identify the opportunities, but more importantly, I'm pleased with the strategies already being implemented to deliver savings in 2023 and beyond. The implemented strategies and tools will be iterative, not just for 2023, but for years to come. Second, we are making progress on organizational structure redesign to improve the efficiency throughout the business. We are assessing structure, spans, layers and activities. We have already taken action to delayer parts of the organization. As this work stream continues, we will further evaluate the structure, spans, layers and activities to reduce costs and deploy resources where needed for growth and to fill gaps. Third, network rationalization and operational excellence, which includes the optimization of our manufacturing footprint and supply chain. This is a focus for the management team as we move further into 2023. Improving our manufacturing efforts to more efficiently operate will greatly benefit us as we work to rightsize the business and ensure the return on capital invested is being maximized. Due to the complexity of this work stream, we are carefully assessing the options and phasing. However, we have already made adjustments in parts of our business to improve service output, quality and in-year cost reductions. Lastly, our commercial excellence and product profitability enhancement portion of the program is in its early stages. The primary objective for this component is twofold: one, to ensure that the price we charge for our products and services reflect the value provided; and two, expanding our product portfolio to broaden our offering. And we have already begun to adjust our pricing to reflect the value of our services and offering. Overall, the operating model realignment program is on pace to achieve $30 million of benefit in 2023 and exit the year with approximately $100 million run rate of profit improvement. We are where expected to be at this stage and encouraged by the path forward already identified in the quarters ahead. With our performance in Q1 and the advancement of our operating model realignment program, we are refining our guidance for 2023. Alex will talk more about the drivers contributing to these revisions in our guidance, but I'd like to briefly talk about the outlook for the remainder of the year at a high level. The upward revision to our guidance are supported by our confidence in our performance thus far in 2023. To reiterate, our Patient Direct segment has continued to outpace the market growth and expand margins. Our Medical Distribution division continues to strengthen. Our Operating Model Realignment program is on track. We will continue to work through destocking of PPE and our exceptional cash flow generation allows us to be nimble in today's macroeconomic environments. I'm excited about what the future holds for Owens & Minor, and we look forward to updating you on the progress through the remainder of the year. With that, I'd like to turn the call over to Alex to discuss our financial results in greater detail. Alex?

Thank you, Ed. Good morning, everyone. I'll begin by providing an overview of our financial results and the primary factors that drove our performance in the first quarter of 2023. Following that, I'll delve into our revised expectations and assumptions for the full year outlook. And finally, I'll discuss our key guidance assumptions and gains for the remainder of the year. Starting with our first quarter results. Our revenue for the quarter was $2.5 billion, which was higher than anticipated due to stronger sales in Medical Distribution and outperformance in the Patient Direct business, driven by solid results from both the Apria and Byram brands. On a pro forma basis, our top line declined by 6% versus prior year, but this was largely due to the notable tailwind in the first quarter of 2022 from COVID-related sales in our Product & Healthcare Services segment. Additionally, we continue to experience some pressure on sales during the quarter related to customer inventory levels. Consolidated top line results were relatively in line with the fourth quarter of 2022. First quarter gross margin was $497 million or 19.7% of revenue compared to $373 million or 15.5% of revenue in the first quarter of 2022. The gross margin expansion was driven by continued Patient Direct sales growth and the power of combining Apria and Byram as well as margin expansion in our Medical Distribution division partially offset by the impact from lower PPE sales from our Global Products division. Our distribution, selling and administrative expense for the quarter was $449 million, making up 17.8% of revenue. This expense increased by $179 million in the quarter, primarily due to the costs associated with servicing Patient Direct sales growth, including the Apria acquisition. GAAP operating income for the quarter was $9.8 million, and adjusted operating income was $47.7 million, ahead of expectations for Q1. Adjusted EBITDA was also ahead of expectations for the quarter at $109 million with a margin of 4.3%. As I just discussed, the revenue and margin performance were key drivers in achieving these results. In addition, as Ed mentioned, we're also on pace to achieve the $30 million adjusted operating income contribution for 2023 from our operating model realignment efforts. Accordingly, we've raised our guidance for adjusted EBITDA, which we'll discuss later in the call. Interest expense for the quarter was $42 million, and the GAAP effective tax rate was 27.7%, both in line with expectations. Our GAAP net loss for the quarter was $24 million, or a loss of $0.32 per common share. Adjusted net income for the quarter amounted to $3.6 million or $0.05 per share. On a segment basis, Product & Healthcare Services first quarter revenue was $1.9 billion, which represents a 10.2% decline versus the prior year due to tailwinds in the first quarter of 2022, driven by higher sales from COVID-related products. Looking at the Patient Direct segment, we had another quarter of strong results. Once again, we saw growth across nearly all key product categories. Patient Direct accounted for $607 million in revenue during the quarter representing growth of 10.4% versus the first quarter of 2022 on a pro forma basis. Shifting gears, let's look at cash flow, the balance sheet and our capital structure. In the first quarter, we generated $158 million of cash from operations. Our business is capable of producing strong cash flow results, which is evidenced by the past few quarters. As Patient Direct becomes a larger part of the overall business and as we continue to optimize working capital, we expect to produce significant operating cash flow that will be used for debt reduction and reinvestment in the business. To that end, we paid down $117 million of debt during the first quarter, bringing total debt reduction to over $0.25 billion since the finalization of the Apria acquisition. At the end of Q1, our total debt was $2.4 billion. We remain focused on delevering and strengthening the balance sheet as we progress toward our long-term leverage target of 2x to 3x. I'd now like to discuss our improved guidance for 2023. We are raising our revenue guidance to $10.2 billion to $10.6 billion, representing an increase of $100 million at the midpoint versus previous guidance. This reflects the encouraging trends we're currently seeing within our Patient Direct segment and Medical Distribution division. We're also increasing our adjusted EBITDA range to $540 million to $590 million, reflecting an increase of $45 million at the midpoint versus prior guidance, which reflects stable margins on the improved expectations for the top line and inclusive of the modifications to our adjusted EBITDA definition as detailed in our April 17 8-K. Finally, we're increasing the bottom end of our adjusted EPS range from $1.15 to $1.30 to reflect Q1 performance. The new range for adjusted EPS is $1.30 to $1.65. We remain enthusiastic about the outlook for the Patient Direct segment as well as the opportunities in the Products & Healthcare Services segment and the overall operating model realignment, while remaining cautious around the outlook for PPE for the remainder of the year. As we think about cadence for the year and as previously discussed, our earnings will be heavily weighted to the back half of the year, and it's reasonable to expect about 85% of earnings in the back half of the year due to traditional seasonality, acceleration of the Operating Model Realignment benefits and anticipated easing of destocking later in the year. Overall, we're pleased with the results from the first quarter of the year and are excited about where the company is heading. Before turning the call over to the operator for Q&A, I'd like to thank all of our dedicated teammates for their efforts in enabling Owens & Minor to provide the highest quality of service to our customers. With that, I'll now turn the call over to the operator for questions. Operator?

Actually, operator, before we start, this is Ed Pesicka. I would like to personally, on behalf of all of our teammates, extend our thoughts and prayers out to the family of Gil Minor. Gil passed away earlier this week. Gil was our Chairman Americas and longtime CEO of Owens & Minor and his family is a namesake of Owens & Minor. Over Gil's life, he made a positive impact on so many people and it's great to know that this impact will continue into the future. So with that, I'll turn it back over to the operator so we can begin Q&A.

Your first question comes from the line of Kevin Caliendo of UBS.

So I wanted to talk a little bit about the Product & Healthcare Services business. It's nice to see the progression there and the progress. You talked about the visibility you had last quarter in terms of PPE inventory, ordering and the like. And this week, we've had sort of mixed messaging from some of the public companies who compete or work in this sector. Can you talk a little bit about what you're seeing in terms of utilization and demand? Is it changing by geography or customer? And where we sit in terms of your line of sight on PPE inventory levels and reordering?

Sure. So there's really a couple of parts to that question. One is on utilization within the hospitals. We are not seeing the utilization slow down through as we do our checks with hospitals, and I personally visit those hospitals. Probably one of the products across the portfolio where utilization is slower — or I should say slowed down slightly — is N95s. But if you look at it across the board, utilization, we believe, is now consistent with where it was pre-pandemic level, if not slightly elevated from that because of the protocols that are in place. So that's what we're seeing through conversations with our customers as well as personally visiting them. On the destocking side, we've done a couple of things. One is, obviously, we've done some checks with the market as well as had some outside help getting some checks on this. And I think it's still consistent with what we said last quarter: we still believe destocking is going to continue to occur through the first half of this year and it will start to come out in the back half of the year. So that's where we're seeing it. And again, back to the regionality, we're not really seeing much variation by region. So again, to recap: we're seeing PPE usage in the hospital above 2019 levels, and that's actually the usage in the hospital. We see the destocking continuing through the front half of the year and then easing in the back half of the year. And that's really what we're seeing in the market today.

Okay. That's helpful. If I can ask a quick follow-up. Can you just frame for us the risk of the FDA action — what's the worst case? What's the best case? And what have you assumed in your guidance around this, any potential impact from it?

Yes. I think, obviously, we've got our disclosure that we have in the 10-K that we filed this morning. And really, what we're doing right now is we're continuing to work with the FDA on this. We're going to work with them aggressively and we want to work with them to address the issue in the process. Again, our primary focus here is around customer safety and transparency. So it's a fluid process, and that's where we are on it right now.

Your next question comes from the line of Michael Cherny of Bank of America.

Congratulations on a nice quarter. Maybe if I can unpack the guidance changes a bit. As you think through maybe in particular on EBITDA, I think the EPS contributions are similar. Relative to the $30 million of operating expense savings or improvement savings, how does that factor in, in terms of realignment costs that get baked in? And where will you be exiting the year on some of those realignment costs in that $30 million as you essentially run rate into '24 and beyond?

Maybe I think the question in the high level is, so the expectation we have is to get at a minimum $30 million in 2023 actual savings to our adjusted operating income. We expect to exit the year at least at a $100 million run rate going into 2024. Costs associated to realignment would be in exit and restructuring costs in the P&L. But that's where we expect it to be from a dollar standpoint this year, and there's nothing coming off of that and then going into 2024 on our run rate. I don't know if that answers the question exactly.

No, it does, and it's helpful in unpacking the pieces on the guide change. And if I could just throw in a second one here, maybe building on Kevin's first question a bit. What do you see right now in the competitive side of your market, both, I would say, on core hospital distribution as well as the Patient Direct side? And where do you see OMI's strength shining through versus other opportunities you have to pick up over time?

Sure. So I'll take the two different segments. In the Product & Healthcare Services segment, we see it continue to be very competitive. We recognize that customers, that being the IDNs and the hospitals, are struggling from a financial standpoint; they're looking for ways to help them with reducing labor costs, reducing overall costs and putting additional technology in place that can help them do that. We're also seeing them looking to have potential more choice on what product and offering that is out there for them. So they have more flexibility. So that's what we're seeing in that sense. And I think a lot of the things we do within our Medical Distribution business fit into those categories. I'll move on to the Patient Direct business. In our Patient Direct business, we continue to see that our customers — the patient, the provider and the payer — are looking for a commercial model that is comprehensive, focused around those three stakeholders. They're looking for technology to make their life easier, and we're doing that through technology that helps the patient, whether it's reordering, checking their account, or making interactions easier. And then really the last thing is they're looking for ways to tie all that together. And I think that's what our Patient Direct business does. When we added Apria on top of our Byram business and you put those together, it really strengthened those key things: one, our proven commercial model, which now we have across the entire business and is comprehensively focused on the patient, provider and the payer; and two, the technology that continues to advance and makes it easier for them. But ultimately, we see the Patient Direct marketplace growing at a rapid pace because of demographics, the increase in home treatments and the acceptance of patient care in the home.

Your next question comes from the line of Daniel Grosslight of Citi.

The products and services business had a pretty significant beat relative to Street expectations and some of the directional commentary you gave on the prior earnings call. It seems like PPE destocking is kind of going as you had expected. So I'm curious if you could just spike out some of the sources of strength other than PPE destocking going as you expected that led to the significant beat this quarter?

Sure. I think one of the things we've talked a little bit about — and I did in my prepared remarks — is the organizational redesign and how we've already taken some costs out and delayered the organization. That came out early in the first quarter and that was primarily part of the Product & Healthcare Services segment. So that's one aspect of it. Two is, again, the operating model realignment. Some of the changes we've made with the network rationalization and operational excellence were focused primarily on Product & Healthcare Services, which enabled us to actually take some cost out of those operations, while at the same time revenue was actually better than we had anticipated. And I tried to signal that in the fact that when you look at our Product & Healthcare Services and you look at the Medical Distribution division, when you pull out the PPE distributed products year-over-year, we grew that business in same-store sales in the mid-single digits. So that's another reason why. Those are the couple of reasons primarily in the Product & Healthcare Services associated with the better-than-expected performance. And really, that comes down to strong execution by Andy who leads that team along with his entire team.

Yes. Makes sense. And if you look at the beat relative to Street, it was about $0.14, $0.15 this quarter, and then you're raising the bottom end of your guidance by around the same amount $0.15. Why you're not raising EPS more given the strength that you've seen? Was there any nonrecurring items or perhaps some pull-through from second quarter that have positive strength this quarter?

I just think from our standpoint, it's only one quarter in. It's early in the year. We felt very comfortable raising the bottom based on what we did relative to our internal plan in Q1. So that's why we took the bottom end up. It's based on some of the things I just talked about: some of the faster growth we're seeing in our Medical Distribution business, the costs that we're taking out in our operating model realignment. And look, I don't want to overlook the performance of our Patient Direct business in the first quarter. It was a phenomenal quarter and the fact that pro forma grew at over 10%. So again, another quarter of double-digit year-over-year growth on a pro forma basis. And virtually every category is growing in double digits outside of really the home respiratory side, which is coming off of some strong tailwinds from COVID last year. Those things. And then the other thing is our operating cash flow and the debt pay down, which will have an implication and benefit longer term on interest expense reduction.

Your next question comes from the line of Eric Coldwell of Baird.

I actually have a few and plan to be a bit greedy this morning if you'll allow me. First, Ed, on the last comment there on Patient Direct with every category growing double digits, but for home respiratory. I struggle with that math a bit because you're up — I mean, 10% is great, don't get me wrong. But if every category is double-digits and yet the segment is at 10%, Home Respiratory had to be pretty low. Could you possibly remind us what the size of that is and what the direction was?

Yes. So I think the way to think about it is, and Eric and all the listeners, if all the other categories are in double digits, anywhere from 10% to the mid- to high-teens, and you have one category that is down, that's going to bring the overall down to just north of 10%.

Right. And I'm just trying to get a sense on how much Home Respiratory is as a percent of your mix last year on a pro forma basis just to have a sense...

And that's something we haven't gone out and disclosed what each category makes up out of the total Patient Direct revenue.

Okay. And then on the FDA portfolio, heard your comments on the call, went and looked at the 10-Q, I didn't see any numbers in there, and it looks like there's a comment that you are unable to reasonably estimate the amount of any possible loss or range of possible losses. So I think the question maybe again is twofold, if you could. One, could you possibly size these categories that are affected by, not recall, but the FDA communications? And then two, with your guidance, I'm curious how you treated the guidance for potential losses? You said you can't quantify them in the 10-Q, but I'm curious what you've embedded in the outlook, if anything?

Yes. So let me just talk a little bit about it. And obviously, we are continuing to work with the FDA to address the issue. This is a process that's going to continue and we will continue to focus on safety and transparency. From a current status, from a historical revenue status and even currently, the N95s, which is one of the areas that we talked about, those prospective revenues are probably back to 2019 levels, which are very, very low. So that's the way we think about that. And again, it's us continuing to work with them on testing. And the reason there's not a range is it could be zero or it could be something else. We're continuing to work with them. And it just depends on where we end up with this. Regarding our guidance, our guidance continues to assume that our products are sound, we stand behind our products, and we're going to continue to move forward with them. But again, we're working closely with the FDA to make sure that we get through all of this; we can't put a timeline on it yet.

Your next question comes from the line of John Stansel on for Lisa Gill of JPMorgan.

Just a quick bit more granular question. I know you've changed your methodology around how you're calculating EBITDA going forward. I think looking at the first quarter, there's about $11 million of incremental adjustments for stock comp and LIFO. I guess can you just size how much of the increased guidance is around changes in methodology? And then kind of following that through to the raised guidance elsewhere, how your expectations for margins have changed a little bit or not at all?

This is Alex Bruni. Yes. So in our guidance, we've assumed about $30 million of benefit from the definition change. And the guidance change for adjusted EBITDA reflects that definition change as well as the pull-through of the Q1 beat.

Your next question comes from the line of Eric Coldwell of Baird.

I can't let you off the hook that easy.

Sorry about that, Eric. No, go ahead.

The last two-parter here that I wanted to hit on was the distribution net wins communications and how that was part of the ex-PPE growth in core medical product distribution? I'm curious what portion of your recent wins have fully onboarded at this point? Where are you in ramping some of those wins you were alluding to last year? Have there been new wins of size recently? And I'm just curious if you could give us a better sense of what your ex-PPE growth might have been if your net wins and losses position was neutral, i.e., what you would have just natural market growth ex share capture would be great?

Eric, the mid-single digit is same-store sales. It's not any channel swap. That's just accounts we had last year versus accounts we had this year. And then of our wins, they are starting to ramp. Our largest win last year just started to generate revenue in December of last year. In March, it was probably about 80% of what the run rate should be. That was our largest one last year. The other ones from last year are also ramping, which is why as we look to the back half of the year and our calendarization, it addresses a portion of that. New wins that are potentially in the pipeline — the reality is our pipeline is as large as it has ever been. We have a dedicated business development team that does an incredible job going out and talking about the value that the Owens & Minor Medical Distribution division brings in. That is starting to resonate with customers. We did have another recent one in the fourth quarter, which was not necessarily a new win, but it was a customer where we had half of their business and they did self-distribution on the other half. It was one of our very large customers; they liked what they saw from us and our ability and they've now moved away from self-distribution and we've taken that on. That transition is progressing quickly; it started about a month ago. Those are a couple of examples. The market is competitive, and we have to continue to make sure we're protecting our base business, growing our share of wallet at those customers and driving business development. Under Andy's leadership, there is a tremendous focus around that.

And then last one for me. It sounds like there aren't many in queue here. Free cash flow, I don't believe you guide to cash flow if I missed it in the — looking at the slides quickly, I apologize. But what is your outlook for free cash flow this year with and without the patient CapEx impact, if you don't mind?

Yes. While we haven't guided on cash flow, just a few comments. We are pleased with our ability to pay down $117 million here in Q1. We do expect to continue to pay down significant debt throughout the year. We did talk about on the last call that we expect operating cash flow to be at least in line with 2022. The operating model realignment includes work streams on working capital benefits that we think will aid our efforts from a cash flow perspective and paying down debt.

There are no further questions at this time. I will turn the call over to John for closing remarks.

Actually, this is Ed Pesicka. I will close it out. So first of all, I want to thank everyone for joining on the call today. Your participation is greatly appreciated, and we value your interest in the company. As I look forward, there are a lot of things that we are excited about in the company going forward in the year and beyond. It starts with our Patient Direct segment that it has continued to outpace market growth. We talk about market growth, but it also has driven significant margin expansions within that segment. In addition to that, our Medical Distribution division continues to strengthen as we talked about today in the prepared remarks and in the Q&A. Our operating model realignment, I'm extremely excited about that. It's on track. It's already taking hold. We know it's going to ramp in the back half of the year as we gain traction on the initiatives. We're going to continue to aggressively work through the destocking of PPE. What you saw in this quarter was exceptional cash flow, and we expect that exceptional cash flow to continue through the remainder of the year, which enables us to be nimble and deploy capital to both pay down debt as well as invest in opportunities for strong growth. So with that, I thank everyone for the time on the call today, and we look forward to talking to you at the end of the next quarter. Thank you.

This concludes today's conference call. You may now disconnect.