OMI
#Good morning, ladies and gentlemen.
Welcome to the Owens & Minor first-quarter 2016 financial results conference call.
My name is Candace, and I will be your operator for today.
(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today's call, Ms.
<UNK> <UNK>.
Please go ahead.
Thank you, operator.
Good morning everyone, and welcome to the Owens & Minor first-quarter 2016 earnings call.
I'm <UNK> <UNK>, and on behalf of the team I'd like to read a Safe Harbor statement before we begin.
Our comments today will be focused on financial results for the first quarter 2016, which are included in our press release.
In our discussion today we will reference certain non-GAAP financial measures.
Information about these measures and reconciliations to GAAP financial measures are included in our press release and in the supplemental information posted on our website.
In the course of our discussion today we may make forward-looking statements.
These statements are subject to risks and uncertainty that could cause actual results to differ materially from those projected.
Please see the our press release and our SEC filings for a full discussion of these risk factors.
Participating on our call this morning are <UNK> <UNK>, our President and CEO; <UNK> <UNK>, EVP and Chief Financial Officer, and President of International; and Nick Pace, our General Counsel.
Now I'd like to turn the call over to <UNK> <UNK>, who will start things off this morning.
<UNK>.
Thanks, <UNK>.
First let me comment on the customer loss, and then I'll get to your specific question.
First, obviously we were disappointed in this decision.
This was a 15-year relationship with a major customer.
And their RFP process spanned a pretty long time, probably 12 to 18 months.
At the same time, we had a lot of change going on with me coming onto the business and building a new team.
It was a long process.
Quite frankly, I'm not sure we got to put our best foot forward in this process.
But we respect their decision and we're going to move on.
Let me address your specific question.
I think our value proposition is focused on attacking the enormous complexity in the healthcare value system through our services, through technology and through the processes that we bring to bear.
So we believe in that pitch.
We see it resonating with our customers.
And we actually renewed new contracts and won new business with that value proposition.
So I think to answer your question specifically, we think this is more of a one-customer issue.
And we think we are well positioned to attack the same complexity that was talked about.
Let me put it in perspective first.
Most of our customer contracts are 3- to 5-year contracts.
So any point in time we have 20% to 30% of our contracts up for renewal.
There is nothing new about that.
I would say we don't see anything abnormal.
The healthcare environment remains a competitive environment, especially for large customers.
Everybody wants to go after large customers.
It is kind of business as usual.
But it is a competitive environment.
<UNK>, hi.
This is <UNK>.
We don't believe this is going to have any direct impact on any of our GPOs.
Most of those volume-related issues are customer-specific in terms of how they get their pricing and the various discounts.
As I'm sure many of you know, we have our own GPO renewal cycle potentially kicking off towards the end of this year.
Certainly with MedAssets being acquired, that may be postponed, depending where Vizient ends up and how they want to look at their aggregated relationships.
We're pretty comfortable that this isn't going to impact our relationships with the GPOs going forward.
Sure.
I think one of the reasons that we moved to the new segment orientation is what we characterized in our prepared remarks, is this is how we are operating our business going forward.
Certainly at Investor Day when we characterized our initiatives, we talked about the Domestic business and the initiatives there.
And we looked at sort of the International segment and the CPS segment as opportunities to grow the business.
We don't provide detail at a gross profit margin level, but certainly from an operating margin level we would expect that business to be a contributor to our growth.
Obviously when we acquired these assets it was a higher margin business, and certainly accretive to our overall platform.
And as we showed in this quarter the growth of the CPS business year over year, and putting this business together with sort of Medical Action, ArcRoyal and our sourcing business, we think this is an opportunity to contribute to improving profitability and contributing to growth over the next couple of years.
Hi, <UNK>.
This is <UNK> again.
I wouldn't characterize the nature of the CPS business and our kitting, whether it is over in Europe or here in the United States, as really seasonal.
I think it is very contract-oriented.
The contracts are similar to our distribution contracts.
They usually run anywhere from 2 to 5 years.
So, I think it is fairly consistent.
The aspect of what we do in Europe and some of the business that we do on a fee-for-service basis directly for the manufacturer maybe a little bit more seasonal than what we'd characterize as our provider-based business.
But I think there's a certain amount of stability to the revenue streams moving forward here On the portion of the business that is related to sourcing, the sourcing aspect maybe slightly seasonal in terms of managing, because we source not only for the CPS business, but we are sourcing for our private-label business as well and potentially some third-party customers.
So there may be a little bit of seasonality based on the product or the end market sales related to that.
But overall, I think you will see this being a fairly consistent business throughout the year.
One of the things I would say, <UNK>, is we are excited about this business because it is directly linked to our overall value proposition of reducing complexity.
So one of the things we're excited about is bundling the CPS capabilities with other services we offer for large IDNs to attack complexity.
And in some ways we think we are uniquely positioned to help bundle across manufactured products and to address points of complexity in the hospital.
We haven't broken out a specific penetration rate or growth rate yet, but we anticipate this will be a contributor to growth and it will be accretive to our margins.
<UNK>, that is a great question.
I appreciate it, because it gives us an opportunity to give, again, a little bit of clarity around it.
The first quarter historically is when we typically experience manufacturer price increases.
And the performance and the contribution in this area this year was again slightly ahead of what we experienced last year.
But in the time I've been here, this has been in a reasonable range, and it is typically a first-quarter event.
What we were alluding to last year is there was a number of events where people had out-of-cycle price increases, and we experienced almost on a quarterly basis, some benefit from manufacturer price increases.
We don't see that as being as robust this year.
And again, I think the first-quarter is what I'd characterize as a fairly normal event, slightly ahead of last year.
It is the remaining of ---+ the remainder of the year and the results we have last year that we were trying to provide some clarity around, that was probably not sustainable.
<UNK>, again I want to be careful not to try to speak for the customer here.
We're in the process, and we're still getting feedback from them.
But overall, again, we feel that our value proposition is very strong.
We got very good feedback from them.
I think the one area that we would say our competitors have something that we don't is in the non-acute space.
That is a known gap and we are working hard to address that.
So if there was one factor that I would say was a gap, it would be that.
And we are working hard to address that.
And again, we had a 15-year relationship with this customer.
And it was a long, lengthy process.
I will leave it at that.
I don't want to speak for them.
And we're still in the process of getting that feedback.
But specifically the one area, post-acute is a known gap for us and we're working to address it.
<UNK>, I think whenever you lose a large customer you sort of have to sit back and look at how it impacts the network and your fixed cost overhead.
I think what we wanted to impart on our investors was, on an annualized basis when you just separate the revenue and gross margin from the business, there are some variable costs that we know that we can take out pretty directly, and what is the net result that we are really going to have to address.
About that's really what the $0.20 to $0.25 represents if you just pulled out of the business.
I think what we've tried to communicate is with the transformational agenda and the performance in the first quarter, we are well on our way to improving the overall productivity of the Company.
I think we have demonstrated our ability to manage and transition large customers with what we did last year in the fourth quarter and outperforming our fourth-quarter expectations as evidence that we can manage these types of transitions fairly aggressively in a fairly short amount of time.
But again, we wanted to give folks the deep impact and some of the headwinds that we would have and we're going to have to address going forward.
We feel pretty confident, and we have the whole organization mobilized to address the mitigation actions that we're going to take, and we will keep you updated over the course of the next couple of quarters of how we are doing that.
We're still looking at the timing of the transitions.
And again, as we indicated, most of this impact will probably fall in 2017.
But I'm sure we're going to be preparing for this transition in 2016.
And we will probably have some costs associated with that.
But again right now I thought it was ---+ our team felt strongly that it was most important to give you what the ---+ some compartmentalized numbers when you just look at taking out the revenue and the contribution margin, and what is left.
So the $0.20 to $0.25 is that.
And again, that is more ---+ we feel most of that will fall in 2017.
But we feel pretty confident that through the activities that we have done and demonstrated the capability around, plus the activity with <UNK> coming onboard, about that significantly improving productivity, that we'll be able to manage through this.
I would like to take this, your question, and give you a little bit more color on some forward statements that we've provided.
At Investor Day we talked about 8% to 10% earnings per share growth and having that come into play in 2017 and beyond.
While this may a bit of a headwind associated with that, we're still deeply committed to driving sustained earnings per share growth and getting to that 8% to 10% growth over the course of the next couple of years.
I think we will continue to be very well-positioned to manage this transition, as <UNK> indicated.
We're disappointed in the loss in any long-term relationship that we have had.
But I think over the 134 years we've demonstrated that we can manage through these things and come out stronger, and really be positioned to continue to attract and build new business.
And probably the most disappointing aspect is we had a really solid first quarter.
We retained a tremendous amount of new business.
We grew our CPS business and International.
And while this is a bit of a headwind, we're operating on all cylinders going ahead.
Thanks, <UNK>.
Appreciate that.
<UNK>, I think it is more of the later.
And having come out of that industry, I think what we are trying to do is just say, look, these are not something you can forecast with any great regularity.
I think the device and medical technology industry is taking cues from the pharma business, and on a product or product category considering out-of-cycle price increases with much more regularity.
But as you know, simply just taking price increases doesn't automatically give us the benefit of a price increase.
It is [a little] more complicated for us and it depends on what our inventory levels are and a variety of other things.
So I think out of caution what we're telling people is, look, this is probably changing in the industry.
But we had a fairly significant amount of this in 2015, and we don't think that amount will repeat itself in 2016.
But we have told people that we think this is a trend that is more likely to continue.
The amount of benefit we receive is just something that we can't predict.
Sure.
I think there is a couple of very specific reasons for that.
And it is really, I think, going to help as you begin to see the segment reporting.
International revenue was down.
That has a direct impact to gross profit, given that is more a fee-for-service business.
And the CPS business was down.
And we've had a slight degradation.
And as everybody knows, provider margins continue to be under some marginal pressure.
So those are the two or three things that are continuing to impact it.
But the biggest year-over-year impact was just the decline in the International business and our CPS business.
What I would characterize is at Investor Day we gave guidance to 12% to 12.5%.
And we're still pretty comfortable with that range.
And that implied that we had a lot of good cost management as well this year.
So I think while we're slightly on the lower end of our range, we're still comfortably in that range for the full year.
So I don't think this is that outside of what we were expecting.
Thanks <UNK>.
It was not.
But obviously that is going to be something that I'm sure was in consideration for the future.
Our understanding is that is a future event but it was not part of this bid.
We have a strategy process underway right now.
And I'm not ruling out anything, but I would say pharma would be a bit of a stretch for us right now in the traditional sense.
What I do see, though, is as we think about how we attack complexity in large systems, there are very innovative services and solutions that we can provide in and around pharma, some of which are in place today, and I am excited about them.
But in the traditional sense of pharma, probably a long putt in our strategy.
<UNK> I will answer that.
Yes, as part of the recasting of our segments, when we acquired our more manufacturing-oriented resources in terms of Medical Action and ArcRoyal, depreciation and amortization becomes part of cost of goods sold.
So as we move forward it was certainly in those numbers in the right place last year, but the segment changes you're probably getting a little bit more visibility into that.
But that did not have an impact on gross profit margin.
It was appropriately categorized and classified in our income statement last year.
But we have recast the numbers a little bit, just to give people some greater visibility.
So when you look at D&A, you have to not just look at what is in the income statement and the consolidated numbers, you have got to go to the cash flow statement to see the entire aggregated depreciation and amortization.
We have been working on improving performance over in our International segment for a number of years, and I think this is a culmination of a lot of great work with the team over in Europe and what they have done.
As many of you know, we talked a lot last year about the transition of a number of customers, and particularly one large customer in the UK that was leaving, transition of a customer from a buy/sell to a more fee-for-service.
And as we put in price increases last year, really getting much more to a market-oriented pricing, some customers exiting as well, to really put this in the business to return to growth and as we look forward.
So year over year, I think the revenue is down, it's at $4.3 million or so when you look at sort of an apples-to-apples basis.
It is probably a reasonable place, but we would expect that business to start growing as we move forward.
And in terms of the operating income, the European business is probably a little bit more seasonal because of the nature of the vaccine business that we participate in and the number of countries over there.
So where we get a third- and fourth-quarter strength, typically our weakest quarter is the first quarter.
So you will see an improvement throughout the year as we move forward.
The direct answer is, I wouldn't look at the first quarter as a run rate because there are just a lot of things going on over there.
It wasn't that large, but it was a fairly significant customer.
They exited in July of last year.
So we've got one more quarter of having us to say the exit of the UK customer.
We have ---+ the first one is scheduled to do that, although with MedAssets and Novation getting together, there is some discussion about whether or not they will go just on the Novation schedule, which is later.
We're still anticipating that the MedAssets side will start this year.
But there's a possibility that will be delayed and just combined with the Novation and just do it is a Vizient contract.
Thank you.
Thank you, Candace.
Thank you for participating in today's call.
We are pleased with our results in the first quarter with solid revenue growth and adjusted earnings of $0.50 per share.
Thank you again for joining us today.
And we look forward to seeing you at our upcoming investor events.
