Good morning ladies and gentlemen and welcome to Owens & Minor’s Second Quarter 2015 Financial Results conference call. My name is Andrew and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference call. If at any time during the call you require assistance, please press star followed by zero, and an operator will happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to the team at Owens & Minor.

Good morning everyone and welcome to Owens & Minor’s second quarter 2015 earnings call. I’m Trudi Allcott, Director of Investor and Media Relations at Owens & Minor, 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 second quarter of 2015, 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 slide presentation. These items are posted on our website along with an archive 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. Participating on our call this morning are Cody Phipps, our new President and CEO; Randy Meier, our EVP and Chief Financial Officer, and Grace den Hartog, our General Counsel. Now I’d like to turn the call over to Randy Meier, who will start things off this morning. Randy?

Thank you, Trudi, and good morning everyone. Before I review the second quarter results, I’d like to take a moment to introduce Cody Phipps, our new President and CEO, who joined us on July 1. As the former president and CEO of Essendant, previously known as United Stationers, Cody was responsible for streamlining operations, inventory and transportation throughout the U.S. His strategic leadership helped position the company as a leading player in the distribution of business essentials. Before joining Essendant, Cody was a partner at McKinsey & Company in Chicago, where he was a leader in the firm’s global operations effectiveness practice. With experience in large scale distribution and logistics and a demonstrated talent for strategy development, we look forward to working with Cody to take the company to the next level. On behalf of everyone on the team, I am pleased to welcome Cody to Owens & Minor. Turning to the business at hand, I’d like to update you on our quarterly results, starting with revenues. Second quarter consolidated revenues improved 5% to $2.5 billion when compared to $2.3 billion last year. Excluding last year’s two acquisitions, second quarter revenues improved 2.9% over the prior year, fueled by stronger growth from our larger healthcare providers as well as new business. On a year-to-date basis, consolidated revenues grew 5.5% to $4.8 billion. Excluding the acquisitions, revenue grew 3.4% in the first half of the year. On an adjusted basis, quarterly consolidated operating earnings improved $8.9 million to $53.6 million or 2.21% of revenues. For the first six months, consolidated operating earnings were $104.5 million, an improvement of $10.2 million. Looking at segments, domestic revenues for the second quarter were $2.3 billion, up 5.9% over last year. Excluding the acquisition, revenues improved 4.2% for the quarter. Growth trends remain consistent with…

Good morning everyone, and thank you, Randy. Since I’m very new to the Owens & Minor team, I will focus today on my early impressions and near-term plans. Over the last four weeks, I’ve been meeting intensively with the field and home office leadership as I want to better appreciate the depth of our talent, our strategic approach to the market, and our tactics for serving the needs of the healthcare sector. In my first few weeks, I’ve learned more about our longstanding provider and manufacturer relationships and our deep institutional knowledge of the healthcare market, which I believe will continue to serve us well into the future. I’m extremely impressed with the Owens & Minor teammates and their dedication to the company, customers and culture. Now that I’ve had a chance to get better acquainted with our management team, I will be meeting with customers, industry leaders and our teammates in the field. To that end, I plan to be on the road throughout the U.S. and will visit with our teams in Europe who have made great strides in stabilizing and improving their results over last year. While my immersion into the company is ongoing, I’m already working with our board and our leadership team to enhance our execution and to refine our strategy for long-term success and profitable growth. I believe that leaders in transition have a finite amount of time to begin to drive lasting and positive change. I will work with my team to establish an aggressive plan to do just that. At this point, I expect to begin sharing that plan with you later this year at our annual investor day, if not sooner. With a platform that extends across the U.S. and Europe, and some 8,000 dedicated teammates across our network, we will continue to lead the reinvention of the healthcare supply chain as we connect the world of medical products to the point of care. Our task ahead is to focus on earnings consistency and on leveraging this great platform to drive profitable growth. Thank you, and with that we will take your questions. Andrew?

[Operator instructions] Our first question will come from Robert Jones from Goldman Sachs. Your line is open.

Thanks for the questions, and welcome, Cody. I know it’s early and I appreciate your comments in your prepared remarks, and I know you’ve only been there a little less than a month now, but I’m just curious - as you’ve gotten to know the company a little bit, is there any things that are obvious to you, any low-hanging fruit or early on your to-do list as you think about changes you might want to make relative to how things have been run historically?

Yes Robert, first of all let me say I look forward to working with you. It is early - I’m three, four weeks in, but one of the things I see, I’m a big believer in having a strong core from which to build for the future. To that end, I do see many opportunities to drive enhanced execution and improve the bottom line of the company, and that will certainly be a focus that I bring.

Got it, I appreciate that. I guess just one on the revenue on the domestic side, organic growth seems to be trending in the high 4% range for the past two quarters. Maybe Randy, could you share the volume versus pricing components of the growth you guys have seen thus far this year? And then I guess just along those same lines, any sense you can give us or that you’re seeing as far as revenue coming from new customers versus just better underlying utilization growth?

Hey Bob, how are you doing? I appreciate the questions. On the revenue side, we’ve seen predominantly good volume increases for most of the past year, driven by our larger customers. As you probably recall, for the better part of the last three or four quarters, we’ve been commenting on a couple of very large customers that we’ve been onboarding and continued strength in the utilization rates in our domestic business, all of which has manifested itself in some pretty reasonable top line growth for us. So mostly it’s been related to existing utilization rates up and the volumes associated with our existing customer base, and the continued growth amongst our larger customers as we’ve seen a couple of good wins out there.

Got it. Thanks so much, guys.

Thank you.

Thank you. Our next question comes from the line of Bob Willoughby from Bank of America Merrill Lynch. Your line is open.

Hey Cody, maybe along the lines of Robert’s question, can you help me better understand where it is you’ve come from? What are some of the anecdotal experiences that do prepare you for your role here at Owens & Minor, and maybe what do you perceive as your mandate? Are you here to grow organically? Are you here for strategic diversification efforts, and what metrics are you going to be compensated on?

Yes, first a little bit of my background, Bob. I spent 13 years at McKinsey & Company in their global operations effectiveness practice, and I think what that gave me was a pretty broad base of experiences going into different environments and turning around the operations of broad networks. Eventually, I was one of the founders of the service operations practice, which really focused on complex and distributed service environments, so I kind of cut my teeth there. I left McKinsey & Company after 13 years and went to United Stationers, now Essendant, and when I walked in there, I see some similarities there, which is we had a great opportunity there to improve our execution and drive operating performance and leverage in the network, and I see the opportunity to do that here. I think that provides a great platform then to go execute against focused growth initiatives, so I see kind of my mandate as somewhat of improve the operations, strengthen the core, and then focus our execution. We’ve already got some growth strategies in place, so enhance the execution there and then build for the future, and try to understand the macro trends impacting the industry and then shape our future for that. That’s certainly something I did at United Stationers as we repositioned that company, given all the changes in that industry, so that’s what I’m excited about. I’ll be compensated on the long-term performance of the company, total shareholder return, and operating performance and leverage broadly speaking.

So it doesn’t sound like a transformational deal in the next couple of years is kind of in the cards. This is more get that margin up, get the capital out, and drive growth across most of the existing franchise here?

Well, I don’t know if I’d say that. I’d say it’s too early for me to comment on a transformational agenda - I’m only three weeks in. But I can comment that we’re going to focus on the operations and the earnings consistency, and that will provide a stronger base from which to launch those transformation initiatives.

Okay, thank you.

Thank you.

Our next question comes from the line of Sean Dodge from Jefferies. Your line is open.

Morning, thanks. The international segment, you guys have been profitable there for three quarters now, but you had a couple of clients leave last year and you’re in the process of transitioning another one now. Can you talk a little bit about the stability of the client base that remains in Europe, and anything you can add on conversations you’re having or strength of the sales pipeline over there?

Sure Sean, and it’s a great question, especially given the transition we’ve been going through over in Europe. Over the past year, we’ve really taken a hard look at our existing customers and the profitability that they’re generating and the activities that we’ve engaged in, and really began to focus on a handful of areas, especially to focus on our pan-European customers and trying to leverage those across the entire platform. We have had a couple of customers in transition, one as we’ve talked about which is exiting, and we’re almost at the tail end of that. We see that as actually enhancing our ability to perform for our existing customer base, so we don’t see that as a negative impact on the future. Then one of our other customers, which we’ve highlighted the past couple of quarters, is a customer that is in a number of our facilities that is transitioning from a buy-sell customer to a fee-for-service customer, so again, impacting revenue but we’re benefiting from all the activity, the fee-based gross profit and operating income that they are generating. Actually, they are exactly the kind of customer that we are looking for - a growth oriented customer looking to use multiple facilities, that we can utilize across the European marketplace. Probably what I’ve been most encouraged by in our customers is as we’ve gone to them over the past six months or so with some annual price increases, that’s being accepted pretty widely, and our service levels have improved and we’re starting to get a lot of real positive customer feedback. So all in all, I’m excited about where we’re positioned after a year of a lot of transition. I think our customers are starting to respond to the activities, and they’ve certainly hung in there with us over the past years as we’ve begun to transform that platform. So I think we continue to be pretty well positioned for the future. We’re starting to see fairly good growth in our pipeline and anticipate getting back on a growth trajectory as we start looking out to next year.

Thanks, very helpful. Then taking the domestic revenue growth question a slightly different way, within the large client base, if you strip out the benefits from higher utilization, what are the other big growth contributors you’re seeing there? Is it selling more unitized delivery services, or it because that part of your client base is more likely to be consolidated, or is it something else?

I think what you’re asking is probably how do we look at growth, organic growth and the continued penetration of our existing customers as we begin to offer them a broader base of services, versus some of our new customer wins. A little earlier in the call, we highlighted the fact that we certainly have been benefiting over the last year of onboarding two very large customers that have provided some pretty reasonable tailwinds to that, and certainly utilization rates have benefited as well. But we continue to see very nice penetration on our existing product line as we attempt to move a large portion of our customers from our basic dock-point services and further penetrate as we move them up into our broader range of services we characterize as our care point. So I think it’s really been a combination of good organic growth and continued retention of our existing customers on a year-to-date basis, as well as layering in some nice business from new customers.

Understood. Thanks again.

Thank you. Our next question comes from the line of Dave Francis from RBC Capital Markets. Your line is open.

Hi, good morning guys, and Cody, let me add my welcoming remarks to you. Glad to have you aboard. Randy, if I could ask a couple questions kind of along Sean’s line as it relates to Europe. Can you talk a little bit, maybe asking a little differently about some of the levers that you guys have available to you to move out of the fix-it mode in that business and more into a revenue growth environment, what is there outside of the traditional just blocking and tackling sales opportunities that you guys might be able to do to lever up revenue growth there?

Sure, and Dave, I appreciate the question. As we talked about back on investor day, both domestically and internationally, our acquisitions toward the tail end of last year certainly provide an opportunity to continue to diversify our revenue base and allow us to target a variety of different services and opportunities with both our manufacturing as well as our provider customers. That is true over in Europe as well. As we’ve transitioned in the past year, I think we’ve got the vast majority of those activities behind us, and the real focus that we’re going to have going forward is the growth in our business. I think that growth is going to be focused in really three areas: one, our traditional 3PL activities, which we’ve been pretty successful at, and the continuing diversification from predominantly a pharma platform to one where we really have a diversified platform that looks at pharma, diagnostic companies, as well as medical products and medical device companies throughout the European market. Two, we’re looking at the opportunity to deliver various manufacturing services around our CPT and Minor kitchen tray services. We certainly have done that through the acquisition of ArcRoyal and will continue to enjoy further market penetration. And then lastly, in a few selected markets we are looking at developing our provider services market as well. As we’ve mentioned from time to time, we do have a couple of hospital customers in the U.K. market. That is a market that we certainly have the best opportunity to begin that transition and see some nice growth opportunities. So again, similarly to what we’re doing here in the United States with the growth opportunities, we have very similar opportunities but, again, more focused on a fee-for-service activity than the buy-sell business that we do in this country.

Then as a quick follow-up, shifting back domestically, there’s been a lot of talk, as you know, of reimbursement shifts potentially gaining more traction here toward more of a fee-for-value and related models for a lot of your provider customers. I guess my first question along those lines is, are you seeing that or hearing that more tangibly from your provider customers today, and to the extent that that is in fact happening in the marketplace, how do you see the company as being positioned for that trend vis-à-vis some of your competitors in the market? Thanks.

Yes, that’s a great question and a conversation that we’ve been having for the better part of the last couple of years, especially with the focus on outcome-related reimbursement, particularly in this market. Certainly that plays pretty well into the various unitized deliveries and the [indiscernible] when we look at those type of services, our ability on a procedural basis to deliver certain care. One of the questions that we’ve asked ourselves as we look forward is how do we continue to help our customers follow the patient post-the acute care setting, and as you’ve asked us over the course, how do we diversify, and we’ve always responded that we really begin to diversify and look at additional markets in looking at where our customers’ needs are, and it’s becoming more and more apparent that we need to follow that customer out into after the procedure, and we think we’re well positioned in that with the unitized delivery and some of the things we do. You know, from a competitive position, I think we continue to position ourselves as one where we’re going to respond to our customers and do that in a fairly diligent fashion. A couple of our competitors have diversified somewhat more aggressively than we have, but we think that we’re better positioned in terms of our service base and how we can accommodate customers in a more customized fashion going forward. So again, I think it’s a slightly different approach that we’ve had. I think with Cody coming onboard, it’s a terrific opportunity for us to examine what we have been doing and where those incremental opportunities are to be more responsive and take on some more profitable situations, and really examine what our value proposition is going forward. I think that our position today, we’ve turned around Europe, we’ve gotten pretty good revenue growth, and I think it’s a great place to be in bringing on a new CEO to look at improving our value proposition and profitability going forward.

Thanks guys.

I would just add too that I do see this notion of following the patient outside of the acute care environment is something that we’re going to spend a lot of time exploring. I think we’re very well positioned to do that for both our provider and manufacturer customers, and that’s certainly something that’s caught my attention and could be a growth opportunity for us.

Thank you. Our next question comes from the line of David Larsen from Leerink. Your line is open.

Hey Randy, congratulations on showing very good EPS growth this quarter. I think it’s the highest growth rate in the past two and a half years, so it seems like some of your efforts are bearing fruit. Can you talk about incremental sales opportunities on the international side? So for Medical Action, for example, how much revenue is flowing through international this quarter, and what could it be, say, a year or two years from now?

Thanks David. While I appreciate your comments directed at me, this has been a pretty broad-based team effort here over the last two years to resurrect growth, both with Craig and Jim and now with Cody, and I think the broader based team over here domestically appreciates that [indiscernible]. A lot of hard work has gone into sort of continuing to position the team and the growth opportunities ahead. With regard to your specific question on international, I think a few questions ago I kind of outlined a little bit where the growth opportunities are. As we have in the past, I’m not going to get into specifics about where current growth or specific targets we have. I think as Cody mentioned, we are reviewing those initiatives, probably are in a better position today to be a little bit more targeted in what we’re doing in Europe as opposed to a year ago. But again, I think the 3PL and the fee-for-service business on the manufacturers and that broader base of pharma, diagnostics and device and medical technologies, looking at some of the provider businesses in selected markets, initially probably the U.K. market, and then also as you pointed out continuing to leverage the acquisition of ArcRoyal and some of those custom packs and various small kitchen trays businesses into the provider or on a fee-for-service basis to the manufacturer are going to be the areas of focus, and I think we have a nice opportunity to get back to a growth trajectory from where we are right now as we get past these transitions.

Okay. Was there any Medical Action revenue flowing through international this quarter?

No, we’ve booked most of the Medical Action transition through the domestic business. They have a couple of areas, very small, that could shift outside the United States in terms of a couple of minor product lines, but for continuity and as we focus on the integration of those activities, we’ve tried to keep them consolidated on a domestic basis more to the segment as we begin to integrate them into our broader business.

Okay, so there’s nothing with regards to, like, European regulations or U.K. regs that would prevent you from expanding sales of Medical Action into your international business, right?

None at all. ArcRoyal and Medical Action are very complementary in what we do, and there are certainly opportunities in the future to begin to integrate those; but we don’t have any regulatory barriers out there in terms of what we can and can’t do with distribution of those products.

All right, and then just one more quick one. ArcRoyal, I think, is all in international. Is that correct - none in domestic, and you could do the same thing with ArcRoyal, right, sell in the domestic space? Is that correct?

Exactly.

Okay. Thanks very much.

Thank you. Ladies and gentlemen, as a brief reminder, you can queue up for a question with star then one on your telephone keypad. That’s star then one. If your question has been answered or if you wish to remove yourself from the queue, you may press the pound key. Our next questioner comes from the line of Steven Valiquette from UBS. Your line is open.

Hi, thanks. Good morning Randy, and also welcome, Cody. I guess just for us, maybe just a financial question for Randy. The reasons you cited for the lower, I guess wider EPS guidance seem pretty straightforward, but I guess I’m curious as some of those previous line item guidance metrics are still intact, particularly the 12.5 to 13% gross margin guidance, because it does seem like the gross margins are maybe trending a little bit below expectations in the first half of ’15. Thanks.

Yes Steve, that’s a very good question. In terms of the guidance that we put out there, really the nickel that we took the bottom end of the range down, and why we used the expansion language when we were adjusting or modifying our guidance, is really as a result of some of the costs associated with bringing Cody on board. There’s some compensation and transition issues as we begin to amortize, and for this year those were incremental costs to what we talked about at the time of our investor day back in December, so we thought it was appropriate just to widen the range, just to give you a perspective on some of those incremental costs. We also talked a little bit about we’ve got some currency headwinds, obviously. I think there’s probably not a global company out there that’s not having some comment related to that, and with the improvement in our international business, the natural hedge that we had when we were sort of at a loss or slightly breakeven, the benefits of being profitable is now we have some exposure to some of the FX exposure going forward. We just wanted to give you some headlines there that we had some exposure. We also wanted to highlight, and we mentioned it, that we were in a competitive position on a renewal of a fairly significant customer in the second quarter, and we did not enjoy the win on that customer. They’ll be beginning a transition out beginning in the fourth quarter. It’s a fairly significant customer, a little over $200 million in revenue, and while we feel fairly confident that we can take the necessary steps to mitigate most of the deletive effects of that transition as we get into 2016, we just through it’s important that we provide some insight that we’re going to have a little bit of revenue headwind in the fourth quarter as that customer begins to transition out. Those transitions usually take several months as we look to that, so we don’t think there’s a significant impact, but we thought it was important that we highlight that to you, that we’ve got a couple of things going on that could impact us this year. But again, as Cody talked about, we’ve got a variety of initiatives that we’re going to be looking at to sustain profitability in the future and profitable growth, so we believe we’re in a pretty good position as we head into 2016.

Okay, got it. Okay, thanks.

Thank you. Our next question comes from the line of Michael Polark from Robert W. Baird. Your line is open.

Hey, good morning, and thanks for taking the question. You mentioned in the press release that you benefited in the domestic segment from supplier price changes. We hadn’t heard about that last quarter, or maybe in the fourth quarter of last year, so can you just expand on that comment and maybe talk about what you’re seeing on the manufacturer pricing front broadly?

Hi Mike. Sure, we can give you a little bit of color on that. You know, as we’ve talked about over the past number of years, profit and inventory and customer or manufacturer price increases, that was typically done in a regular cycle in around year-end and impacting the first quarter. It has become something that has become much more sporadic and inconsistent, so we’re starting to see a lot more price adjustments on off-cycle time, and I think this is what you’re seeing. We had a few customers come in and put some price increases in place, and that adjustment, we had a bit of a benefit in the second quarter. But we have experienced this in a couple of quarters last year - in the third and the fourth quarter, we had some benefit. Typically, as I mentioned, it’s a first quarter benefit. We don’t see any trend here. The only trend, I’d say, is some customers are looking at very targeted price increases, and more typically we’re seeing them in an out-of-cycle cadence here. So while I would not say that we have any ability to predict when this is going to happen, there may be a little incremental volatility associated with this kind of activities with our customers going forward. But in the second quarter, we had a modest benefit. We don’t have a lot of visibility into that going forward, but it’s something that could go either way. So I think right now, we are enjoying a little bit of a tailwind there.

Okay, that makes sense. One other quick one on the $0.05 from the recruitment and transition costs. Should we think about that as kind of a one-timer to SG&A in the third quarter, or is that spread evenly over the third and fourth quarters in ’15 as kind of a more permanent step-up?

We had a little bit of the costs hit the second quarter in terms of the recruitment costs and some of that. Some of the longer term compensation and other things will be evenly spread over the third and the fourth quarter, and then as we roll into 2016 and beyond, that will just become part of our normal guidance and as the normal operating expenses that we had. So again, we just wanted to provide some color on some unforeseen costs that will hit the second half of the year, and that’s again the reason that we expanded the lower end of the range, just to incorporate some of those newer costs associated with onboarding Cody.

Okay, thanks very much.

Thank you. There are no further questions at this time, so I will now turn the call back over to Mr. Cody Phipps for his closing remarks.

Thank you, Andrew. I want to thank all of you for participating in the call today. We appreciate your interest in Owens & Minor, and I personally look forward to getting to know you and working with you in the future. Thank you and have a good day.

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