Good morning ladies and gentlemen and welcome to Owens & Minor Third Quarter 2012 Earnings Conference Call. My name is Huie, and I will be your operator today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference call. (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, Mr. Craig Smith, President and Chief Executive Officer of Owens & Minor. Please proceed, sir.

Thank you, Huie, and good morning, everyone, and welcome to the Owens & Minor third quarter 2012 conference call. We do realize a lot of you are currently coping with Hurricane Sandy, so we appreciate your participation on the call today. In events of a storm as we always do, we made every effort to ensure that our customers were care of and that our hospitals receive their emergency orders ahead of a storm. We believe that our customers and our teammates are in good shape to weather this hurricane and we hope that you are taking every precaution as well. Now, we'll review our results and take your questions in a moment, but first let me introduce my colleagues on the call today. Jim Bierman, our Chief Operating Officer, Drew Edwards, our Interim Chief Financial Officer, Grace den Hartog, our General Counsel and Brian Shotto, Vice President of Specialty Services, who is available to answer your questions. Now before we begin, Trudi Allcott, from our Investor Relations team will read a Safe Harbor statement. Trudi?

Thank you, Craig. Our comments today will be focused on financial results for the third quarter of 2012, which are included in our press release. In our discussion today, we will reference certain non-GAAP financial measures. Information about these measures and reconciliation to GAAP financial measures included in our press release and in the supplemental slides, which are posted on our website, where we will also archive the webcast of today's call. In the course of our discussion today, we may make forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please see our press release and our SEC filings for a full discussion of these risk factors. Finally upcoming investor events are provided in our press release, but as a reminder we will have or Annual Investor Day in New York, on Thursday November 29th. You can find the registration link on our website, and we do hope you will join us. Thank you. Craig?

Thank you, Trudi, and I would like to call Andrew Edwards, our Interim Chief Financial Officer to brief us on the numbers and then Jim will provide us an operational overview. Let's start with Drew.

Thank you, Craig, and good morning, everyone. With the acquisition of Movianto, our third quarter financial results require more explanation than in past quarters. We will now report consolidated results along with two reporting segments. International and domestic. Our new international business segment is comprised of Movianto, while our domestic segment is comprised of existing operations. I'll start with consolidated results and then move to a discussion of each segment. In addition, my discussion of adjusted consolidated results will exclude the after-tax acquisition related cost of $0.10 per share for the third quarter and $0.11 per share year to-date. By definition, our segment operating earnings or losses exclude these acquisition related costs. Adjusted EPS declined to $0.49 in the third quarter of 2012 from $0.53 in the third quarter of last year due to a 7.3% or $4.3 million decrease in consolidated adjusted operating earnings. This decrease resulted primarily from lower domestic gross margin of $8.2 million and an operating loss of $626,000, for the international segment partially offset by lower domestic segment SG&A of $6.6 million. In addition, for comparison sake, the third quarter 2011 included income of $2.2 million related to the settlement of a lawsuit. Moving onto results for the international segment, which includes only one month for Movianto since it was acquired on August 31st. The Movianto operating loss of $626,000 was comprised of revenue of $49.7 million, gross margin of $19.6 million, SG&A expenses of approximately $19 million and depreciation and amortization of $1.3 million. September is traditionally a high volume month in preparation for the flu season. Seasonality impacts both, revenue mix and margins. Accordingly September results cannot be simply extrapolated to obtain annual amounts. For example, we explained last quarter that annual revenues for Movianto in 2011 were approximately €300 million. I would…

Thank you, Drew, and good morning everyone. With that, first look at our results I would like to provide further insight into our financial performance. Revenue growth in the domestic segments so far this year has been hampered by the combined effect of ongoing weakness in utilization and little to no product price inflation. As we told you last quarter, we targeted that for the second half of this year, revenue growth would be flat. That is exactly what we saw this quarter with our large IDN customers. The factors contributing to the quarter's results were weaker healthcare utilization trends, little to no product price inflation, a reduced level of purchasing activity from the federal government and ongoing rationalization of the company's supplier base. We would reiterate that we expect to see similar conditions with similar results in the fourth quarter of this year. As we think about revenue, we must also think about its impact on operating margin and its components. In analyzing the domestic gross margin results, we would note that we reported a sequential increase in gross margin percentage, which is certainly positive. Also, we would note that the decline in third quarter gross margin dollars when compared to a year ago, resulted largely from the decline in revenues rather than customer mix. As we've been discussing for some time, customer mix does play a role in our gross margin results. As we look at our core distribution business, the impact of large IDNs, as well as hospital consolidation trends have affected our gross margin percentages. One element impacting our acute care relationships are the GPOs. Let me provide an update on this year's renewals. Regarding the new Novation contract, we are pleased that we have effectively finished the sign up phase. To a large degree, the…

Thank you, Jim, and now that we provided a very in-depth look at our results and operations, I'd like to take a step back and give you a look at the bigger picture. This has been a very challenging year in healthcare with many healthcare companies facing greater softness in utilization than anticipated. Consequently, many companies, healthcare companies are focusing on improving efficiencies while looking for new opportunities just as we are. Even in a challenging environment, we are pleased that our teams have turned in a steady performance and made solid headways on many fronts. Under Jim's leadership, our operation's teams have made significant progress in adapting to changes in our market. The realignments we undertook nearly a year ago have helped lower our expenses in 2012. Our customers increasingly seek our help with emerging supply chain challenges and of course we are excited about the opportunities presented by the Movianto acquisition to expand our global reach in our third-party logistics services. Now even with these pressures in today's economy and in the healthcare industry, we are providing supply chain solutions that can deliver a tangible difference for our hospital and our supplier customers. One of the ways we serve suppliers is through our third-party logistics offering and during the quarter we completed the Movianto transaction, our first overseas acquisition. Movianto is one of only two pan-European healthcare 3PLs, and it gives us an experienced team and well-run logistics facilities throughout Europe. After we close the transaction, our teams quickly began to transition Movianto from the parent company to Owens & Minor. The transitioned team is focused on ramping up services previously provided by the parent company such as certain corporate support functions, marketing efforts and information technology systems. As we said last quarter, this is a strategic platform…

Yes, sir. (Operator Instructions). All right, it looks like our first question in the phone queue comes from the line of Joel Ray with Davenport. Please go ahead. Your line is open.

Folks, could you possibly elaborate a little bit on the revenues that were generated in the quarter. They seem to be fair a bit light and you'd mentioned not only volume but pricing. I was wondering if you could give us a little bit more detail on that. How much was do you think was related to each component, where was this coming from and so on and if anything has changed on the outlook on that effort?

I'd be happy to. This is Jim Bierman. So, as we commented there were several factors that played this quarter, as we looked at revenue for the third quarter 2012 compared to the revenue for the third quarter of 2011. As Drew mentioned in his remarks, one of the factors in play was that there was one less sales day between the two periods. That being said, there were other factors that came into play. One was the fact that we have continued to see and we mentioned this during last quarter's call, we continued to see softness in healthcare utilization in the United State. When you take the softness and utilization and you couple it with the lack of really any product price inflation, we are seeing results that are flatter than we were thinking a year ago when we talk in terms of our outlook for 2012. Other factors in play were that last year in the third and also the fourth quarter, the Department of Defense, which is one of our top customers had significant activity, and so the comparable between the third quarter of this year, fourth quarter of this year and last year as it relates to that particular customer are high. Then the final point is as is normal and customary and you might expect, we are constantly looking and working with our suppliers and brining on suppliers that haven’t traditionally used distribution services or whose line up product may not have gone through distribution services and add them to the mix, but also quite candidly, looking at opportunities where economically, it doesn’t make sense for us to continue to handle product where we are not receiving fair financial consideration for the efforts we are putting forth. And again, in this quarter there was an impact with a decision that we made there that I mentioned. So, those factors combined explain the variance that we saw in the third quarter and as I said I think we'll see those factors in a similar fashion coming to play in fourth quarter of this year.

I presume that the calling of one or more suppliers is probably one of the key drivers to the improvement in gross margins?

It certainly would be a factor improving gross margin particularly in instances where that supplier was virtually receiving those service for free, so no question about that. Yes.

Okay. And, you would mention that you are in process with the premier renewal. Could you update us as far as what you think the timing is getting all of that pulled together?

Yes. I would think that by the time the year ends, or even really by the time we meet with the investor community at our Investor Day at the end of November that we have a pretty good outlook as to what the sign up impact may be as it relates to 2013.

Okay. And finally, with the addition of the 3PL capability in Europe, are we starting to see some cross-selling opportunity, bringing some of those products to the U.S. also in addition to the domestic organizations you are talking to, possibly shipping over there?

Let me hand it up to my colleague, Brian Shotto to answer that.

Sure. The short answer to that is yes. It was certainly one of the things that we put some immediate resources on to see if we can leverage work has been done both here in the U.S. and Europe, and look for a commonality amongst customer basis and we have had some successes coming right out of the gate. Nothing that we are ready to announce today, but certainly some successes and we anticipate that to continue going forward.

Very good. Thank you very much.

Thank you.

Thank you.

Thank you, Mr. Ray. Our next questioner in queue comes from the line of Evan Stover with Robert W. Baird. Please go ahead your line is open.

Hi. This Evan in for Eric. How you guys are doing today?

Good, Evan.

I just had a quick question on little point of clarification on the guidance. You had spoken to similar performance in the fourth quarter. I just wanted to clarify is that on an absolute basis sequentially or should we be thinking about similar year-over-year growth rates versus the prior year? Just want to clarify that.

Yes, and, not to parse technical terminology, but really the comment had to do with our outlook for fourth quarter operating results that would say that the results should be similar to what we reported this quarter. I think if one was to take my other comments relative to revenue in the context, there I think it is a more of a relative rather than absolute thought, and in large part because there is an additional sales day in the fourth quarter when compared to the third quarter of this year. Yes.

Okay. That's helpful. As we think about Movianto, we have one month now of the business incorporated into results. Obviously, understand the comment that we cannot take that business and run rate it given the September month was I guess a higher run rate month, but as we step back and think about €300 million at the time of acquisition, call it $400 million, does that estimate still hold, or are you seeing anything in the first month that gives you a little more confidence as it kind of contribute at a higher level?

Well, I'd like to answer that question, Evan, really from earnings perspective. Our guidance for the impact of Movianto for the year is probably in the neighborhood of $0.15 a share and that includes the acquisition related cost, so a negative impact of $0.15 per year. As you look forward to 2013, consistent with what we said in the second quarter, we expect that to be neutral on earnings and then it to be accretive thereafter beginning in 2014.

All right. That's helpful and my final one. I think there were some comments to the effect that the U.S. 3PL business last quarter was running at breakeven or just above. Can you verify that business to achieve breakeven this quarter and then any other color on the trajectory there is helpful.

Yes. This is Drew again. It has achieved a breakeven level.

All right. Thank you all. I'll step back in queue.

Thank you, sir. Our next question comes from the line of Robert Jones with Goldman Sachs. Please go ahead. One moment please. Your line is now open.

Hey, guys. Thanks for the questions. This is Stephan Stewart calling in for Bob. I just wanted to follow-up on the fee-for-service businesses. It's still breakeven or acute breakeven this quarter. How much did that contribute to the sequential improvement in gross margin?

This is Drew again Stephan, and the contribution was, it had a negative impact not sequential. I'm talking year-over-year of 14 basis points overall to gross margin.

Okay, and anything un-sequential, I'm assuming given the relative change in revenue sequentially versus the rest of your distribution business that there were some positive impacts?

Yes. I don't have that calculation with me Stephan on a sequential basis the impact.

Got it, and just a follow up on SG&A. A couple of quarter's of impressive cost control. How much benefit is there left out of the realignment you announced last fourth quarter you think, and is there further room to improve efficiency in fee-for-services businesses? I guess moving forward as the sort of 6.8% of revenue is a good run rate to think about for the year combined business axe I guess domestic axe Movianto?

Yes. It's a great question and probably deserves a more full form answer that we can provide at Investor Day.

Okay.

As we think about 2013, but let me answer it directly now with limited time. I think we are at near record levels of performance presently. So, the challenge we have going forward is not lost on us. That being said, we also acknowledge that we have seen gross margin compression that exist, particularly as a result of consolidation that's going on with our customers in the industry, so I think we are vigilantly looking for opportunities to continue to set the SG&A bar at record levels and we think that we have some strategies and some tactics that will accomplished that some of which we'll share when we get together in November, but we think it's a paramount and important that we continue to demonstrate our ability to lead in the area of SG&A.

Great. Thanks, and one last follow-up if I may. The $0.10, $0.15 dilution from Movianto for this year's guidance, I know we got $0.10 in acquisition related cost this quarter. Is there an estimate for acquisition related cost in next quarter?

Steven, our estimate is that the overall adverse impact of Movianto for the year is probably going to be closer to $0.15.

Okay.

We already have $0.10 associate with acquisition related that was in the third quarter, so the $0.15 would include the acquisition related for the whole year as well as the impact of operating results.

Got it. Thanks for the questions guys.

Thank you, sir. And at this time, there appears to be no additional questioners, and I would like to turn the program back over to Mr. Smith for his closing remarks.

All right. Thank you, Huie. I know we are all struggling with Hurricane Sandy here in either personal or professional mode in terms of taking care of our patients and taking care of the hospitals, and I know it's been very challenging in the Northeast, so I appreciate those of you who have phoned in. I think, we tried to put a lot of the information in our comments, so I would encourage you as you go to the website to review this to look at the comments. I think we went into more detail than we normally do, and we are looking forward to all seeing you at Investor Day at the end of November. Thank you.

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