Good morning, ladies and gentlemen, and welcome to the Owens & Minor's First Quarter 2018 Financial Results Conference Call. My name is Glenda, 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 first quarter 2018 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 first quarter of 2018, 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 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, the new 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 today. I'll begin with a few comments on our most recent acquisition and our results for the quarter. Then I'll discuss the continuing steps were taken to transform our business and the potential we see for our new company going forward. Randy will follow with the discussion of our result and more details about the Halyard S&IP transaction which closed last week. We're excited about the opportunities we see in the market for the combination of Owens & Minor and the Halyard's S&IP business. This transaction marks a significant step in the transformation of Owens & Minor into a true global healthcare company. Our team's around the world are excited about the future and are already hard at work executing our plans. Our immediate task is the on boarding of our new teammates and bringing them together under our new combined organization. We believe the combination of our two companies gives us a stronger position in the market place with a leading portfolio of products and exceptional teams around the world. The Halyard transaction is the largest in our history and by combining Owens & Minor and Halyard's S&IP business; we can leverage our existing channel and our leading portfolio of products to grow our business. The S&IP acquisition also gives us significant opportunities for growth in attractive new markets including Canada, Japan, South Africa and Australia. To focus our organization and enhance our execution we've formed two strategic business units. The Global Solutions SBU with Stuart Morris [ph] Hipkins as President and the Global Products SBU with Chris Lowery as President, who's most recently COO of Halyard Health. This new structure for our organization trade sharp execution focus and clear accountabilities to move our…

Thank you Cody and good morning, everyone. Today I'd like to start our discussion with our results of the first quarter and then spend some time talking about the Halyard S&IP business which we acquired on April 30. For the quarter, consolidated revenues increased 1.9% and $2.37 billion. Consolidated operating income for the quarter was $24.2 million compared to $35.5 million last year. Adjusted consolidated operating income for the quarter was $47.6 million virtually the same as last year's first quarter. Performance during the quarter was affected by the previously discussed ongoing price and margin trends and higher than expected cost in the US and the UK. For the quarter, we reported net income of $8.2 million or $0.13 per share with adjusted net income of $26.2 million or $0.43 per share. The adjusted effective tax rate for the first quarter was 29.6% reflecting lower income in a more favorable tax jurisdictions. However, we continue to expect our adjusted effective tax rate for the full year to be in the mid-20s. for the quarter, our consolidated asset management metrics were in line with recent trends with DSOs of 28.9 days and inventory turns of 8.3 times. We call that both measures now include Byram and these metrics will further adjust as our business mix continues to evolve with a consolidation of the Halyard S&IP business in the second quarter. Cash flow from operations was $18.3 million compared to $26.4 million use of cash last year. And our cash balance at the end of the first quarter was $87.6 million. As we've indicated in the past, we've organized our business segments into two strategic business units. Global Solutions and Global Products. For your convenience we have filed an 8-K today containing our historical results and the new SBU reporting segments. The…

[Operator Instructions] our first question comes from the line of Michael Turney [ph] from Bank of America. Your line is now open.

I want to think about, I know you're not providing guidance but maybe if you can talk about the puts and takes as you expect the business into this year. if you can talk about what are some of the tailwinds you have? Maybe explain some of the comp effects, that you've had in terms of some of the recent headwinds where there's customer attrition, market pricing, whatever it maybe just so we can get a sense on how at least the base business, traditional distribution business absent S&IP should be growing as we head over the course of this year, especially with all the noise I would say, that is currently going on as you work to integrate S&IP.

Yes, Michael let me take that and then I'll ask Randy to comment. First, I think we've been clear - we expect the challenges that we've seen in the acute distribution space to continue, so from a headwind standpoint, the margin pressure in that space. I would call that out as the primary headwind and then we still expect to be working through some headwinds in our international segment. On the tailwind part of this and where we're excited, we're very excited about the steps we've taken to strengthen and diversify our business model. So going forward, we expect to see benefits from the Halyard S&IP acquisition obviously, it's going bring platform for growing our own brand products and we have more headroom there than most. And the second one we're very excited about is, is Byram and how it's allowing us to access the attractive alternate site market. So I would call both of those out as areas where we expect to see tailwinds and obviously we're working very hard to improve the sustainability of the margins in our distribution business. Randy?

Sure, Mike. I think Cody said it very nicely and as you'll know, we've been highlighting some of the challenges in the - what we formally call the core distribution business and the ongoing transformation activities that performed pretty well in 2017 and are up to reasonably start in 2018. With the new segments, a lot of these activities are going to be captured in the global solutions business and I think when you put the core distribution business together with our transformation activity, the consolidation of Byram and the positive results they're showing. I think we have a fairly reasonable outlook and as we said, in our last quarter we were looking for sequential improvement over the fourth quarter which admittedly was not a great quarter, but much more in line with the third quarter, I think that's what we delivered and I'd expect to continue to see that kind of performance going forward.

Understood and then just one other question. When you think about the rapid business transformation and the steps you're taking to reposition some of the cost base on a long-term basis. Is there some kind of calculation or rule of thumb we should be thinking about in terms of type [indiscernible] growth you need to see some of those RBT cost savings flow down to the bottom line and going forward as you continue to pursue on this plan, what do you think can contribute just to broad based margin expansion versus what some might be reinvested in the business?

First of all I'm very pleased with how that team's operating it, we're going into our second year of that business transformation effort and we're seeing very good results from it. Not all of it related to the productivity in our facility, so what I say is, we expect to see continuous improvement there and contributions. The one area that you're pointing out that is more challenging, we had some loss business last year and some deleveraging going on and in that environment it's very difficult to drop productivity improvements through to the bottom line. We're starting to see the business stabilize and when it does, we expect to see more of those DC [ph] productivity initiatives flow through to the bottom line. As you've seen we've committed to $100 million and $150 million of sustained improvement by the end of 2019.

And Mike just to sort of echo those comments. Historically the trend of that business has been pretty in line with overall utilization rates since we always get a comment about utilization rates, I might as well address it here. We continue to see reasonable utilization. Obviously the flu season in the first quarter probably contribute to some of that but overall, we can still believe there is a positive nature to the utilization rates in that segment of our business and typically that order is fairly well on a go forward basis.

Understood. Thanks so much.

And your next question comes from the line of Robert Jones from Goldman Sachs. Your line is now open.

I just wanted to go back to the performance of the core business a little bit better. I know you guys commented on it, but within global solutions. It seems like maybe revenue would have been down slightly versus last year, if we adjust for Byram. I know it's like operating income in the segment might have been down, maybe roughly north of 30% if we adjust for Byram. I guess, first is that directionally right and then Randy, if I heard you correctly, would you characterize the core business has haven't gotten better sequentially versus 4Q. I know 4Q was a tough quarter and then, just relative to the trend do you think that core business in 1Q was more better or just trying to get any thoughts around the core business would be helpful.

Sure. kind of have two questions, there one sort of top line growth year-over-year and where we're going to be. As you recall, we had a fair amount of turnover in the last year's first quarter with some puts and takes that's all come through the business. so then I think, when we're thinking about sequentially and where we're going, we continue to believe that we have from an overall volume through the channel, some reasonable opportunity to continue to see some positive trends there. And what I was alluding to with the sequential trends, we announced in yearend results. we talk about expectations in the first quarter and we didn't give performance guidance but what we suggested is that, we would continue to see sequential growth on a consolidated basis. We happen to see good growth in our two new segments as in aside [ph], but we expected to see sequential improvement in terms of the overall performance of the company more in line with the third quarter and I think we accomplished that.

Okay, that's helpful and then Randy, just to follow-up on the synergies. It sounds like you expect from S&IP to be the same as what you had outlined previously but maybe the cost might be a little bit higher to onboard the business. if I heard you correctly, I'm just curious are those separate from the synergy targets that you outlined?

We've never really talked in terms of the cost to achieve this synergies. I think there's always going to be a number of acquisitions related cost that will incur over the next year or two as we integrate this business on a global basis. So they were not net numbers, they were just raw synergy numbers. But you're absolutely correct. The goals and the opportunities $40 million or $50 million over the next three years and $13 million to $14 million in the next 12 months is what we continue to look for.

Very good. Thank you.

Robert, I just wanted to add to that - we just closed this transaction. I think Randy articulated how large and complex it is, but I do want to just say that, we're very pleased with the early day. I mean - Chris Lowery is leading this, he was the former COO of Halyard, the transition teams are off to a really good start. It's just early on in a very large integration effort.

Understood. Thank you Cody.

And your next question comes from the line of Erin Wright from Credit Suisse. Your line is now open.

I guess a follow-up to that question. I guess what are more specifically some of those complexities that were somewhat surprising at the carve-out that you were speaking to and in terms of those incremental cost before and potential net synergies coming from the acquisitions, if you can maybe quantify that a little bit better, that would be helpful. Thanks.

Sure, Erin. I think when we announced the transaction six months ago, we recognized that this was a carve-out and so I wouldn't say that they were surprising. I think surprising nature was just as we went through it and around the world, the amount and enormity of the activity that would be required to create the infrastructure to absorb both the teammates that we've taken on and a variety of locations around the world as well as just our ability to conduct business on the first day. that said, as we look forward over the next the proverbial first 100 days is just a tremendous amount of activity and as Cody indicated we're off to a very good start, but again we have a significant number of TSAs particularly in the first 90 to 100 days to ensure the transition, we still have teammates that are transitioning based on local rules and regulations and how that occurs, we've got a few albeit small rolling closes of a few local jurisdictions around the world and so there's just a tremendous amount of moving parts, that I think when we announce the transaction didn't anticipate just the length of time to accomplish the closing activities and the on boarding activities. And I think as we move through that, again over the next couple of months and we'll be in a better position with increased visibility and transparency throughout the organization to give you guidance as we move forward.

And I would just add, one of the goals I've set for the organization when we started this diversification move was to do this better and if you look at the results - Byram know it in just the first period, first second period with Byram, that acquisition is exceeding our expectations. The integration efforts, everything the teams' did there is exceeding our expectations we want to bring that same approach with Halyard and we're off to a good start and we see very compelling value from both of these acquisitions, but we want to be very precise in outlining what we expect.

Okay, great. That's helpful and then from a capital deployment perspective. How quickly kind of do you expect to delever here I guess, what sort of balance sheet flexibility do you have now? Thanks.

Sure, what we said all along and what we've said during our capital raising efforts. Is that over the next three years or so, we would expect to get down to sort of pre-acquisition levels in terms of our total debt-to-EBITDA which would be back down into the mid-three's. we'll be relatively speaking well into the five's upon closing. So again we recognize that we'll be fully utilizing our balance sheet, but the focus on improved earnings integration getting off of the TSAs and continue to improve cash flow and earnings over the next couple of years, will certainly continue to that and allow us to deleverage in appropriate period of time.

Great. thank you.

And your next question comes from the line of Sean Dodge from Jefferies. Your line is now open.

So maybe going back to Halyard and just thinking about the timeline a little more for the stages of the integration. It sounds like there is a lot of upfront focus on building out the infrastructure while you sell the TSAs in place. When we think about the opportunities you mentioned for growth, so opening up new markets to sell the rest of the Owens & Minor platform, it sounds like that's a little bit further down the road in the next, that's going to be focus much over the next 100 days.

Well at the end I think let me restate part of the thesis here Sean, which is one; we were low single-digit owned brand product. So first by making this move and bringing in the Halyard S&IP products we go from low single-digit to low double-digit of owned brand products and that's just by getting the integration right out of the gates. Another opportunity we see is, we have our kitting business and we control what goes in those kits. So we have a growth opportunity to put more of the Halyard S&IP products into our kits. Another opportunity is to start to take our MediChoice brand, our own brand that we have here domestically and start to sell that internationally now with the clinical resources that Halyard brings. So I think what we're trying to say is that the immediate focus is on making the integration successful, standing up the new global products SBU and we see lots of value there and then appropriately staging those other growth drivers as we look ahead. But most of the focus right now is making sure we get that initial phase, right.

And just to echo that again and add more some colors. One of things that we spend a tremendous amount of time on with Chris and the activities and what we talked about in our prepared remarks was the focus, was beyond integration and making sure that the pieces are all going to work - fit together, we can take the costs out and create those synergistic opportunities on the cost side. And Chris understands and the team's understand around the world. We're wanting to hit the ground running with these products as we've said, the products already flow through our channel. So on the revenue side of the equation don't mistake the fact that we are very prepared to continue to be focused there. So there is no delay and it's sort of top line aspect of that.

I think the other thing I'd add to is, we know the Halyard folks, well we've been strategic partner of that business for a long time and what's exciting for both them and for us to is to bring the two organizations together. Within the old Halyard organization there was a lot of focus on other medical device categories we're bringing them over here and they are the focus and we formed this new global products SBU. So I would say the esprit de corps amongst the two organizations is very high to, let's get out there and sell more products. So we just want to get that initial phase right.

Okay, very good and then. On the kitting business I know you've been wrestling with some production issues. It sounds like those have been stabilized in the United States, but still a little challenging internationally, did I interpret that right?

First of all, what we used to call the CPS business is now part of the global products SBU and we like it under that new leadership and team structure, that business made very good progress operationally and both domestically and abroad. So stabilizing the business and both of those units are now turning toward growth and that's going to take some time, but we were pleased with the progress they made to operationally improve and position the business to grow.

Okay, very good. Thank you again.

And your next question comes from the line of Steven Valiquette from Barclays. Your line is now open.

The first one just despite the general market comments flu prevalence which is lower acuity. There's actually been a lot of discussion this quarter from the publicly traded hospital companies witnessing greater acuity within their in-patient and mission mix. So I guess I was curious whether you guys were seeing any evidence of that higher acuity for admission within your own SKU sales mix in the quarter and also more importantly, perhaps did that help your results [indiscernible] on 1Q versus what your results would have been otherwise in the first quarter? thanks.

Thanks Steven, that's a great question. Going back to the January, February timeframe we did see some incremental volume flowing through the channel. We attributed a large part to some of the activity around the flu season and so that activity at the acute care center really being driven by that, little softer in March timeframe, but again so really pretty good quarter in terms of utilization and volume through the channel. [Indiscernible] a lot of attention and stay close to our customers to try to sort of get some visibility and sustainability if it was more just a flu season or something else there. But again, always good to have increased volumes and positive first quarter, it's a good way to start the year and we'll keep you updated as the year progress, but that's where we are so I think it's pretty much aligned with. I listen to the 10 A call and the HCA call and they seem to indicate similar trends.

Okay, great. maybe one other quick one, if I can sneak another one in. with the balance sheet capacity you're spending on M&A and the associated increased financial leverage. Some investors are asking us about your dividend policy and whether you plan to stay committed to a current levels or could there perhaps be a change in your dividend philosophy going forward. Thanks.

Sure. Absolutely in terms of our dividend policy as we indicated in our remarks, the board did authorize our dividend and we're continuing with our history of continuing to grow the dividend. One of the things we spend a lot of time on during the past year, as we made both the Byram and Halyard acquisition with understanding how well we could do and sustaining the dividend as we simultaneously delivered the balance sheet and we continue to believe that we can do both and move the business forward and continue to grow. So I think, at least at this juncture there's been no change in our perspective on that.

Okay, that's great. thanks.

And your next question comes from the line of David Larsen from Leerink. Your line is now open.

Can you talk a little bit about the year-over-year growth rates for Byram and Halyard? What were those revenue growth rates and what are the operating margins?

Well when we talk about Byram, we can only give sort of anecdotal growth perspective. It was not a public company last year, it was part of a large organization. As Cody suggested in this remarks and he commented on, we continue to see both sequential nice movement in that business both from a top line and from an operating perspective and so we're very pleased with the acquisition and the progress that's been made and the future outlook there. We haven't given guidance on margins, but we continue to see very nice margins there. It's well above what the historical distribution business was and as I think most folks understand and as Cody pointed out. the home health and some of the chronic disease states that Byram support is one of the fastest growing segments of healthcare. So again for both the top line and profitability perspective, we're real pleased with that acquisition and how it's going. With regard to Halyard, we have tried to give some indication along with the [indiscernible] it's out there and what Halyard has been. We saw some pretty positive results in the fourth quarter sequentially as is business continued during the transition and in the first quarter that, we continue to see some positive momentum in terms of revenue growth. So I think some of the concerns about the trend line growth of the past year I think beginning to be addressed with some of the more recent results. so again we're very positive about the acquisition and the opportunity to integrate it and really see this as a springboard to the future.

And David if I could just add on Byram case, again exceeding our expectations accretive to our earnings. What's been nice and just we've owned it since August of last year, but our teams have done a nice job of connecting the Byram team to large IDNs and we're starting to unlock growth there and what we see, is as the industry moves, the value base payments more and more of our large IDN customers care about following their patients to their home and we see in compelling opportunity connect to Byram value proposition back to our large IDNs. Little early on that, but I'm seeing a nice trend there and I like the way the two teams are working. But for purposes right now, growth is exceeding expectations and as Randy said it's accretive and much higher margins in the core distribution.

Great. Thanks and then when do you lap these customers losses and do you have any significant renewals on horizon? Thank you.

Most of the significant exists and things that we referred to over the past couple of years are going to be behind us as we move into the second and third quarter - so from a top line perspective we should begin to see more reasonable comparisons as we move ahead here. But there's just the normal trend and churn in our business every year, so there's ebbs and flows to that. and as far as any meaningful renewals, as we've indicated a number of times. Anywhere from about 25% to 30% of our business is always up for renewals every year. There's large customers, small customers, so that the breadths of I would say, we have ongoing opportunities to continue to retain and grow our business as we move forward, but that's kind of everyday life for us, as we go forward. But I don't think it's anything that's material when you look out ahead.

Great. thanks very much.

[Operator Instructions] and our next question comes from the line of Eric Coldwell from Baird. Your line is now open.

I wanted to go back to David's question just now, on Byram and the growth rate there. Last quarter we had Byram doing $129 million of sales. You reported $118 million today. But you just said it grew sequentially. So I'm hoping to get a little more specificity on what you're saying there.

Sure, Eric. And I'll be little more specific - I think it grew sequentially based on our own expectations of where it should be, but the Byram business is seasonal as I'm sure you know that side of the business with their leverage to reimbursement and third party payer and so in the first quarter when people are hitting their deductibles, there's always a bit seasonality and that and fourth quarter is seasonally their strongest quarter. So you're absolutely correct, but I misspoke relative to just the absolute numbers as speaking more in terms of around expectations. But year-over-year it's seeing very nice growth and we continue to be very positive about the opportunities to leveraging that business with our own customer base and channel access which is the steep is behind [indiscernible] not only Byram, but also Halyard. So combining both from a more vertically orientation on that and expanding on the continuum care with Byram certainly creates opportunity for us to continue to see nice growth and improved profitability on a go forward basis.

Got it. Quickly on S&IP. We had a lot of questions here obviously, but how much of their inventory is moved through the channel on a consignment basis?

Formally their inventory and consigned through us.

Consigned globally. So perhaps in these 90 countries they're in that - they might not have the infrastructure or footprint, they might be consigning maybe through some kind of third party organization or directly to a hospital in some country. I'm curious how much of that inventory might be under consignment.

Well we would be integrating or consolidating all that inventory, if it were consigned. There's not a given their portfolio or the portfolio that we're acquiring. There is not a lot of consigned [ph] inventory. Perhaps [indiscernible] and some of the products they're selling has a little bit - in the nature of both products. But we're going to get the vast majority of the inventory on our books that move through. We have a few third party or 3PO like situations which creates synergy opportunities with our own global distribution logistics channel. But most of that again that would be to use your word a consignment of owned inventory at a 3PO but again that would be consolidated on our balance sheet. But over the traditional consignment stock but at a hospital or point of care, that usually doesn't occur within these products.

Okay and then last question, do you know how the inventory is tracked? What the systems are in each of those countries? Is it one global standard? Is it kind of some of legacy stuff that we've seen with some other global medical supply companies like Excel spreadsheets or is this a more robust cloud-based system? How do you track inventory in that business?

I think this gets to one of the challenges and opportunities of the integration and this sort of transitional period and part of the myriad of TSAs that we have in place, one of them is an IT TSA. We operate a variety of platforms around the world and I think that one of the reasons that we acquired the underlying IT systems was so that we could create a little bit more continuity as we move forward. The basic infrastructure technology that Halyard was utilizing was an SAP platform around the world. But I would say it's not cloud based, we're not using Excel Spreadsheets but we're somewhere in between and there's opportunities as we move forward. But again the long pole in the tent so to speak will be the IT transition which is we're expecting sort of an 18 to 24-month opportunity and I think both the Remainco [ph] of Halyard plus [indiscernible] both recognizing the cooperative opportunity and really focused on doing the things necessary to ensure a smooth transition there. But again there's going to be a lot of work around that going forward.

All right, thanks very much that's helpful. Appreciate the comments.

[Operator Instructions] and there are no further questions at this time. I will now turn the call back over to Mr. Phipps for his closing remarks.

Thank you for joining us today. We're excited about the steps we've taken to strengthen and diversify the company including the Halyard acquisition. We look forward to seeing you on the road this summer and updating you on our second quarter call. thank you.

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