Good morning, ladies and gentlemen, and welcome to the Owens & Minor second quarter 2017 financial results 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 will be facilitating a question-and-answer session towards the end of the conference call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to the presentation over to your host for today's call, Trudi Allcott. Please proceed, Ms. Allcott.

Thank you, operator. Good morning, everyone and welcome to the Owens & Minor second quarter 2017 earnings call. I'm Trudi Allcott, and on behalf of the team, I would like to read the Safe Harbor statement before we begin. Our comments today will be focused on financial results for the second quarter 2017, 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 the most comparable 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 risk and uncertainty 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 Chairman, President and CEO, who will provide an overview of the business, our strategy and the acquisition of Byram Healthcare; and Randy Meier, EVP and Chief Financial Officer and President of International, who will give an update on our results and insight into the performance of our three segments. Now, I'd like to turn the call over to Cody Phipps, who will start things off this morning. Cody?

Thank you, Trudi, and good morning, everyone. Thank you for joining us on the call this morning. This morning, we will review our strategic progress, quarterly results and segment performance with you. As for our financial and operational performance, we have been expecting a soft first half of this year and that's exactly what we've seen in our results. While we're not satisfied with our current performance, I see positive underlying trends that we can build upon. As the healthcare market continues to change, new challenges and opportunities emerge every day. We're working to transform our business, so that we can capture these opportunities. So far this year, our teams have continued to work to overcome challenges, such as the loss of a major domestic customer last year stepped up competitive dynamics and production challenges in our CPS unit, which had a significant impact on our results year-to-date. While we're seeing improvement and growth in our CPS units, our work is not yet finished in returning this business to performance that meets our expectations. However, our customers are embracing the value proposition that CPS offers, which is helping us to gain traction in the market. While we're not happy with our results, we're taking aggressive actions to improve operating performance and execute our strategy. Our teams are down into what they need to do to improve our performance and to achieve success with our strategy. On a positive note, we are pleased to report that we officially closed the Byram transaction yesterday. We welcome the Byram teammates to the Owens & Minor family and we look forward to working with them to expand our reach along the continuum of care. Byram represents a significant step toward expanding our services across the continuum of care since they are the number two…

Thank you, Cody and good morning, everyone. I'd like to start with an overview of the Byram transaction and then update you on the second quarter financial and operational results. As we said in our press release yesterday, we successfully closed the Byram acquisition for $380 million. If you finance the transaction, last Friday, we completed a new $850 million credit facility, which included a $600 million line of credit and a $250 million term loan. Byram Health is a key to accelerating our entry into the direct-to-patient non-acute care market. As we expand our services along the continuum of care, Byram gives us a market leading presence and a strong reputation. We welcome our new Byram teammates to the Owens & Minor family. We expect that Byram will contribute approximately 450 million in incremental annual revenues and will have a slightly accretive effect on our 2017 seventeen operating earnings and will be further accretive in 2018. With the Byram healthcare acquisition, Owens & Minor has adopted a revised non-GAAP presentation that excludes amortization of acquisition related intangible assets as well as items already excluded. This revised presentation will improve the consistency and comparability of our results as it will remove the variable impact from acquisition costs on our results. Prior periods have been recast on the same basis. As is our practice, please keep in mind that adjustments made to our reported results are outlined in our press release. Turning to the quarter, as we have been saying, we had expected the first half of the year to be challenging and it was. As we look ahead to the rest of 2017 and into next year, our teams have launched a variety of initiatives, designed to improve productivity and efficiency. We believe these initiatives will gain momentum in the…

[Operator Instructions] Our first question comes from Sean Dodge with Jefferies.

Cody, you mentioned seeing some encouraging signs or trends that give you confidence things will improve as you go into the back half of the year. Can you talk a little bit more about those?

Yes, Sean. Thanks for the question. One that I would point out, we've talked a lot about the loss of a major customer and as you know, our business model, we're leveraged to volume. So when you look through that loss, which will start to lap in - late in the third quarter and into the fourth quarter, when you look through that into our productivity trends in our distribution network, I see some really good productivity trends there that we'd like to be seen on the bottom line, they're not showing up, because they're swamped by that loss. That would certainly be one I would point to. I'd say another one is, when I look at the underlying trends in our CPS business unit, which we've had a lot of work going into that, I see good trends there in terms of production. We're getting the production issues behind us. We're improving quality. We're starting to win some new accounts. So we're not where we want to be at. But I see some good momentum there. I guess the third one I'd point out in Europe where it's not contributing the way we want it to yet, we just won a couple of new contracts there and so those will be three examples that I would point to, but the general theme is when you have to look through the loss and de-leveraging of that large customer into the underlying trends and that's what I was speaking to.

Okay. And then going back to the comment around CPS, revenue there still running well below where you were last year despite the large client you signed. Has that large client you signed in the second quarter last year, has that begun to ramp now?

Yeah. I'd say it's begun to ramp probably slower than we thought. Again, we took that on; we ran into some production issues that caused some hiccups for us. We've done a lot of work with that client. They're pretty happy with us now and we're starting to ramp that but albeit slower than we had originally hoped for.

Our next question comes from Michael Cherny with UBS.

Can you just for simplicity sake maybe just this is a housekeeping item, give us a bridge in terms of specific for '17 guidance, what changed in terms how much amortization you expect, how much of the operational change and then how do you factor in the specific tax, I think you said $0.06 if I heard you right, Randy, just want to make sure had all the numbers in place.

Just to be clear, are you looking for the guidance or you're looking for just where earnings were in the quarter?

For the bridge on guidance in terms of what changed relative to the accounting change versus operationally.

Sure. I think if you use it as a starting point, our original guidance which was $1.75 to $1.85 and I think with our first half of the year performance; we'd probably guide the starting point sort of the low end to midpoint of that range. I think than you - we would then look at adding the intangible amortization, which is, on an earnings per share basis approximately $0.11 to that. And then you'd add in some of the accretion associated with Byram and that's really the simplicity of the bridge to where we are going forward.

And so I just understand, the $0.06 tax relief was that contemplate in the original guidance?

No, it was not.

And then just thinking about Byram, I know it's ridiculous early days, so I might be getting a big ahead of myself I might say this for the next quarter. As you think about the rollout of that business on your platform, I guess what are some of the quick and easy wins I would say that you think you can capture in the market base on your infrastructure versus some of the development of new opportunities that you think will take more time.

Yeah Mike, well first of all we just closed that yesterday and we're delighted to bring it on board. And one of things we like about Byram is the capabilities they bring, again it's the largest acquisition the company has made, it's right down our strategy number two of expanding into the continuum of care. So first and foremost, we want to make sure we keep their investment and growth on track. They've got a great sales force, they've got great momentum on that side, they've had a track record of success and growth and we want to continue that on. What I'm excited about is the potential to build back from the home and create a value proposition for the large IDNs. So one of things our teams have started to work on is, when we talk to our IDN customers, they want to follow those patients outside of the hospital all the way into the home, they want to help manage those chronic disease states. So one of the future things we're looking for is how we connect the dots on a value proposition back to the large IDNs. And it plays into our first strategy around connecting our supply chain. We're right in the flow with that, we want to track the data, where those products go, how they're used. But I'd the first order business is do everything we can to facilitate the ongoing growth of Byram in their current channel. Randy?

Just to add to that, Cody, I think hits the nail on the head with first and foremost the opportunity to expand their customer base, align it with some of the large IDN customers we have. We also think over the course of the next few years, we have the opportunity to integrate their supply chain and their sourcing activity into our sourcing, so there's some opportunity maybe to benefit from our scale. We also think our network over the next course of the next two or three years will provide some opportunity for some additional synergies as well. But first and foremost we believe the topline synergies between our large IDNs and some of their customers to connect with patients is the real opportunity.

And Mike, I'd just add one last thing. For our manufacturing partners, they view this as a new channel, Owens & Minor just opened up a new channel for their products, so they're excited to explore what new product categories, what new opportunities we can explore in that time front. So, we see a lot of upside.

Our next question comes from Lisa Gill with J.P. Morgan.

Hey guys its Stephanie Davis on for Lisa Gill, thank you for taking my questions. Could you talk to your investment art for '18 and '19 and maybe just how the Byram acquisition might impact this cadence.

Sure. I think from a perspective right now, we're with the just closing this transaction. I think we're first and foremost really focused on the integration over the next three to four months and really making sure that we bring on board the Byram team mates, integrate them into our domestic and global platform and make sure that we've got that consistency and continuity build going forward. Cody mentioned in his remarks, the RBT process and some of the things we're doing there. And as we mentioned on Investor Day, part of creating our strategy one that end-to-end connectivity is investing in our own network and our own capabilities. So we'll probably continue to see some internal investment around productivity tools at both in the warehouse, some IT platforms as you saw in the second quarter and going forward. And I think that's really where we're going to be focused for at least the next few quarters.

Our next question comes from Erin Wright with Credit Suisse.

This is Adam Krasner on for Erin Wright. I just wanted to follow up on the question on intangible amortization, the $0.11 impact in the guidance that you cited. That seems pretty consistent with the level of amortization that you had in the most recent quarter, around 2.3 million. Is it the right way to interpret that that there's not going to be a big step up in amortization with the close by Byram.

No, it wouldn't be. I think what we wanted to do is utilize this quarter as a transition in our adjusted earnings to what I'd probably characterize as adjusted cash earnings. And just begin the process of executing intangible amortization. The amortization that we excluded in the second quarter and in the first half of the year is our historical. So going forward now that we closed it, we'll probably be seeing a reasonable increase in that amortization as a result of the acquisition.

Our next question comes from Robert Jones of Goldman Sachs.

You guys talked about the 2018 guidance, you've raised the range by $0.15 to $0.20. I think you know, Randy the decision to exclude the deal amortization adds about $0.12 and Byram obviously is going to be accretive as we look out into next year. So it seems like on that math that you're a little bit more cautious on the underlying business if I'm thinking about the moving pieces there correctly relative to how we were thinking about '18 before. So can you maybe just talk a little bit about what actually you are seeing differently in the core business or any environment that would have you slightly more cautious on the business as you look out into '18?

Sure and its great question. When we thought about our guidance and then the sequencing it from 2017 to 2018 we did want to pay particular attention to the question of how Byram is going to impact that. And as we've mentioned to everyone since we've made the announcement of the acquisition and even as far back as Investor Day that 2018 guidance did include some benefit in that for moving down and expanding in an non-organic fashion the continuum of care. So when you think about moving from prior guidance adding the amortization and then some of the benefit of Byram. The incremental benefit from what we already had in our guidance is what's really being represented there. So it doesn't represent all of the benefit of the Byram transaction because we've already had some of that implied in our future dime. For 2018 as we've said, what I just said a few minutes ago, we're probably looking at the lower half of our range for 2017. I think as Cody alluded to, we have a number of initiatives with the RBT process and where we want to go strategically. So we do think we are well positioned now to continue to improve [indiscernible]. We have always said 2017 was going to be a transition year with a loss of our large customer and we do see sequentially revenue beginning to improve as we go to third quarter and the second half of the year. So hopefully that gives you a little bit more color.

Robert, I guess to address your question directly, as I said, our current business models leverage the volume. We've now seen the impact of that with the loss of a large customer. We commented on the competitive dynamics out there, which are a little tougher than we thought. And so as we look ahead we have moderated our view a bit. I'd say based on what we're seeing in the marketplace when we win or retain business we're having to give up more margin than we had originally thought. So that's certainly a factor in our view going forward. And the other thing is I think we've seen a modest softening of utilization in the marketplace, others have commented on that. So I think their question was, what do we see why - maybe we're you know we're less optimistic going forward in the base business, it's driven by those two factors.

And then just one quick follow-up on the RBT initiative. If I think about maybe you could touch a little bit on that just on what qualitatively is that program relative to some of the other initiatives that you guys had underway. And I guess on the numbers, I think you said 50 to 60 million, is that incremental to the 150 that you guys laid out at Analyst Day or is that part of kind of the overall EBIT improvement?

I think - no, it's not incremental. I think we just wanted to give you some color, we've been asked in a couple of occasions how that might roll out over the next couple of years. With the RBT initiative really being the process and the program really to initiate and execute a lot of the initiatives in that arena. We're going to see the benefit we believe of that $50 million, $60 million of operating income this year. And we think we'll also see a like amount on top of that next year.

Just to give you a little color around that, so we called RBT internally, we saw the headwinds coming in the marketplace, so we launched a broad scale improvement program with our teammates. I've been really pleased, we've got a really strong disciplined process the PMO, senior management is engaged all the way down to the front line, our teammates are doing a great job driving that. So the number we outlined again was 100 million to 150 million over three years. We have line of sight to 50 to 60 this year. We're trying to get off to a fast start and it's designed specifically to go at those headwinds I just mentioned in the marketplace. So I characterize it as kind of a full blown transformation effort engaging a broad scale, engaging our organization on a broad scale in top to bottom.

Our next question comes from Steven Valiquette with Bank of America Merrill Lynch.

And I guess just for us most the questions we're getting still are kind of centered around how much EPS accretion from Byram is baked into the 2017 and 2018 guidance. I'm not sure if you're able to more specifically quantify that. And then I guess you already touched on kind of the reductions for core operations within that, so I think you already hit on that. But curious just around Byram, can you give any more specific quantification around accretion. And I got a couple of quick comment follow up of one liners after that.

I think probably the 2017 is probably a little bit challenges because of the stab year and a lot of the moving parts, but for 2018 I think you can characterize the incremental accretion is about 5% to earnings.

And then for depreciation related just to Byram, you're going to strip out the deal amortization, but just depreciation annual run rate roughly for Byram, do you have a just a rough number for that?

That's a little bit of a moving target right now, they don't have a lot of fixed costs, so I wouldn't expect it to be very high, but I probably have to get back to you on that one.

And then final quick one, you have a tax rate for this year you said kind of goes to 33 to 35 for 2017. What's the assumption for 2018, does that go back up a little bit or is it going to stay within that range for 2018? What's a good preliminary range do you use for '18?

Excluding the impact of our onetime evaluating allowance that we had the benefit of this quarter you were on a very modestly declining trajectory over the past couple of years and I think if you would go back to that kind of trend line that's probably where we will be.

The next question comes from Evan Stover of Robert W. Baird.

So I'm kind turning my head around a little bit, what exactly is in the business transformation numbers. The comments around 50 to 60 million run rate by the end of this year and 100 to 150 million long term. 50 to 60 is I mean that's more than 20% of your current EBIT base, so I just want to make crystal clear that would that include for example the incremental EBIT from Byram as part of your continuum of care transformation because it feels like it must because it's such a large number relative to your current operating earnings?

I think Evan, probably the best way to look at it is, a lot of the initiative that we have in place are [indiscernible] a few months back, we're beginning to starting to see the benefit of these. Some of these transformational have some very meaningful benefits going forward in terms of the cost side of some of the productivity opportunities going forward. There is some incremental benefit of Byram in that number. As we said, we had already programmed in our original guidance some inorganic benefit because we were fairly comfortable where we were when we gave guidance. So had some of it in there, but we are in a midst as Cody talked about is a pretty meaningful transformation and drive forward and trying to do some things here. So we remain fairly confident. Most of the benefit is the second half of the year benefit because of the activities that we performed in the first half of the year. So we remain pretty confident that those are achievable.

And Evan, I think it's fair to say though more of that benefit is going to offsetting the headwinds that we're seeing in the marketplace than we would like. So I don't want to be vague on that. This is a transformation because our current business model is heavily leveraged to volume and we're - so when you think about our plan, the RBT is designed to offset some of the headwinds, our four-part strategy is designed to reposition our business for long term success. But you shouldn't - I don't want you to misread that that 50 to 60 is all going to fall to the bottom line because it's not, it's going to go into offsetting headwinds that we're seeing.

Ad that kind of plays into my follow up, which is, if I look at the domestic segments, even if I strip out what I believe the Kaiser losses, the revenue declines there have been accelerating and I know there's obviously margin pressure in that business, but the revenue moderation is more than I thought it would be and it's been getting worse over the last quarters. So I'm hoping maybe you can tell me is there also some - beyond just margin pressure, is there also maybe some other discrete customer losses besides Kaiser that are flowing through the model right now, if there's anything you could give us to help us understand why the revenue is going down and if it's just utilization or if there's something else at play there that would be helpful.

I think there's a number of factors there. First, obviously it's Kaiser and we'll start to lap that late in the third quarter and into the fourth quarter. The second was, some of the revenue declines in our CPS business that we've commented on. And the third factor is when you, you know, every year when we go out and we did business we win business we lose business. I think [indiscernible] there is a bit of a timing difference between some of the business we're onboarding it's probably come on a little slower than we thought and then we've lost some business. And then the final thing I'd comment on is we do see a moderation of revenue out there, a softening, a slight softening. So I think it's a combination of those factors. I think we're actually starting to see a bit of a more normalized trend going forward, but those four factors have certainly contributed to a softer topline than we thought. We knew that first half of this year was going to be tough. I think it's been a little tougher than we thought even on the topline.

I would say just to add on to Cody, I think the second quarter will most likely represent a bit of a low point in terms of where we are now in that process and we'll start to see some sequential improvement as Cody indicated. Most of the folks that we had or customers that we had exiting that's been accomplished and some of the timing differences of the onboard is beginning to materialize. So I think you'll start to some sequential improvement in that numbers.

[Operator Instructions] And I'm not showing any further question at this time. I'd like to turn the call back over to Mr. Phipps for closing comments.

Thank you Kevin, thank you for joining us on the call today. To sum up our results, we had a tough first half of the year, but we see positive underlying trends that we can build upon. With the acquisition of Byram Healthcare, we're taking a substantial step forward on our strategy to expand our services along the continuum of care. And with the RBT initiatives underway, we have a line of sight toward achieving our goals and improving our operating performance this year and next. Our teams are very focused on the road ahead and they're making headway on our long range strategic goals and our financial targets for 2017 and 2018. Thank you for joining us.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.