Good morning ladies and gentlemen and welcome to Owens & Minor Fourth Quarter and Full Year 2012 Earnings Conference Call. My name is Kevin, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We'll be facilitating a question-and-answer session towards the end of today's conference. (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 begin, sir.

Thank you, Kevin, and good morning, everyone and welcome to the Owens & Minor Fourth Quarter 2012 Conference Call. This morning, we will review our results and take your questions but first let me introduce my colleagues on the call today: Jim Bierman, our Chief Operating Officer; Grace den Hartog, our General Counsel and Michael Lowry our Interim Chief Financial Officer. 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 fourth quarter and full year 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 reconciliations to GAAP financial measures are included in our press release and in the fourth quarter supplemental slide presentation, both of which are posted on our website. Our call today will also be archived on our website. 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 spelled out in our press release. Thank you. Craig?

Thank you, Trudi, and now I'd like to call on Jim Bierman, for financial and operational overview.

Thank you Craig and good morning everyone. In the interest of time, we will assume you’ve had a chance to read our press release where we provided a bit more detail this quarter including comments regarding both the domestic and international segments. Therefore, I will use the time we have this morning to provide further insights in a few areas of our results. Consolidated revenue growth was 5.9% for the quarter and 3.2% for the year with the increase resulting primarily from revenues associated with our acquisition of Movianto. Domestic revenue growth was flat for the quarter and increased 1.2% for the full year consistent with where we indicated it would be but during our third quarter and our November 2012 Investor Day. As we mentioned throughout the year, revenue growth reflected the impact of softer healthcare utilization, lower comparative product price inflation, lower levels of spending by the Federal Government and our ongoing supplier rationalization efforts. As for the international segment, Movianto contributed $127 million in revenue for the quarter and $177 million of revenue for the four months we have owned the business. Please keep in mind, there is some seasonality in the Movianto business. Turning now to gross margin results, consolidated gross margin for the year of $925 million increased $67 million primarily due to the positive impact of four months of Movianto operations. Please keep in mind that Movianto has both buy sell wholesaler contracts and fee-for-service third party logistics contracts. The fee-for-service business impacts gross margin on a dollar-per-dollar basis, since there is no associated product cost. The components of gross margin in 2012 included comparative decline in domestic distribution gross margin, which was more than offset by a positive contribution from our international fee-for-service offerings. If you will recall, we completed contract renewals with…

Thank you, Jim. And with that insight in to our financial results, I’ll take a few minutes to talk about ongoing market conditions. The achievements that I see we made in 2012 and our European operations. Now, looking back over the last few years and even in 2012, we recognized the healthcare market has been affected by obviously a slow economic recovery. AN ongoing and continuing debate over healthcare reform of rapid consolidation in the hospital market and the ongoing globalization of healthcare products supply chains and services. Throughout this period we were focused on maintaining operational efficiency while also investing for the future and 2012 was no exception. We can list a number of achievements including the Novation and Premier Contract renewals. Good control of domestic segments spending, solid asset management, meaningful realignments in our domestic network. The first phase of a three year IT investment plan, progress with our sourcing venture in China. And our investment in a promising 3PL platform that gives us a leadership edge in Europe. First turning to our domestic business, as Jim said, 2012 revenue results reflected little change in utilization or inflation trends that we saw throughout the year. The contract renewals for Novation and Premier are now behind us and the results are within our expectations. Renewal years can be very challenging. First, it can be tough to sell additional service to providers until the sign-up periods are completed. Also, the sign-up process can increase pressure on expenses as our teams must travel more to meet with customers all around the country. But I am pleased to report that our teams manage the sign-up process very, very well. One of the bright spots in 2012 was continuing strength in asset management. Domestic DSOs reached record lows in the fourth quarter and…

(Operator Instructions) Our first question comes from Robert Willoughby with Bank of America.

Craig, what's the management change in Movianto that you just mentioned? Was that anticipated ahead of the merger close? And then secondarily, do you offer any insights as to when the operating losses there at Movianto? When do you expect they turn to operating profits?

Well let me comment on two things. One, I had a chance to meet Marrie back in October when I was there and I will actually be back there in the first week of March and I'll be looking forward to working with him. So we have been talking with Marrie for a period of time. The second piece Bob is and I'll just make this very clear for all the questions. When you have a lot of capacity, I think your first option is to try to sell your way out of it and I think with bringing Marrie in, we are going to look at the total infrastructure of what we have in Movianto, the expenses that we have and I think it's going to take a combination of both. We also have obviously the TSA's or the Transition Services Agreement which is very high on my list, which is the services that we pay solely CO. if you remember we had to do this with (inaudible) back in 2006. And if I remember correctly we actually had a little blip of operating loss when we first took on (inaudible). So you really don't know what you have till you really start pulling things out. I am not trying to dodge your question, but obviously SG&A and infrastructure and operating expense is very high in our profile. Brian just got back, so I'll be sitting down with him today, but we're going to move as quickly as we can. And I think the other piece we need to remember is, like any sales and service organization, there's always an opportunity around contract compliance. So, we're taking a very hard look at the 600 contracts we have and making sure that all of the manufacturers are in compliance in terms of what we're doing for.

Is it realistic to say that you'd at least exit the year on a profitable run rate or just too early to tell given all those parts?

Well I think we're still committed to breakeven in 2013. So I think that's a good goal for us. I think it was a good goal OM HCL in 2012, and I have a lot of confidence in Brian and Murray that they're going to move as fast as they quickly can. They worked together off and on for 29 years, so these guys are a pretty good team in terms of looking at the 3PL business.

And just on the California tax issue, if you're able to get that $7 million benefit that you're after, any idea how that will flow through the P&L? Is that just a lower tax rate for a quarter or does that show up somewhere above the line?

I think right now the expectation is that it's an offset somewhere or it's reported somewhere within SG&A. Now maybe in the other income kind of category within SG&A, but the notion behind it was the establishment of a sales office in one of the given areas of California that had tax incentives associated with it. So we've increased the SG&A expenses in setting up this office. you would think logic would somehow dictate that the incentive piece or the tax incentive would be an offset to those increased expenses. Unfortunately, for a number of years, we've borne the brunt of the increased expense and we haven't enjoyed the promised incentive that we were, that California had presented to us.

And you have no sense of timing on that Jim? It's impossible to tell?

It's very difficult to tell, and my legal counsel keeps telling me to relax. It'll come when it comes, but it has been a major source of frustration for all of us.

Our next question comes from Glen Santangelo of Credit Suisse.

Can you guys give us a little bit of an update on the trends with your domestic 3PL business? What kind of trends you are seeing in terms of adding new business partners and how the benefit of owning Movianto is helping out the domestic business?

Well I think we touched down on that a little bit at Investor Day. I'm not going to get probably into it monthly call out score card on one business, but we have picked up four new customers, that was in late November, really around the combination U.S., Europe approach to the third party logistics. Two of the customers I know were in the United States OM HCL business and then two were Movianto and I might be actually missing one. I think it might be actually five. so three in Europe and two in the United States. We also said in the opening remarks and if you remember correctly at the end of 2011 we said we'd be break-even in the U.S. business which we currently are today. So, the piece of the 2012 was continuing to get that business stabilized, really starting to build a sales pipeline. We got some new sales people in there and so far I feel like everything that we felt we were going to do in that business and getting it set up and how that might help us in Europe has come to fruition so far.

As we are moving here early in 2013, your expectations around utilization for the year, do you guys have any sort of changes, improvements or issues relative to 2012 or is it kind of continuing as it's been?

Sure, we looked at the fourth quarter very closely and some of the megatrends that we've called out for a number of quarters now, continue the big-get-bigger in just a sound bite and so we continue to see that but when you call away that and look at the fundamentals, we're not seeing a dramatic change in utilization and so as we think about 2013, the outlook that we shared, the comments that we made at our investor day at the end of the November remain consistent.

Our next question comes from the Lisa Gill with JPMorgan.

Just going back quickly to Movianto, has something changed in the market since the acquisition? Can you talk about the business versus your expectations when you originally executed the transaction?

Let’s kind of look at two dynamics of this business. One, again, it’s a carve out, so a lot of times when you are dealing with a carve out, you don’t know what’s you have till you really have everything. I don’t think we were surprised but we did have some more transactions costs and then we did have the challenge around lower than expected operating results. I think we're really getting our arms around the business. We're getting our arms around the sales pipeline and what’s probably real and what’s probably more positive thinking. I think the second piece is anytime you’re dealing with capacity of 60% as I had said I think in one of the early remarks, we’re all sales people. You try to get sales pipeline going faster than normal. I think with bringing Marrie in, we have a realistic look at 32 facilities in Europe and the potential of filling those and then if we can’t, what do we do from an SG&A standpoint to improve. So, it really hasn’t changed. I think the other piece is, is really looking at all the contracts and making sure that we get paid appropriately through the 600 manufactures that we have. So, we have some work to do. We knew we were going to have some work. I think Marrie is going to do a good job for us, a lot of experience. So just remember at the end of December we’d only had that business for about three months. So, you got it through experience pick up as fast as you can. I think we’ve got our arms much better around that business now.

And then in terms of the guidance range for 2013, can you maybe talk about what the factors would get you to the high-end of the range? And what would drive to a low-end of the range. I am assuming obviously losses from Movianto would drive it down. But what could be upside here?

So, again this is Jim Bierman. I think unfortunately just to repeat your observation, the biggest driver we have to achieve upside or downside performance is how quickly Movianto can stabilize, reach breakeven and then reach some degree of expected profitability given the level of investment that we’ve made. So, I think everything else sort of pales by comparison but that being said, if you look at the domestic segment, I think a meaningful sustainable uptick in utilization would certainly drive much to the bottom line or to the top rating earnings for the domestic business. We feel very good about the operational model that we have in place and the improvements we’re making and we believe and we have general capacity for some additional throughput that in a classic sense should be a marginal contribution to the bottom line. I think those are two largest fibers. obviously the gross margin issue domestically is one that consistently needs to be worked on and so does SG&A. But that’s a continual aspect of the business and absent something very unusual happening; I don’t see a dramatic trend shifts in either of those two areas.

Our next question comes from Robert Jones, Goldman Sachs.

Just trying to get a better sense of what the gross profit assumption is for the domestic business for 2013. Even directionally I don’t know if you guys obviously willing to disclose what the assumption is specifically. But it would seem like we didn’t see much improvement on that line into year-end, so I was just wondering if you could maybe share a little bit on what the expectation is for gross profit margin expansion or what the expectation is overall for 2013?

Let me try to answer that directionally because I don’t think at this point and as we gave the outlook for 2013 at Investor Day, that we’re comfortable being more granular. But I think I can definitely address directionally the thinking. Now, just to level set at Investor Day, at the end of November and we shared our outlook for the year of 2013 for modeling purposes we were thinking in terms of gross margin of 11.75% to 12.25%. And obviously, that’s consolidated. So there is an international component that has a heavier fee for service than domestic fees and that disproportionally influences the gross margin lease when you compared to the past. In the fourth quarter, we came in at 11.65%. So just outside the range but again, the outlook was for the entire year and is definitely within a reasonable range. If you deconstruct that and look at the contribution of the international segment for let’s say for the year because that gives us four months, a little more data points. We recognize revenue of $176 million. The component of the change in gross margin related to fee-for-service represents about $74 million of that. So about $100 million of the $176 million came through as a buy-sell kind of an arrangement which as we've talked about traditionally has lower margins than what we would see here in the United States. So, if you adjust for that additional data I just shared and back out, you get to where we are domestically for gross margin. So, the directional guidance I would give is, for the fourth quarter, our gross margin domestically was very much in line with what we had seen for the entire year. And we viewed that as being positive given some of the changes that were towards the backend of the year, specifically GPO sign ups and so on. So, all in all, the gross margin domestically held within reasonable range of our expectations, at least as those expectations were formed during the course of the year.

And then just on the international side again, trying to understand Movianto more from the top line, obviously we don't have a ton of experience with this business and it does seem like it's a little bit more seasonal than what we're used to from you guys domestically. Is the $127 million that we saw in this quarter, I know it obviously is plus or minus quarter-to-quarter but is that a fair annual run rate to think of on a quarterly basis or is this still something that's going to evolve as we move through 2013?

I think it will evolve as we move through 2013. Our colleagues, our new team mates over in Europe continue to advise us, counsel us that the business can be seasonal and the fourth quarter is the higher run rate. So, we take that advice seriously and we think a lot more obviously data points as we get to the next quarter, but that's how we see it presently.

Our next question comes from Eric Coldwell with Robert W. Baird.

Jim, first up on the domestic fee-for-service business, in the first nine months of 2012, you gave us a sense of what the revenue trend was year-over-year and it’s true, if you could do the same for us for the fourth quarter or perhaps for the full year?

Sure, I can’t do full year, I don't happen to have the fourth quarter broken up, but Eric for the full year, domestic fee-for-service revenue was fundamentally flat, couple of hundred thousand shift between one year and the other, but basically think of it in terms of being flat, and the little bit of increase that we saw in third party logistics business was offset by a little bit of decrease that we saw in the consulting business. And I think we've talked consistently over the course of the year that the consulting business has run into some sales challenges this last year as the market has gotten more competitive with very large consulting firms stepping down into a space that we enjoyed with very little competition other than boutique consultants.

And I know you mentioned that domestic fee-for-service has achieved breakeven/profitability. I wasn't clear if that was indicative of the fourth quarter or for the yearend total. I know you've made I think a little over a million in the third quarter. Could you give us a sense on the fee-for-service operating profit in the fourth quarter?

Domestically?

Domestic, yes.

I'm not sure as I have that broken out on a quarter basis. Craig made the comment that we achieved breakeven status in the third party logistics business in 2012, I think that, that pretty much I think answers your question.

Okay, and then in the past you've also been kind enough to give us a deeper dive into the core U.S. distribution business, the drivers of revenue, breaking out of course the one extra selling day this quarter but net new business, wins-losses, existing clients and then maybe even volume in the price, you have to give, in the past given some fairly detailed analysis in terms of what the influences were to get to the top line in distribution. Could you do that again for us?

I think what I do is refer you to our filings on the Form 10-K with the Securities and Exchange Commission. We are working through because of the increased disclosure associated with the international and domestic segments, we're working through that actual disclosure and that filling will be done shortly. And I think I can answer your question directionally. we certainly saw modest growth in what one might characterize as same store sales or existing customers and there was for the year, again fundamentally neutral impact of the net gain and losses of customers, but I think the actual quantitative amounts, I would direct you to the 10-K filing when that gets done.

And then last question, this is more of a clarification. I know you have mentioned with International Movianto, you made a comment about the fourth quarter having some seasonality I assume you mean seasonality to the upside a strong quarter so that $127 million revenue performance, are you signaling that we should be looking for a something a little below that, as we kickoff the first quarter?

Yes, I think that sort of the guidance that we have been given from our folks in Europe as to think along in those terms, yes.

(Operator Instructions). Our next question comes from the David Larsen with Leerink Swann.

As far as revenue guidance goes for the domestic segment for 2013, are you expecting fairly flat revenue and the increase overall is really Movianto?

Let me again level set everyone. The guidance that we have given for revenue growth on a consolidated basis is between 2% and 4%. We have the benefit of Movianto being reported within our results for four months out of 2012. So, by virtue of the fact that we have eight additional months where there has been no Movianto, we will get a pickup. And as you think about that and run the math, you will fall between 2% and 4%. The domestic component is a relatively modest growth when you look at it from that perspective.

And then do you have any initial thoughts on domestic growths for 2014. I mean if we have 35 million people gaining access to health insurance, would you expect volumes to improve in 2014. Without getting too specific, I know, can you just sort of give us some general comments there on your thoughts? Thanks.

Sure. We’ve stop sort of giving longer range outlooks than just the next 12 months. But that being said, I think we go back to the November Investor Day and some of our comments at other investor conferences; we do think that the bolus of new patients into the system that’s being talked about would be a net benefit for ourselves and for utilization. So, it’s debatable right now what that impact maybe. We’ve all seen and heard numbers in the $30 million range to $16 million of additional patients in the system and it’s not clear how they will access the system. But all in all, we think if these types of numbers materialize, that the knock on benefit to us will be positive, absolutely.

And then can you give us sense as to how much the transition services ran as far as cost go, trying to get a size, if there was a $4 million or $5 million operating loss in international segment. Any idea for how much the transition services fees cost?

I don’t have that broken out separately and we’ll consider that for our 10-K filing but I don’t have it here at my fingertips. Sorry.

As far as like Novation, Premier and net assets go, what percentage of total revenues to those three items contribute? Thanks.

I think you have to through HPG and it’s about 80%, 85%. And I don’t think it’s dramatically different than the disclosure we had in the last 10-K is to what the amount is. But it’s upwards of 80%.

So, is net assets the one who’s still outstanding and…?

So in the 2013 contracts that are out for renewal will be the broad line/net assets and then HPG.

Okay. And then could convert any idea large ideas onto your platform this quarter, I think you had for your last quarter?

Try to think as nothing that was – I don’t think we actually break it out by quarter but let me naive, I think we had a couple of that were probably in the process of smaller ones but they’re pretty big that were brining on. I do base on your question, I was hoping somebody to ask me about consolidation today, so I was going to wax philosophically on that, I do think we’re going to have some opportunities. I was at a noncustomer yesterday spent all day there and I do believe that the investments that we’re making in our strategy are going to be the light strategy for these larger systems, around consolidation of physicians that are owned and managed transportation, logistics, warehousing, standardization, and all of the things that I talked about yesterday this system was very interested and I do think we’re still going to continue to have opportunities with these larger system with the investments we’ve made around technology, around consulting resources, our warehousing, our differed warehousing capabilities for these larger customers. I do think we’re going to continue to have opportunities with these larger systems as we go forward. So we had a couple of them but I wouldn’t say that they’re in the magnitude of probably what you’re thinking about that we brought on maybe 18 months ago, but there’re fairly significant customers and nice once for us.

We are not showing any further questions at this time. I would like to turn the conference back to Mr. Smith for closing remarks.

All right Kevin, thank you, and thank you for everybody listening in today and we’ve had a very busy 2012, we’ve really got a lot of accomplished. We’ve got a lot that we’re looking forward to accomplish in 2013 and we have several conferences coming up over the next several months that Jim and I would love to have conversation with you. So thank you for your interest and thank you for your participation today and we’ll see you soon.

Ladies and gentleman, this concludes today’s conference call. You may now disconnect and have a wonderful day.