Accendra Health, Inc. (ACH) Q4 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Owens & Minor’s Fourth Quarter and Full-Year 2017 Financial Results Conference Call. My name is Brian, 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 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, Ms. Trudi Allcott. Please proceed, Ms. Allcott.

Thank you, operator. Good morning, everyone, and welcome to the Owens & Minor fourth quarter and full-year 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 fourth quarter and full-year of 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 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 Chairman, President and CEO, who will provide an overview of the business, our strategy and the acquisition of the Halyard's S&IP business. And Randy Meier, EVP and Chief Financial Officer and President of International, who will provide details on the transactions, an update of our financial results and more insight into our business performance. 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. I’ll make a few comments about the year, our business, and ongoing efforts to transform our Company. I’ll then turn the call over to Randy to discuss our quarterly and full-year results. 2017 was a very challenging year for Owens & Minor. All three segments faced significant market and competitive forces and encountered executional challenges throughout the year and in the fourth quarter. Our results are unacceptable and we are taking aggressive steps to accelerate the transformation of our business and to improve our performance. We face the reality that the market continues to move toward discounted distribution, where products are increasingly used to subsidize distribution and this continues to negatively impact our margins. We also absorbed customer losses and saw a slowdown in the growth of existing customers, which had a de-leveraging effect on our business. To counter these trends, we undertook aggressive actions to reduce expenses and improve operational efficiency. Our rapid business transformation or RBT as we call it, exceeded our expectations for the year, but was not sufficient to offset the previously mentioned revenue and margin headwinds. Our legacy distribution business as leveraged to volume and it became increasingly clear that we needed to strengthen and diversify our business model to achieve our long-term growth and profitability goals. To propel our strategy and position our business for the future, we announced two large strategic acquisitions this past year. First, consistent with our strategy to expand across the continuum of care, we announced that we acquired Byram Healthcare, the second largest direct to patients services company in the U.S. in August of last year. Byram has been a great addition to the Owens & Minor portfolio and gives us access to a growing channel with higher margins. We also see the ability to better align our home health platform enabling large IDNs to follow their patients all the way to the home. This is a need that many of our customers have and it will become increasingly important in a world of value-based payments. We have been pleased with our progress to date and the Byram team has brought meaningful momentum to our continuum of care strategy and they will be a strong contributor to our 2018 results. Second, we made a bold move to strengthen our own brand product portfolio when we announced the acquisition of Halyard Surgical and Infection Prevention business which we expect to close in the April timeframe. This is a significant step that we believe will strengthen and diversify our business model. This will be the largest transaction in Owens & Minor's history and is intended to achieve two goals. First, this acquisition will increase our own brand product sales from low single-digits as a percent of total revenues to low double-digits. Of even greater importance, we believe that provides a platform and the capabilities to reach our strategic goal of growing our own brand products to 20% to 25% of total revenues. Second, it gives us access to a leading portfolio of Surgical and Infection Prevention products that we can bundle with our solutions at the point of care. Obviously, having our larger product portfolio with higher margins, we will reduce our dependence on distribution margins and should favorably impact our business mix. Furthermore, this transaction also enables global expansion for Owens & Minor with significant opportunities for growth in new attractive markets including Canada, Japan, South Africa, and Australia. As we said last quarter, we believe the Halyard business has tremendous upside for us. Teams from both companies are finalizing plans and working toward closing the transaction. We look forward to welcoming the Halyard team on board once we close the transaction and we know they will bring valuable new skills and resources to our team. This new business will be an integral part of our new business model and is aligned with our strategy. We are also reorganizing to enhance our execution focus. As a result of these two transactions, we are organizing the company into two strategic business units; global products and global solutions. These two business units will enable us to serve the market with the coordinated approach to address the needs of healthcare today and into the future. We have announced that Chris Lowery, formally the COO of Halyard Health has joined the Company and leads our Global Products division as its President. And Stuart Morris-Hipkins who joined us last year now serves as President of the Global Solutions SBU. While our current environment remains challenging, the Byram acquisition and the upcoming acquisition of Halyard are significant steps in the transformation of our business. All of us remain focused on executing our strategy and improving our performance. Our valuable team mates remain committed to serving the needs of customers, whether they are healthcare providers, manufactures, payers or patients at home. Going forward, we remain committed and focused on four priorities to improve our performance. One, strengthening and diversifying our business model by successfully integrating Byram and Halyard S&IP business; two, executing our rapid business transformation to reduce costs and improve operating performance; three, emphasizing our value added solutions and bundling products at the point of care; and four, developing new solutions to solve the complex problems that our customers are facing today and in the future. With that, I will turn the call over to Randy to review our financial results. Randy?

Thank you, Cody, and good morning, everyone. Today, I'll start with the discussion of our results for the full-year and the quarter followed by a review of the factors affecting our performance. I will then have a few comments on Halyard S&IP business. Let's start by reviewing our financial results for 2017 which fell far short of our expectations. For 2017, net income was $72.8 million or $1.20 per share with adjusted net income of $97.5 million or $1.61 per share. For the year, consolidated revenues were $9.32 billion compared to $9.72 billion last year. For 2017, annual consolidated operating earnings were $89.3 million versus $110 million a year ago. Adjusted consolidated operating earnings for 2017 were $180 million compared to adjusted operating earnings of $234 million for the same period last year. During 2017, our performance continued to be hampered by ongoing customer margin pressures, softness in our Proprietary Products segment, and expenses incurred in Europe to support new business. Benefits derived from the Byram Healthcare which is now part of the Domestic segment as well as our ongoing expense control and productivity gains and the RBT initiatives partially offset these challenges. The recently enacted Tax Reform Act provided a benefit of $34.6 million or $0.58 for the year. As a reminder, we excluded the impact of tax reform from adjusted net income per diluted share for the quarter and the year. Excluding the benefit of tax reform, the adjusted effective tax rate was 34.1%. And in 2018, we expect an adjusted effective tax rate for the year to be in the range of 24% to 26%. Asset Management metrics included DSO of 28.7 days and inventory turns of 8.5 times, both measurements include the operations of Byram Healthcare. It is important to realize that the ongoing diversification of our business model and international growth continues to impact Asset Management metrics and we intend to provide further guidance upon the close of the Halyard S&IP transaction. Cash flow from operations was $56.8 million compared to $188 million last year. The fourth quarter, we reported net income of $23 million or $0.38 per share and adjusted net income of $21 million or $0.35 per share. For the quarter consolidated revenues increased 0.9% to $2.39 billion. For the fourth quarter consolidated operating loss was $8.77 million, compared to operating earnings of $49 million last year. Adjusted consolidated operating earnings for the quarter were $42.2 million versus last year's fourth quarter of $56.2 million. Performance during the fourth quarter was affected by increased price and margin compression, longer than expected sales cycles for fee-for-service businesses, product supply issues with certain large manufacturers, and exit and realignment costs incurred to improve our future performance. Now let's look at the three segments. Domestic segment annual revenues were $8.79 billion compared to $9.19 billion a year-ago. Fourth quarter revenues for Domestic segment were $2.28 billion, compared to $2.24 billion in the fourth quarter of 2016. Annual segment operating earnings were $134 million compared to $165 million in the prior year. In the Domestic segment, price and margin compression in the market negatively affected revenue and gross margin results. In addition, during the fourth quarter, the Domestic segment incurred higher than usual healthcare costs and LIFO expense. Partially offsetting these results were the benefits derived from the Company's transformation and expense reduction initiatives. Byram Healthcare, which we acquired in August of 2017, contributed $209 million to net revenues. Turning to the International segment results; for the year, International segment revenues were $392 million compared to $344 million last year. Fourth quarter revenues were $104 million compared to $88 million last year. For the year, the segment operating loss was $3.9 million compared to income of $5.6 million last year. As for the quarterly operating earnings, the International segment had a loss of $3.1 million, compared to income of $2.2 million in the prior year. In the quarter, the International segment experienced softer than expected fee-for-service revenue, increased costs to onboard new customers, severance and a lag in implementing cost reduction initiatives. Next our Proprietary Products segment; in a Proprietary Products segment, annual revenues were $504 million, compared to $540 million last year. For the quarter, revenues were $111 million compared to $131 million in the prior year. For the year, segment operating earnings were $33 million compared to $54 million in the year before, while quarterly operating earnings were $6.9 million compared to $11.9 million last year. The operating earnings declined in the Proprietary Products segment resulted from lower revenues as well as an increase in inventory reserves for returns and obsolescence. Looking back on the year, margin compression and pricing pressures were more challenging than we anticipated. In addition, we did not see a rebound and utilization rates, which contributed to lower than expected sales volumes. Other items which typically benefit our results did not materialize, such as the impact of our year-end LIFO provision and our own healthcare costs were unusually high in the fourth quarter which also had a negative impact on our results. While these factors all had a dampening effect on our results for the year, the rapid business transformation initiatives which we launched last year help to mitigate some of the pricing and margin pressures and yielded in excess of $50 million an annualized benefits for the year. We expect to see incremental benefits from these initiatives in 2018 and believe we may achieve up to $150 million in operating contributions by the end of 2019. We’ve said it before and we continue to believe that the long-term financial goal of our company transformation is to achieve sustainable earnings growth of 8% to 10%. As we look ahead, we remain excited about the agreement to acquire Halyard Health S&IP business. There is good momentum as we move towards closing the transaction and integrating the S&IP business. As we have discussed, this transaction will continue to reposition Owens & Minor, allow us to enhance our product offering, and expand our global reach. As a reminder, we will be acquiring the assets of Halyard’s S&IP business for approximately $710 million. Upon closing, we expect to gain approximately $750 million in incremental annual revenues from the acquisition. The balance of the billion of revenue generated by the S&IP business already flows through our channel. We also believe the deal will deliver $40 million to $50 million in synergies over the first three years and be accretive this year and increasingly accretive thereafter. At present, we are looking forward to closing the transaction in the April timeframe. Together with the positive contributions from Byram Healthcare, we believe that Halyard’s global breadth and clinical expertise will give us the new direction and platform to achieve profitable growth. While our outlook for 2018 remains dependent on the timing of the Halyard transaction, we believe we will begin to see improvement in our performance as a result of modest improvements in our existing business, growth as we integrate Byram, and improved international performance as well as the broad benefits of tax reform. Upon closing the Halyard transaction, we plan to provide a more detailed financial outlook for 2018. And finally, our board recently approved the first quarter 2018 dividend payment of $0.26 per share, at a 1% increase over the prior period and that expression of confidence builds on the track record of consistent dividend increases over the last 20 years. Since becoming a public company in 1971, Owens & Minor has paid dividends continuously. Thank you. And with that, we will turn the call over to the operator for questions. Operator?

Thank you, sir. [Operator Instructions] And our first question will come from the line of Lisa Gill with J.P. Morgan. Your line is now open.

Great. Thanks very much. Cody, let me just start with the competitive marketplace. So you talk about this whole idea around reduction and distribution margins and those that are using distribution to try to some of those services. One, clearly you're reading everything we are, how do we think about Amazon or others trying to get into this business and how the business is positioned today? And then secondly, as we think about your four initiatives going forward, one that kind of stands out to me is the value added bundle. Can you talk about what customers are specifically looking for today when we think about that bundled approach?

Yes. Thanks Lisa for the question. First, let me comment on your first part of the question which is, we've just seen an acceleration of the bundling and the subsidization of distribution with products, and obviously that’s had an impact on our margins and that's what we're calling out there. Our answer to that is really twofold, one, we want to offset as much of that as we can through our business transformation or what we call the RBT. And then second, we want to emphasize our point of care logistics and solutions and we think that enhances and improves the value that we bring to our customers. So I think the second part of your question is what are the customers asking for? Where do they see that? And you mentioned the Amazon as well. What we see today is a very broken and disconnected supply chain, frankly. And what our customers are asking us to do is help them improve that supply chain and unlock that value that exists in the end-to-end supply chain. So we're focused on investing in our core distribution platform, investing in the continuum of care. One of the things – I hear constantly from customers is want to leave the acute setting. There's no visibility. There's no transparency. They can't control those costs. So that's why we made the Byram acquisition. We want to go all the way to home and then connect that back to the IDN. So that's where we're investing in services and solutions and some of those are the same things that I believe Amazon is talking about disrupting and constructively disrupting the healthcare industry. Let me pause there.

So do you view them – as you view them constructively then, I mean do you think that Amazon can bring something differentiated to the marketplace, will it foresee acceleration on your side because of the potential competition from Amazon? And do you see them talking to your customers, I mean again you just going based on The Wall Street Journal article, yesterday, it sounds like they are bringing people to Seattle et cetera?

Yes. I think it's very well known that Amazon is out there talking to a lot of large IDNs and including our customers as well as our competitors customers. I think what I'm saying is much of what they say, they want to do, we agree with. We think the industry is right for disruption, it needs innovation, it needs connectivity, and it needs transparency. So a lot of what they say are kind of right down the same path that we're going with the solutions. So are they forced to be reckoned with? Yes, they are forced to be reckoned with. But what we're focused on right now is trying to unlock the value through the solutions that we're bringing to the marketplace. I happen to believe that's not too far off from what Amazon is talking about.

Okay. Great. And then if I could just ask one other question and that's around the guidance on 2018. I know you feel like it's too early, but can you just give us any of your initial thoughts on the underlying business for 2018? I know we’ll get the actual guidance when Halyard disclosed in April. You talked about a tax benefits, talked about some incremental savings from RBT, but what are some of the other factors that we should be thinking about for 2018 from our core business model perspective?

Yes. And again, what we said is that we will give guidance once we close the Halyard transaction because it's such a material transaction to our business. But the way you should think about it, we're certainly modeling in improvements to our core legacy business. We're modeling in the positive contribution of Byram to our business, and once we holding the Halyard S&IP transaction, we will give a much clear picture. And it's just – it’s materially – what I'd like to say is the addition of Byram and Halyard, it materially diversifies and strengthens our business portfolio and that's what we want to outline once we close that transaction. But we are counting on fairly significant improvements in the base distribution business.

Okay. Great. Thank you.

Thank you, Lisa.

Thank you. And our next question will come from the line of Sean Dodge with Jefferies. Your line is now open.

Yes. Thanks. Cody, maybe on the Proprietary Products segment, you mentioned having stabilized the production environment there, so kind of giving the feeling that the worst is behind us. Can you talk a little bit about what's driving the lower revenue from the source products? Is it what you mentioned before using distribution to subside of sale of other services or is it something different? And then maybe a little bit on the outlook there?

Yes. I would say there is two things going on there, Sean. First in the Proprietary Products segment, we have our own private label products there and they were impacted by the decline in revenues and the customer losses. So that was a significant portion of the decline there. We did comment that we went through a rough patch with our kitting business. I think that our team has done a very good job of stabilizing that business. We've got a really well running operation there now. And so we're pleased with – we're not pleased with the result for last year, but we're pleased with where the team is got in that business and we're starting to win that customers and win new customers and that's what we're speaking about in terms of stabilizing the business.

Okay. The client losses that you referenced, are those are the ones that started to roll off and I think the third quarter of 2016 or this is the different client or clients?

The big one was the one we talked about in 2016 and that’s fully annualized now. There were a couple of other losses that impacted our business in 2017. Randy?

Yes, I think Sean certainly we started with some of the larger customers that rolled off and in third and fourth quarter of 2016, we saw some customer losses in the first half of the year. So that impacted the Private Label business in terms of the volumes coming through. On a kitting side, those contracts are a little bit independent of some of our large IDN customer contracts. And as a result some of the challenges we were having. We saw some customer losses there. But as Cody indicated, as we rolled around into the fourth quarter, we started to see stabilization in that business and we’re starting to see wins and some new customers. So we would expect 2018 to a little brighter than we had in 2017.

I mentioned Sean that one of the things we're excited about with the addition of the Halyard S&IP products. That's also leverage point for us with the kitting business. A lot of those products go into those kits.

Okay, very good. And then the last one for me, in the International segment, I think there was a referenced to bit of a lag in implementing some of the cost initiatives there. Can you give us a little bit more detail on that? And then given things like the less favorable revenue mix, what's the timeline you think for returning to International segment to profitability?

Sure. I think the first question really was we had a few initiatives that we're looking to improve cost. It took a little longer to implement than in the fourth quarter than anticipated. So there was some cost associated with – playing like severance and whatnot, that we realizing the quarter, but we won't see the benefit of that and so we roll upon into the first quarter and all of 2018. In terms of some of the topline growth, we continue to see good topline growth, a lot of that was driven by our more direct-to-market organization as we took over some of the front-end of the business for some of our customers. Some of the challenges on the profitability side with the investment and the direct-to-market sales force that we built over the course of the last year. But what we were referencing in our comments was the underlying fee-for-service business was just a little bit softer in the fourth quarter than we anticipated. Some of the end market business was just softer over in Europe. So we didn’t see some of that volume pull through. What we're seeing in the early days is that there's somewhat of a rebound. We've also onboard a number of new customers in the third and fourth quarter of last year. So we’d expect to see a return to profitability in the fourth quarter of that business in 2018.

Okay, thank you again.

Thank you.

Thank you. And our next question will come from the line of Erin Wright with Credit Suisse. Your line is now open.

Great, thanks. Can you speak to maybe the product supply issues from certain larger manufacturers? Is that different from what you were discussing before and how isolated or board-based for some of those specific headwinds, what will recur kind of going forward?

Yes, I’ll speak to that Erin. We've seen kind of unprecedented high back order rates and it's impacting our customers. I think obviously some of it is due to the well publicized shortage of IV solutions and the impact of the hurricanes and some of the drivers of that. But we've also seen disruptions from some of our other large suppliers, some of it driven by things they're dealing with on their side. And that's been a big impact for our customers particularly late in the fourth quarter and earlier end of this year. The actions we're taking and we're having to take in more inventories to try to cover our customers and we're working with specific manufacturers to try to address the specific needs there, but it is kind of unprecedented levels that we're seeing.

Okay. And then I think you mentioned with the Halyard acquisition that there were some incremental costs as you bring the two companies together. I guess that's still a variable here since we don't have 2018 guidance, but you have some better visibility on kind of that would entail or has there been any sort of surprises in the initial days as you kind of start to close that transaction. Thanks.

Yes, I'll comment, and then I’ll ask Randy to jump in. First of all, so far we're very pleased with the progress with the teams are making. I think it was a really good move for us to bring Chris Lowery on Board. Obviously Chris is the Former COO of Halyard and he brings a lot knowledge of that business and the teams are working very collaboratively together. So that's on track for where we're trying to go. It is a carve out of that business from how you're going that that adds complexity when you're going through a carve out. So a lot of the work that's going in right now is figuring out the transition service agreements, figuring out the IT environment and we're pleased with how the teams are working together, but that does add complexity. Randy, if you want to comment?

Yes, I think I just add to all the things Cody said, the transition from the announcement to closing is going very well. The teams are all working pretty well together and we're still targeting, relatively speaking a certain April timeframe to get the close done. Relative to the costs, I think it's just we were referencing some of the acquisition related costs that we incurred in a fourth quarter and we will probably in the first time in the first quarter those are carved out of our adjusted earnings.

Okay. Great. Thank you.

Thank you.

Thank you. And our next question will come from the line of Robert Jones with Goldman Sachs. Your line is now open.

Great. Thanks for the questions. Cody, you've highlighted the pricing pressure throughout 2017. Amazon is a topic that's come up. You commented on that earlier in the call as well. Yes, I'm just wondering, has Amazon had an impact as of yet as you think about the negative results that you experienced in 2017? And then looking forward as we think about Amazon, just curious if you could elaborate on some of your earlier comments? Do you Amazon purely as a new competitor or is it somebody you actually see is potential partner as you think about the landscape in 2018 and beyond?

Yes, Robert, I'll try to answer your first question. First, I think from my perspective and what we're seeing I don't think Amazon that had a direct large impact on our business and let me explain why we believe that. Their strength really comes from the consumer base or in our world the patient base and I think their strength comes from the small office space or in our world the physician office space. So our belief is that where Amazon's really picked up traction is direct the patient and to some of the small office – physician office arenas. So from that standpoint that hasn't had a large impact on us. Where they want to go and what they're talking about is actually helping hospitals and hospital systems address the needs that they have and the article in The Wall Street Journal yesterday talked about their desire to enter that space. From that standpoint that's where we're strong. That's where our strength is with the large IDN. So what we bring is the knowledge of how to get medical products and medical devices to a hospital, but not just at a hospital all the way into the operating room to the cath lab to the point of care. And so again what we're focused on of developing our solution that we think our customers need both inside the acute setting or the large idea and along the continuum of care. So as we go out into the continuum of care and try to connect that and bring transparency that's where I see a lot of overlap with what Amazon's trying to do and to the extent they want to succeed with large IDNs, we have a lot of knowledge there. So are they competitor and forcing the industry. Yes, they are. What we're focused on right now is extending our solutions on behalf of our customers and frankly learning where their desires are and where there's overlap.

Okay. Got it. That's helpful. And then Randy just I know you're not giving official guidance for 2018. But just as far as thinking about a run rate, if I look at the 4Q operating earnings around I think is what $42 million? Is that the right quarterly run rate for the underlying business and then obviously we would have to layer on top of that Halyard and RBT savings. But is that is that the general framework we should think about as we model out 2018?

As we look at the business there is just a lot going on in the fourth quarter with a whole series of things let alone just integrating Byram as well as focusing on the transition with Halyard. So I wouldn't consider the fourth quarter a good run rate as we would go forward. If you want to go back to the third quarter and think about that that maybe more indicative of where we're going and then you could include a full quarter of Byram. But I think the fourth quarter gets with all the noise in a variety of things going on would not be where I would look to establish a run rate.

That's helpful. Thank you.

Thank you. [Operator Instructions] And our next question will come from the line of David Larsen with Leerink. Your line is now open.

Hi. Can you talk a little bit about the sequential increase in SG&A costs and it seem to me like it was pretty significant like almost $20 million, what drove that and will some of that be in 1Q of 2018?

Hi, David. How are you doing? Great question, simply put it was in large part Byram. It’s the first full quarter that we had year-over-year and a vast majority of the incremental costs running through the business with Byram.

Okay. Sorry, I guess we can continue to expect to see that elevated level as we progress through 2018?

Yes. Offset.

Okay. And then with respect to Amazon, just maybe can you help sort of frame us a little bit like how far away or how many years is Amazon from [indiscernible], say 40%, 50%, 80% of hospital supply for any hospital client might need, like in your mind is Amazon there now? Could they potentially displace when Owens & Minor or Cardinal or another medical distributor now or are they sort of having exploratory talks where it might take five years, 10 years for them to be able to get to that point, what do you sense?

David, it’s probably inappropriate for us to comment on the timing of what’s Amazon is attempting to do, what you're talking about. What I can say is, again, I think their strength is more out in the physician office and direct to patient side. I think there's a lot of effort that they're putting forth to try to understand large IDNs in the complexity of what they order? How they order? How they price that world? So I don't think it's appropriate for me to comment on their timeframe. What I can tell you is that they're very interested in solving for that. I think they understand that to constructively disrupt healthcare. They're going to have to address the needs of large IDNs in those. I think a lot of effort going into trying to figure that out.

Okay. And then just quickly on the Domestic segment. I think in 3Q, you mentioned that there were some on-boarded costs for new business. I think we saw that again in 4Q, but I mean do you expect the International segment – I’m sorry, do you expect that operating income to turn positive in 1Q? When is that new business going to start to be on the P&L? And are those costs one-time in nature, where you're ramping up capabilities to be able to meet that incremental demand?

Yes. I think you articulated it very well. We on-boarded a number of customers in our southern region, in the fourth quarter and in our northern region, which has some initial costs to startup, and if they roll into the first quarter, we would expect to see that turn profitable. So I think you spot on with your comment.

Okay. Thanks very much.

Thank you.

Thank you. And our next question will come from the line of Evan Stover with Robert W. Baird. Your line is now open.

Hi, thank you. I wanted to talk about some - hopefully get some updated thoughts on financing for the Byram deal. You had previously said that deal would put you in the high fours leverage and I know you just cautioned us not to fully read into the run rate 4Q results, but it does look like that could be a little bit higher. Can you provide what you think an updated pro forma leverage for OMI? I think I was calculating something in the in the five, five area? And then also given the higher than expected leverage, can you talk about what your discussions with lenders are so far on your cost to debt and maybe just what you're going to do with your entire debt stack, because I think there was some talk about rejiggering a lot of your capital structure as a result of this deal? Thank you.

Sure. Evan, I think the question that you’re asking was related to more of the Halyard transactions and the capital structure with Byram. Just to refresh with Byram…

Yes. Sorry, I replaced Byram with Halyard throughout there, yes.

Yes. I understood where you're going, but just to refresh. We used a bank borrowing to close the Byram transaction and when we announced the Halyard transaction, we had committed financing using bank financing to go out to market. We indicated that we would look to the capital markets to try to put where I would characterize a little bit more permanent capital out in our capital structures of the maturity schedule would be a little bit more favorable. We continue to plan on doing that. I think with the performance of year-end, we certainly are within our current covenant package and we still pro forma for the future we would still be well within our limits that we would have there as we look to go-to-market. You're correct that in your assumptions that in recent weeks with some of the volatility back in the market, we've seen the credit markets, see some of the interest rates back up with the 10-year treasury, adding about 40 basis points and some of the credit spreads in the non-investment grade world widening a bit and we probably will have a little bit higher cost of capital as we go to market. Given that over the next four weeks to six weeks, we will probably enter the market, probably a little bit premature for me to comment on what the exact cost of capital might be of our eventual capital structure. But I think we're still committed to going to the capital markets, putting some longer-term paper out. That would I think have a favorable benefit to our overall balance sheet as well as reaffirming our bank models that we have today.

Great. Thank you.

You bet. End of Q&A

Thank you. And there are no further questions at this time. So it's my pleasure to hand the conference back over to Mr. Phipps for his closing remarks. Sir, the floor is yours.

Thank you all for joining us this morning. Our teams remain keenly focused on serving our customers, closing the Halyard transaction, and improving our operating results. We look forward to updating you on our progress during our first quarter call which will occur on May 2. Thank you for joining us and have a good day.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Good day.