Good day, and thank you for standing by. Welcome to Owens & Minor's Third Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jackie Marcus, Investor Relations.

Thank you, operator. Hello, everyone, and welcome to Owens & Minor's Third Quarter 2023 Earnings Call. Our comments on the call will be focused on the financial results for the third quarter of 2023 as well as our outlook for 2023, both of which are included in today's press release. The press release, along with the supplemental slides are posted on the Investor Relations section of our website. Please note that during this call, we will make forward-looking statements. The matters addressed in these statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied 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 on Form 10-K and quarterly reports on Form 10-Q. In our discussion today, we will reference certain non-GAAP financial measures, and information about these measures and reconciliations to the most comparable GAAP financial measures, which are included in our press release. 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.

Thank you, Jackie. Good morning, everyone, and thank you for joining us today. Our third quarter represented another strong indication that we are executing at a high level. We generated high single-digit top line growth in our Patient Direct segment and low single-digit improvement in our Products and Healthcare Services segment. Our operational performance in the quarter was complemented by a significant reduction in our overall debt position combined with robust cash flow generation. I'm incredibly proud of what the team has done thus far with our Operating Model Realignment Program, and I am excited about what the future holds for our organization. Let's now look at the business in a little more detail, starting with our Patient Direct segment. The performance of our Patient Direct segment in the third quarter continued to outperform the market, demonstrating the enduring strength of our go-to-market strategies and our service offerings. This is evidenced in the strength of our new patient starts across most categories. The Patient Direct segment continues to identify opportunities for growth, including investments in technology, expanding our commercial capabilities and footprints and identifying adjacent conditions and associated products. There is significant opportunity in this space as we see more patients and providers preferring at-home treatment options for chronic conditions, and we are well positioned to capture this opportunity. Now let's turn to our Products & Healthcare Services segment. For the second consecutive quarter, our Medical Distribution division saw year-over-year revenue growth of more than 5%, driven by same-store sales combined with net new wins, and when excluding the impact of PPE, sales grew at 8%. We continue to face the saturation of PPE in various markets, including but not limited to healthcare, government, industrial and international markets, which led to a 14% top line decline in our Global Products division when compared to prior year. Finally, much of our Operating Model Realignment Program is focused on improving this segment through operational excellence and driving efficiencies in our manufacturing footprint and supply chain network. In the nine months since we launched our Operating Model Realignment Program, our team has done a tremendous job of positioning us to achieve or even exceed our target of $30 million of benefit in 2023. We are doing exactly what we said we would do when we launched this program: improve our operations, generate savings, reduce working capital and allow for future investments. It should also be noted that the Operating Model Realignment Program not only continued to deliver economic benefits, but it has enabled us to reassess how we do business every day. As a result, we are well on our way to achieving the objectives established when we launched this program in the first quarter of 2023. We have also made great progress with respect to our balance sheet. We paid down $188 million in total debt during the quarter, with $0.5 billion in net debt reduction in the first nine months of this year. With our healthy operating cash flow of $157 million in the quarter and over $600 million of operating cash flow in the first nine months of this year, we remain focused on paying down debt we took on to acquire Apria as well as making further investments in our people, products and processes. These efforts are part and parcel with making Owens & Minor stronger. Before I turn the call over to Alex, I'd like to take a moment to address a recent update from the FDA regarding its April 2023 communication about certain O&M Halyard facial protection products. We worked diligently over the last seven months with the FDA to provide extensive testing and performance data demonstrating that our products provide the level of filtration and fluid resistance for which they are rated. I am pleased to report that on September 29, the FDA updated its recommendation to confirm that the Halyard Facial Protection products may be used in accordance with the product labeling for both particle filtration and fluid resistance. We are glad to bring this review to conclusion, which reaffirms the safety and effectiveness of our Halyard Facial Protection products. In conclusion, we continue to deliver on our 2023 commitments, including the strengthening of our balance sheet, the paying down of debt, the market-leading performance of our Patient Direct segment and the improvement of our medical distribution division. With that, let me turn it over to Alex. Alex?

Thank you, Ed. Good morning, everyone. Let's dive into our third quarter performance. On the top line, we posted total revenue of $2.6 billion, up nearly 4% from the prior year. This uptick in revenue was driven by a 9% year-over-year improvement from our Patient Direct segment with strong revenue growth across many of our product categories, led by Sleep and Diabetes, our two largest categories. We also saw a 2% growth in our Products and Healthcare Services segment compared to the prior year due primarily to revenue growth in non-PPE product categories. We continue to see positive momentum in our Medical Distribution division, which helped to offset the decline in our Products division. Our third quarter gross margin was $538 million or 20.8% of revenue compared to $513 million or 20.6% of revenue in the third quarter of 2022. The changes in our gross margin can also be attributed to the strength of our Patient Direct segment and strong performance across most product categories. Turning to expenses. Distribution, selling and administrative expenses for the quarter were $453 million, making up 17.5% of revenue. The rise in DS&A expenses was mainly due to the added cost of supporting $94.3 million or 3.8% growth in net revenue when compared to the prior year. This included a $15.4 million increase in teammate benefit costs. However, these increased expenses were partially offset by productivity gains from the Operating Model Realignment Program and overall continuous improvement efforts. GAAP operating income for the quarter was $24 million, and adjusted operating income was $84 million. PHS experienced a decrease in operating income from shifts in product sales mix and reduced demand for PPE. Interest expense for the quarter was $38 million, which is a $2 million decrease from a year ago, driven by reduced debt, but partially offset by higher interest rates. GAAP net loss for the quarter was $6 million or a loss of $0.08 per common share. Adjusted net income for the quarter amounted to $34 million or $0.44 per share. Adjusted EPS benefited by $0.06 due to a LIFO credit as a result of a $101 million reduction in our PHS segment inventory in the third quarter. We had anticipated this benefit in Q4, but we were able to realize it a quarter early due to exceptional inventory management while maintaining market-leading service levels. Adjusted EBITDA in the third quarter was $135 million, with a margin of 5.2%. We continue to be well positioned to achieve $30 million of adjusted operating income benefit in 2023 from our Operating Model Realignment Program as well as exiting the year with a $100 million run rate. Moving to cash flow, balance sheet and capital structure. We continue to generate significant operating cash flow with $157 million this quarter, bringing the year-to-date total to $629 million, driven by strong working capital management and profitability. Our strong cash flow allowed us to reduce total debt by $188 million and net debt by $117 million during the third quarter. This brings our year-to-date net debt reduction to $0.5 billion. These actions brought our total debt to $2.1 billion and net debt to $1.9 billion and brought net book leverage to below 4x at the end of the quarter. Having delivered a solid quarter in Q3 in line with expectations and as we head into the fourth quarter, we narrowed our guidance for 2023 to reflect our confidence in Patient Direct and the Operating Model Realignment Program. Balanced against the lack of visibility and caution we have around PPE product sales for the remainder of the year, we are narrowing our full year guidance for revenue to be between $10.3 billion and $10.4 billion, adjusted EBITDA to be between $535 million and $555 million and adjusted EPS to be between $1.30 and $1.40. As we begin to look ahead to 2024, we're excited about the prospects for our Patient Direct segment, where we plan to invest to ensure its future growth and market leadership. We expect our PHS segment to continue on its path building on the benefits of our Operating Model Realignment Program to becoming a low-cost provider with a broader proprietary product portfolio while retaining our focus on the customer. With the combination of our growth outlook and planned investments, we expect 2024 adjusted EBITDA and adjusted EPS to grow in the low double digits. We will elaborate more on this at our upcoming Investor Day. With that, I'll now turn the call over to the operator for questions.

The operator provided instructions on how participants could ask questions. Your first question today comes from the line of Kevin Caliendo from UBS.

Congrats on the solid quarter. How much visibility do we have in the business right now when we talk about Patient Direct with respect to impact from GLP-1s, which is certainly a topic, and on PPE demand? Just thinking about going forward, do you feel that it's getting better, you have better visibility, the same, worsening? I'd love to hear, as you think about we're coming up to Analyst Day in a month and everybody is going to be focused on your long-range plan and your guidance there, how you feel about your own visibility into the business.

Thanks for the question. Here's how we think about the GLP-1s: for us, it's really business as usual. If you look at what we've seen even in this quarter, we saw double-digit growth in both Sleep and Diabetes, and those categories continue to be extremely strong for us. We have nearly 1 million new patients diagnosed with diabetes in America every single year. In addition to that, we still believe there are about 20 million Americans who haven't even been diagnosed yet with OSA who have it. So you just think about the opportunity size out there. Second, as we continue to manage and drive this business, we recognize that GLP-1s will help people, but they are not a cure for everything. We also think the market has somewhat overreacted to the GLP-1s. Looking at where we see it going, we continue to see tremendous opportunity in two of our major categories, Diabetes and Sleep, due to the number of people that haven't been diagnosed and the number of people that are being diagnosed with those issues every year. We continue to see growth in that segment. So we view it a little differently than maybe others do.

Okay. That's helpful. And if I can ask a quick follow-up. We had some news this week that CMS is going to reinstitute a plan which would cut DME reimbursement starting 1/1/24 and could impact the Patient Direct business. Have you analyzed that? Is it meaningful for you? Any comments there would be helpful.

Yes. This is Alex Bruni. We follow this closely, and I think what we're seeing is consistent with our assumptions and what we've factored in for next year broadly.

That's really it. It's already been factored into our assumptions. You also have to look at our payor mix, which is much more heavily weighted to the private side than the public side, and that mitigates some of the risk for us. We still think there's tremendous opportunity in that segment. We're working with our external suppliers as well as expanding our portfolio. So we have baked it into our assumptions for 2024.

The operator provided instructions for the next question. Your next question comes from the line of John Stansel from JPMorgan.

This is John on for Lisa. Just want to walk through the Global Products business. Maybe a little bit of color: I think you said down about 14% in the quarter. Are there pockets of relative strength or weakness that you could speak to?

If you think about the pockets of strength within Global Products, it's really all of the non-PPE items. For example, our surgical infection prevention products, excluding PPE, continue to see strength. Our MediChoice brand products continue to see strength as well. So it's really isolated to the traditional PPE. Even within PPE, there's a mix between face protection, gloves, gowns and other aspects. The way to look at it is that the weakness is more narrowly isolated in PPE within our Global Products division. The rest of our surgical and infection prevention products are doing well, our MediChoice and our broader product population is doing well. Getting through the FDA notice has helped us tremendously because now, working directly with the FDA, it has reopened the opportunity for us to grow and sell that portion of our facial protection. So, in short, it's really isolated and narrowed to PPE within our Global Products division.

Great. And then just a quick one on gross margins. It looks like you'll see another step up sequentially into the fourth quarter, which I imagine lines up with seasonality. But is there anything to call out as we start to think about how gross margins will play out in 2024?

Yes. The update to the guidance to 20.5% is consistent with where we thought things would be at the beginning of the year. In Q1, we did take it down a bit in Q2. The gross margin is driven primarily by mix, and it is factored into where we think we're going for next year. We'll have more to say on that in December at Investor Day.

The operator provided instructions for the next question. Your next question comes from the line of Daniel Grosslight from Citi.

You had a nice improvement in product in terms of the EBIT margin sequentially — I think it was around 90 basis points — which was ahead of our expectations. I'm curious if that was in line with your expectations or was it ahead? Maybe dig into what drove that improvement. And then looking forward, 4Q implies a pretty big increase in sequential margins, largely due to seasonality. Can you break out that margin improvement for 4Q between Products & Healthcare Services and Patient Direct?

Absolutely — it was what we assumed it would be. If you think about how we talked about the phasing of the year early on, profits were expected to continue to rise during the year, with larger step changes from Q1 to Q2, Q2 to Q3 and Q3 to Q4. That's exactly how we planned it out. What's driving the Products & Healthcare Services segment improvement? A couple of factors. First, the growth we're seeing in our Medical Distribution business — that mid-single-digit growth with share gains and new wins. Second, the Operating Model Realignment, which wasn't just a tweak; it was a transformational change in how we do business. That has helped us take cost out of the business and add productivity. Continuous improvement efforts have further helped implementation. We knew these programs would take some time to show benefits, and now we're starting to see them deliver on the timing and value we anticipated. Those are key drivers of the profit improvement.

Got it. You mentioned share gains as a driver of your core distribution growth more recently. Where are those wins coming from? Are they from other large national distributors or smaller, more fragmented distributors? Are they in specific products? Can you double click into where the share gains specifically are coming from this year?

It's primarily a mix of some smaller competitors and larger competitors. It's a mix of pure new wins where we have won business from competitors and also expansion at current customers where they may have been doing self-distribution and have moved to us as their distributor partner. In those cases, we've implemented a model that can drive efficiency and cost savings for them. Another thing to touch on is inventory and working capital reduction driven by continuous improvement and the operating model. That reduction has driven significant operating cash flow and enabled us to pay down a significant amount of debt — close to $0.5 billion year-to-date. These actions are part of the Operating Model Realignment and strengthen our PHS segment, translating into improvements across the P&L.

The operator provided instructions for the next question. Your next question comes from the line of Eric Coldwell from Baird.

Thank you for the comments, especially the preliminary outlook on calendar 2024. Trying to do some math on what low double digits means — if I think of that as somewhere in the 10% to 12% range, maybe a little over 12% — it looks like earnings per share would come in well below the Street while EBITDA comes in line or maybe even above. Is there something going on below the line that would pull EPS down more while EBITDA is actually looking okay?

No, there's nothing extraordinary happening there. This is consistent with how we see the business evolving. There's nothing surprising to call out at this point.

Okay. And then with Global Products, the minus 14% due to PPE, you mentioned everything else is strong. It would help to have more detail on mix within the segment: how much is PPE, where was that? If you're down 14% and PPE is only part of the segment, that implies PPE is down substantially, which is surprising given some commentary from other distributors and manufacturers. Hoping for more help with the mix within that segment.

If you think about the mix since last year, Q1, Q2 and Q3 were really strong last year. In Q3 of last year, a lot of our customers were ramping up for the triple-demic at the time and taking on a significant amount of PPE. During the peaks of COVID, PPE was a material portion of that segment. The drop we've seen in demand for PPE has flattened out; that curve has flattened. As we move forward and compare year-over-year, we would expect that decrease to somewhat flatten out going forward.

On Patient Direct, you highlighted areas of strength and said there were strong new starts in most categories. Which categories did not see strong starts or where there was some pressure?

The area that continues to be pressured is home respiratory — home oxygen and NIV. We have some recall issues, and during COVID that was a significantly strong business, both NIV and home oxygen. That's the one area where we've seen pressure, and that's been relatively consistent throughout the year. Other than that, the bulk of categories are doing well. We called out Sleep and Diabetes because they're our two largest categories and both grew at double digits.

Last one from me: you foreshadowed heavier investments. When you say investments, are you talking about CapEx, M&A, operating expenses, building teams, adding sales? Give a sense of what you mean by investments looking into 2024 and beyond.

We'll go into more detail at Investor Day, but it's primarily around operating investments: commercial, category management, sourcing — operating-related investments that will have payback over time.

There are no further questions at this time. Mr. Ed Pesicka, I turn the call back over to you for final closing remarks.

Thank you, operator. First of all, I'd like to thank everyone for joining us this morning. As an organization and personally, we are extremely excited about the work that we've done so far in 2023. I also want to remind you about our upcoming Investor Day. We hope you'll either join us in person in Boston or virtually on Wednesday, December 6 at 8:30 a.m. Eastern Standard Time. We'll be taking a deep dive into our recent performance, our strategy, our opportunities and our vision for the future of Owens & Minor. With that, hopefully we'll see you December 6, and thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.