Accendra Health, Inc. (ACH) Q3 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the Owens & Minor's Third Quarter 2018 Financial Results Conference Call. My name is Bridget and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference call. 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. Truitt Allcott - Owens & Minor, Inc.: Thank you, operator. Good morning, everyone and welcome to the Owens & Minor's third quarter 2018 earnings call. I'm Trudi Allcott, and on behalf of the team, I'd like to read the Safe Harbor statement before we begin. Our comments today will be focused on financial results for the third 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 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 and an update on the progress we're making on our strategic plan; and Robert Snead, Vice President and Interim Chief Financial Officer, who will provide details on the third quarter 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? Paul Cody Phipps - Owens & Minor, Inc.: Thank you Trudi and good morning everyone. Thank you for joining us on the call this morning. I'll begin with a few comments on our quarterly results and then I'll move on to an update on the progress we are making towards transforming our company. The third quarter was characterized by solid performance from our products SBU driven by Halyard and strong growth and performance from Byram. However these gains were offset by continued pressures and underperformance in our legacy distribution business. During the quarter we had planned to see greater operational improvements in our domestic distribution business and our European logistics business. Capturing these improvements is still attainable and a top priority, but it will take longer than we had anticipated. We have added new leadership and resources to enhance our efforts in both of these areas and to accelerate our progress. In addition the acute distribution space remains a challenging environment and customer churn and margin pressures have continued. Robert will provide additional insight into our quarter results during his remarks in a few minutes. As we have discussed on previous calls, we have made significant moves to strengthen and diversify our business model and to position Owens & Minor for long-term success. The acquisitions of Byram and Halyard are performing well and are helping to counter the headwinds in our domestic distribution business. The transformation of Owens & Minor is based on successfully delivering on the following four objectives: one, strengthening our domestic distribution business; two, growing an attractive alternate site channels; three, integrating Halyard and expanding our portfolio of own brand products; and four, delivering new value-added solutions for both providers and manufacturers. Now I'd like to provide an update on the concrete progress we are making towards achieving our business transformation and in building out our strategy. As for our domestic distribution business, our top priority is improving our operating performance. I'm seeing signs of progress, but as I mentioned this is taking longer than we had anticipated. Success in stabilizing this business is impacted by competitive dynamics and we are taking actions to emphasize our differentiated supply chain and value-added solutions. Our new data-rich customer service model and our new solutions that are integrated with our customers' operations will enable us to deliver greater value for our customers. As for growing an attractive alternate site channel, our strategy is already delivering results. Byram Healthcare has given us great momentum in entering the attractive direct-to-patient home health channel. Byram is the second-largest player in the market. Byram brings to the market an established brand, advanced third-party billing capabilities robust patient expertise and a strong team. We are investing in new capabilities such as an integrated e-commerce and electronic catalog platform to enhance our patient's experience and a new B2B web portal to improve service to our payers and supplier partners. We are also in the early stages of connecting Byram's value proposition to our large IDN customers which includes accessing GPO contract pricing. The Byram team is having good success in pursuing and signing customers. As I mentioned last quarter, Byram recently won a major new contract which they are already on boarding. This new customer will further accelerate Byram's growth as it heads into 2019. Since acquiring Byram in August of last year, the team has exceeded our growth expectations. We are on track in our progress to integrate Halyard and expand our portfolio of own brand products. As we move through the integration process, our focus is on adding resources to this business unit and exiting the various transition services agreements. Halyard is showing positive revenue growth and is achieving early cost synergies. As I had mentioned previously, the Halyard transaction increases our own brand product percentage of revenue from low-single digits to low-double digits. This will be a meaningful source of our earnings as we go forward with our new business model. We now have the leadership and platform in place to drive growth initiatives for our own brand products. Halyard was a strong contributor to our results in the third quarter. However, as mentioned during our Q2 earnings call, we will experience higher production costs in the Q4 and into 2019, driven by higher commodity input costs. Our move to deliver new value-added solutions for both providers and manufacturers is also gaining traction. Our new value proposition is based on enhanced supply chain with a range of value-added solutions and services, is resonating with our customers. For providers, these solutions address significant customer pain points on a number of fronts such as inventory management, real-time consumption data at the point of care and product selection that drives standardization while reducing costs. For example during the quarter, we saw improved customer wins with our newly enhanced QSight point of use technology. Our customers are under enormous cost pressures and they want our help in reducing clinical waste and variation and reducing their total cost. For manufacturers, we continue to make headway toward becoming the preferred outsourcer for healthcare manufacturers. Recently we have signed a number of new manufacturer customers in the U.S. and Europe who are seeking our logistic services. These manufacturers value our extensive knowledge of healthcare logistics and our ability to deliver products all the way to the point of care. Now let me turn to our capital deployment, and specifically the recent changes to our dividend. As we have discussed on previous calls, we regularly review our capital deployment strategy and dividend. After extensive review and benchmarking, our board has adjusted our dividend so that it is aligned with our current earnings level. This move will allow us to continue to return capital to shareholders, while also deleveraging our balance sheet and deploying capital to transform our business. Now let me turn to our outlook for the remainder of the year. Based on expectations for the remainder of 2018, we now expect adjusted net income per diluted share in the range of $1.20 to $1.25. We will update 2019 guidance in the first quarter of next year. Against the backdrop of challenging industry dynamics, especially in our domestic distribution business, our transformation is well underway. We continue to take bold and decisive steps to position our business to deliver additional value to our customers and invest in capabilities and assets that enhance our value proposition in the marketplace. The company now has a stronger, more diversified business model with significant new sources of earnings and cash flow. We believe these new drivers of sustainable growth and profitability combined with our performance improvement initiatives will allow us to drive significant value for our shareholders' and to position Owens & Minor for long-term success. Now I'd like to turn the call over to Robert for a review of our financial results. Robert K. Snead - Owens & Minor, Inc.: Thank you Cody and good morning everyone. Today I will provide an update on our third quarter results, discuss recent changes to our capital allocation strategy and then discuss our outlook for the remainder of 2018. Consolidated revenues were $2.46 billion, an increase of 5.6% compared to prior year. Consistent with last quarter, revenue growth was driven primarily by our two recent acquisitions with contributions of $61 million from Byram Healthcare and $240 million from the Halyard transaction which is before eliminating inter-company sales of $52 million. As Cody mentioned, we are pleased with the performance to-date from both acquisitions. For the first nine months, consolidated revenues were $7.3 billion, an increase of 5.3% compared to prior year. We reported consolidated operating income of $21.4 million for the quarter and a loss for the year of $126.5 million. As a reminder, year-to-date results include a second quarter non-cash impairment charge of $165 million or $2.73 per share related to the goodwill and intangibles of our kitting businesses. Adjusted operating income for the third quarter was $48.8 million compared to $48.5 million for the prior year. Year-to-date adjusted operating income was $143 million compared to $138 million for the prior year. For the quarter, we reported a GAAP net loss of $565,000 or $0.01 per share and adjusted net income of $19.5 million or $0.32 per share. On a year-to-date basis, we reported a GAAP net loss of $175 million or $2.92 per share which includes the impairment charge mentioned previously. On an adjusted basis, net income was $65.1 million or $1.06 per share. Before I transition to our segment results, it is worth noting that our results this year include a significant year-over-year increase in our LIFO provision which is a non-cash item. More specifically, for the third quarter, the provision increased $6.6 million over prior year or $0.08 per share, and for the year-to-date period it increased $13.6 million or $0.17 per share. Now for our segment performance. Global Solutions segment revenues were $2.24 billion for the third quarter compared to $2.29 billion in the prior year. Results were affected by lower-than-expected growth from new and existing customers, primarily in our distribution solutions business. Quarterly operating income was $24.2 million compared to $37.6 million last year. The decline resulted from a number of factors including continued margin pressure, warehouse inefficiencies in certain locations, increased expenses to develop new customer solutions and the aforementioned higher LIFO provision. As Cody mentioned, the recovery in our operating performance is slower-than-expected and not where we want it to be at this point in the year. On a positive note, Byram continues to exceed our expectations. Turning to the Global Products segment. For the quarter, revenues were $350 million compared to $125 million in the prior year. Revenues include a full quarter of Halyard contributions totaling $240 million. Operating income for the quarter was $27.6 million, an increase of $17.1 million primarily from Halyard contribution. Excluding the impact of the commodity price headwinds Halyard continues to exceed our expectations. Turning to the balance sheet. Consolidated long-term debt was $1.64 billion at September 30th which represents more than $60 million in debt reduction since the close of the Halyard S&IP acquisition on May 1st. We remain focused on generating operating cash flow including managing our working capital to de-lever our balance sheet. Year-to-date operating cash flow of $123 million was positively affected by working capital timing and changes. Turning to capital allocation. The board declared a $0.075 quarterly dividend for the fourth quarter of 2018, representing a reduction of $0.185 per share from our last dividend. This change reflects our board's objective to adjust the dividend to our current earnings level and achieve a more balanced capital allocation. Our capital allocation priorities continue to focus on deleveraging the balance sheet, pursuing a disciplined investment strategy for our business and providing a return of capital to our shareholders. Finally, let me discuss the changes we are making to our outlook. As Cody indicated, for 2018 we are targeting adjusted net income of $1.20 to $1.25 per share. This reduction in guidance incorporates our results to-date and our expectations for the remainder of the year. More specifically, our Global Solutions business has not performed as well as we expected. In addition, we expect results for our Global Products segment will be impacted by higher costs for the goods sold in the fourth quarter, a portion of which are non-recurring in nature. As Cody mentioned, we intend to share our 2019 guidance with you in the first quarter of next year. Thanks. And with that I'll turn the call back over to the operator to begin the Q&A session.

Thank you. Our first question comes from Michael Cherny with Bank of America Merrill Lynch. Your line is open.

Good morning and thank you for taking the question. So, in thinking big picture, I know you walked through the numbers of headwind across your business and, Cody, you told that relative to what you had expected, you were hoping for better performance. How do you think about, as we transition into 2019, some of the items that you can attack, particularly on the core distribution business that are within your control versus items, in terms of competitive environment, in terms of pricing headwinds that you're just going to be cycling through and in terms of thinking about how you can get that stabilization of the core distribution business that you've been looking for? Paul Cody Phipps - Owens & Minor, Inc.: Yes. Thanks Michael. Let me define what we mean by stabilization. There's really three things that go into that. One is, reducing customer churn. The second is, as you know we pointed out that we've had a re-pricing going on throughout the industry. We're well into that. We're 18 to 24 months into that. So, we expect to see the pricing environment stabilize. And if those two things happen, we expect to see more of the operating improvements that we're driving, drop through to the bottom-line. So specifically to your question, what can we control? We've had a big focus on driving operational improvements. And one of the things we called out in this quarter is, we now think that's going to take longer to materialize. But that's within our control. We've got teams on that, we've got new leadership in place. And we're driving both service and operating improvements throughout our network. So, that's certainly within our control. We're making good progress, and it's just taking longer than we had originally anticipated. The part of the market that we don't fully control is what's going on in the competitive environment and net churn has been a negative for us. And now what we're focused on is our value proposition and our value proposition is focused on delivering a better supply chain. Our customers value that. We're winning new business, when we win new business it's because they want a better supply chain and they see that as the path towards sustained improvements in their business. And that's in stark contrast to other's models where it's more of a product-centric approach. You have to buy more products to get savings. So, we're out driving our value proposition and winning new business. And that's what we're going to continue to do.

Is it possible to give us an update on just where churn sits right now? Paul Cody Phipps - Owens & Minor, Inc.: I'll do it qualitatively. Churn for us – net churn is customer wins versus customer losses. And as we've said at any one point in time we have about 20% to 25% of our business out for RFP. And we're winning new customers, we're also losing customers and that has been a net negative for us this year.

And are you losing them to other traditional distribution and logistics providers? Or is there new competition coming into the market and/or the potential disintermediation and more direct sales? Just trying to think about how competitive landscape is developing around you? Paul Cody Phipps - Owens & Minor, Inc.: For us, because we're mostly anchored in the acute space, it's traditional competitors that we're up against.

Okay. Great. Thanks for the color.

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

Good morning. Thank you. Maybe starting with the guidance and the expected tick up in the production costs for the fourth quarter. It sounds like some of that's not recurring, but some of it may be. I guess can you give us a little insight on what's driving that? And then help us or split out what the recurring versus non-recurring potions would be? Thanks. Robert K. Snead - Owens & Minor, Inc.: Sure. This is Robert. If you take a look at our performance in the third quarter and then step back for how we're thinking about this year, we came in below what we were expecting, even though our EPS for the quarter was in-line with the consensus, we were below where we were expecting in the Solutions business. We actually performed better than we were expecting in the Products business. And then if you look towards the fourth quarter – and part of the reason we were doing better in the Products business because some of the commodity headwinds and other items that we had pointed out back in July took a little bit longer than we were anticipating to actually come through and hit the P&L. That's certainly going to be hitting the P&L in the fourth quarter. And so that's part of the reason we're indicating there'll be sequentially lower results in the Products business in the fourth quarter. And when you take all of that into account that's what's in our thinking in terms of the revised guidance. And then more specifically to your question on the cost of goods sold side for our Products business; there is a component in the fourth quarter that is the commodity side of the headwinds that we've been talking about this year, that's going to be reflected in our results. And then there's also a portion of it that was more discrete production related items that we're going to see in the fourth quarter. And some of those are non-recurring in nature and we wouldn't expect to necessarily translate into 2019.

Okay. So the discrete portion, is that half of the pressures that you expect to see incrementally in the fourth quarter? Is that something less than that or more? Robert K. Snead - Owens & Minor, Inc.: Yeah. It's probably less. And as we thought about that that's something that we're certainly factoring into our thinking as we indicated we'll be coming back to folks in the first quarter of next year with our more complete thinking on 2019.

Got it. Okay, and then on Halyard, the $240 million revenue contribution in the quarter, Cody you said you're pleased with the performance thus far. It sounds like momentum there has been a little bit better than expected. Is there much seasonality in that business? And any updates on how we should think about the trajectory of revenue from Halyard over the coming quarters? Paul Cody Phipps - Owens & Minor, Inc.: Again this was the first full quarter of Halyard results in our numbers and we're very pleased with how the integration is going. We've got a lot of effort going into exiting the TSAs and adding resources to our new products SBU. So that's all going well. And what Robert's pointing out is, as we bring that business in we're understanding the commodity cost and the production costs and that's what we factored into our results. Seasonality is not a big factor in our projections. Robert K. Snead - Owens & Minor, Inc.: We do see a little bit in the distribution business and this business, particularly in the U.S. a portion of its revenues go through, so the fourth quarter tends to have a little bit more heavier weight in terms of the revenue spread through the year. That's consistent with what you seen in our distribution business as well. And then the other point on revenues I'd make is that – and we mentioned this previously, relative to the expectations that we had when we modeled out the transaction itself, revenues have performed north of what we originally were thinking. So, that's been an encouraging sign.

Okay. Very helpful. Thank you. Paul Cody Phipps - Owens & Minor, Inc.: Thank you.

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

Great, thanks. Can you provide some color on the recent dynamics contributing I guess to the higher commodity cost than what you're most exposed to and what sort of visibility I guess you have on that headwind? And can you break out specifically or quantify the commodity pricing impact? And how much is, I guess, embedded in your fourth quarter expectations? Thanks. Robert K. Snead - Owens & Minor, Inc.: Sure. So, we have exposure to raw materials that are ultimately derivatives of petroleum products. Nitrile is a key component into the gloves we manufacture for example and polypropylene is another commodity that goes into a lot of the non-woven. And a lot of folks when they first get their heads around that they think that our raw materials are tightly correlated with oil and over the long run that is generally true. But in the near to medium-term, our raw materials can deviate from where oil is because it's a by-product of the process of refining and producing the oil. So it depends on individual or supply and demand dynamics broadly in industries for those commodities. The headwinds that we talked about are consistent with what we mentioned back in July that we're pointing to in the fourth quarter. I'd say spot prices have probably come a little north of what the original forecast was in that, with some of the taking back in the broader stock market economy and where oil is going to recently we'll see where that ends up for 2019. But that certainly was contemplated as we thought about it. I think the timing as I mentioned previously hit our P&L a little slower than what we were thinking which was helpful for the third quarter.

Okay. Thanks. And then on Byram what's outstanding in terms of the integration process there? And you spoke to incremental investments in customer solutions and IT systems. Where do you stand on that effort? Thanks. Paul Cody Phipps - Owens & Minor, Inc.: Yeah, Byram has been a real shining star for us. Again, it's consistent with our strategy to enter attractive alternate site markets. They are the number two player. The nice thing about Byram, the integration, it's not like how we're exiting TSAs and things, Byram is a, kind of, standalone business and where we integrate with them, it's where we bring scale to help their operations. So, we've done that on the distribution side, on some of the delivery capabilities on sourcing things where we can bring scale to them. And we're investing to enable additional growth. So, I mentioned that we're investing in new e-commerce capabilities, B2B portal capabilities. So, the actual integration effort there is much easier than it is on the Halyard front. And it's really – they've been exceeding our expectations. Robert K. Snead - Owens & Minor, Inc.: And I'd just add to Cody's comments, the back office side of the integration is complete for Byram. The opportunities that we have ahead, as Cody mentioned, are on the revenue side to help fuel their growth. And there are some operational, more complex-related operational synergies that we're working on, that are still out there for us to capture.

Okay. Great. Thank you.

Our next question is from Robert Jones with Goldman Sachs. Your line is open. Robert Patrick Jones - Goldman Sachs & Co. LLC: Great. Thanks for the questions. I think Cody and Robert even, some of your comments just now helped quantify some of the implied step down into 4Q. But I guess, if we think about just the major headwinds you guys are highlighting here, it sounds like there is an expense in the Global Products business, you touched on this commodity issue and then, kind of, this continued pressure from the competitive landscape on the core acute care distribution business. As we think about maybe those three big buckets, and I know you're not giving guidance on 2019 today, but just qualitatively even, could you maybe just help us think about how we should be thinking about those headwinds as we move beyond 2018? Paul Cody Phipps - Owens & Minor, Inc.: Yeah. I'll start and then Robert can jump in here. Let me start with the operational challenges in our core distribution business. We've got really good efforts underway there Robert and I am pleased with the progress we're making. We'd expect it to see more progress in the fourth quarter than what we're seeing. So, we now expect some of those challenges to persist into 2019, and we're factoring that into our thinking as we go forward. I'll let Robert comment on the cost headwinds we see in the Products division. And the reason we did not give guidance, we're in the middle of our bottom up planning exercise for 2019, we thought it was prudent to complete that exercise before giving guidance for 2019. Robert K. Snead - Owens & Minor, Inc.: And Bob, I'd just to Cody's comments, on the commodity side, I think it's pretty consistent with what we put forth in July. Obviously, as we look towards 2019, we're going to have an updated forecast for where we think commodities are going to be for the year. And we will share, or our plan is to share our thinking along those lines, just to align with folks with what our outlook is for those commodities. Similar to what we've done in the past in terms of currency and some other items that are outside of our control. So, we'll provide perspective on that. On the operating expenses on the Solutions business, that one was probably, at least, from our perspective where we had more disappointment in the third quarter quite frankly. But that's also – the flipside of that is, it is an area where we have more direct control. And we have doubled down on our efforts there. And the opportunity that we see in that is one that we're laser-focused on capturing and we look to get some of that in the fourth quarter, but really gain momentum on that effort as we move into 2019. And you had a third item and I missed what that was. Robert Patrick Jones - Goldman Sachs & Co. LLC: No. I think that covered the main things that you guys had outlined. I guess, just one follow-up. Cody on the customer churn, you highlighted being more negative for you guys this year than positive and that you're losing to what you believe is, kind of, the traditional competitors in the marketplace. Any feedback you've gotten from customers as far as the reasons why on those instances where you're not winning the business? Any rationale for why they're going with your traditional competitors? I know you guys have done a lot to add alternate site and add owned products, I mean is there anything that they're citing to you that you feel like you guys don't have today that you still need to have to compete more effectively? Paul Cody Phipps - Owens & Minor, Inc.: No. Bob I think it's really what I said, that our customers are under enormous cost pressures. I mean every one of them had multi-hundred million dollar cost reduction goals. And again, our value proposition is based on having a better supply chain, going after large and sustainable improvements in the supply chain. But another more product-centric approach is, buy more products and you'll get savings that way. So when we lose, it's typically because the customer is pursuing that approach versus a longer-term supply chain approach. And we are winning new customers. So, when we talk to our customers that we've won, the reason they're going with us is because they believe that the path toward a better future is through having a better supply chain and that's certainly the cornerstone of our value opposition. Robert Patrick Jones - Goldman Sachs & Co. LLC: Okay. Got it. Thank you.

Our next question is from Eric Coldwell with Baird. Your line is open. Eric W. Coldwell - Robert W. Baird & Co., Inc.: Hey, thanks. I'm just going to play off that last line of questions. If Medline and Cardinal are winning these accounts then that wins are based on their ability to provide more owned brands and private label. Are they the effectively giving distribution away? Is that become a loss-leader in the industry? Paul Cody Phipps - Owens & Minor, Inc.: What we've said, Eric is that there's been an industry-wide re-pricing of distribution and from our standpoint, part of that re-pricing is driven by subsidizing distribution with product margins. Eric W. Coldwell - Robert W. Baird & Co., Inc.: Yeah. Paul Cody Phipps - Owens & Minor, Inc.: So, again – but we're winning customers too. And our belief is that, what's in the best interest of our customers and the long-term health of the industry is a better supply chain. That's why we're investing in connecting our supply chain along the continuum of care and investing in solutions that bring greater transparency to the supply chain. And when we win those are the reasons that customers' cite for going with us. There's also a bit of – they don't want to be forced to buy products to achieve savings. They like having choice. So, again that's a hallmark of our value proposition. Eric W. Coldwell - Robert W. Baird & Co., Inc.: That's fair. Shifting gears you talked about your logistics businesses in both the U.S. and Europe winning a number of new manufacture relationships, which 3PL providers are those coming from? Are you seeing it more from, maybe some of the legacy trucking companies, the DHLs, the FedExs, UPSs of the world, or is it coming more from, say, a more traditional distributor that also has a 3PL line? Paul Cody Phipps - Owens & Minor, Inc.: Yeah. We've been pleased with the progress there. And again what we hear from those customers both in Europe and the U.S. when we win those customers is, they value our expensive healthcare logistics capabilities. They like the fact that we're healthcare-only and not mixing their products into DC's that have non-healthcare-related products. The other thing they really value about us is our – we don't just back a truck up to the back of a hospital, we actually can get their products all the way to the point of care, the cath lab, the operating room. And so we're winning – when we win those engagements, it's because they value that knowledge we have and that expertise to get all the way to the point of care and that's coming from various competitors. Robert K. Snead - Owens & Minor, Inc.: And Eric when I, sort of, think through the list of different wins that we've had here recently and I think about where they've come from, it really has hit all three of the things you mentioned. I can think of examples where it's come from the big players that are multi-national, you mentioned there's a couple of local folks that are more country-specific that we've been able to secure business with. And then the last piece, which is sometimes even more interesting, is that, it's an outsourcing play. So we've won business where we've helped the manufacturer that said, hey I'm doing this. I've got my own warehouse and I'm not very good at it. And I struggle with it. I don't keep up with. There's a lot of regulatory compliance aspects to that that are different in doing the handling within the warehouse than it is, sort of, just complying with having a 510(k) and that sort of regulatory side of healthcare, that we bring to the table we have expertise in and it's a headache taken away for some of these manufacturers and we get them out of having to do that themselves. But we do it in a way that we're highly integrated with their systems. They still have visibility and control over the inventory and how their product gets to market and it's a win-win for both sides. Paul Cody Phipps - Owens & Minor, Inc.: I might just add to that the cost pressures in the industry are cascading through the industry. So, we see more growth here as manufacturers face these cost pressures too. They're increasingly asking the question why are we in distribution? And we want to be there to support them. Eric W. Coldwell - Robert W. Baird & Co., Inc.: That's all fair. Good answers on that. Last one from me, I know it's a tough one and there are a lot of moving pieces here with bank definition, debt and leverage. But as we ran our back of the envelope on what your fourth quarter guidance implies, it looks to us like you might be exiting the year with maybe 6.5, 7 times gross debt on a bank definition basis. Are we too high, too low, what are your thoughts on that? And how comfortable are you with the covenants at this point on the debt position? Robert K. Snead - Owens & Minor, Inc.: Yes. That number is certainly too high and we've obviously done all our math as well and we're in compliance with our covenant. Eric W. Coldwell - Robert W. Baird & Co., Inc.: Okay. And you think that'll be the case exiting 4Q based on the midpoint guidance for 4Q? Robert K. Snead - Owens & Minor, Inc.: Correct. Eric W. Coldwell - Robert W. Baird & Co., Inc.: Okay. Good. Thank you very much.

Our next question is from Steven Valiquette with Barclays. Your line is open.

Thanks. Good morning everyone. Paul Cody Phipps - Owens & Minor, Inc.: Good morning.

I just have a quick question about the competitive landscape in the domestic hospital distribution business. Some of the customers that you mentioned, they might be losing, I'm just curious about the mechanics of this whether you have any rights of first refusal language in the contracts where you can maybe match prices of competitors trying to take the business from you, if you want. So, I guess really the question is, are you voluntarily walking away from some of these customers because of the pricing or are you actually matching the lower price that some of your competitors might be offering and then perhaps still losing those customers for various other factors? Just trying to understand some of the mechanics around that? Thanks. Paul Cody Phipps - Owens & Minor, Inc.: Yeah. The type of provisions that you just mentioned typically don't exist. Mechanisms like that actually are more common on the manufacturer solutions side of our business where we may make specific investments that the customer may need to buy us out of in order to exit those contracts. With the distribution side of the business, unless we've entered into a similar, what we call strategic logistics center and some of those investments will have certain penalties and aspects to the arrangements because of the level of investment we've put behind supporting the customer. But in general, those types of provisions don't exist. And when we are – more often when we are declining business, it's more on a case of where we're in a pursuit mode and we're going after a business and we decide that it doesn't make sense for either our network or the types of solutions beyond just distribution that they may be willing to sign up for with us and that's where we maybe more inclined to, sort of, walk away from business as opposed to trying to retain it.

Well it seemed like a typical hospital GPO. I mean every large distributor will have a contract, so it's kind of a hunting license to try to get some of the members to use you as the primary distributor. I guess if you – and again, if you're losing some of those customers, do you just get a notification from those hospitals, just saying, hey, we're going to switch to – company X is our primary competitor, thank you very much, or how much chance do you have to try to retain this business against, I am just trying to get more color around that? Paul Cody Phipps - Owens & Minor, Inc.: Yes. I mean these typically follow a pretty well defined RFP. But you're right in your assessment of how the GPO contracts work and then we go contract with individual hospital and IDNs, and they follow a pretty well-defined RFP path, so we have opportunities to compete and retain business and we're doing that.

Okay. All right that's helpful color, thank you.

Our next question is from the line of David Larsen with Leerink Partners. Your line is open.

Hi. Can you talk about some of these restructuring programs that we have, sort of, talked about in the past like I think there was $70 million to $80 million of cost reduction efforts that were going to recur in 2018, and then the goal was $100 million to $150 million I think in 2019. How your – I think, $40 million to $50 million of synergies were expected? Just any, sort of, thoughts on where we stand with those and what we should see in terms of earnings flow through? Robert K. Snead - Owens & Minor, Inc.: Yeah. You're referring to our RBT as one of those programs. So, again, as we discussed last year, we had solid success with our restructuring and cost reduction programs. Unfortunately, a lot of that has gone to offsetting the declining margins in our core distribution business. We still have a very strong focus on operational improvements throughout our network. We've referred to that. That's been slower to materialize than we had hoped this year and that's one of the things we're calling out. Some of that's driven by the robust job market, which has led to higher turnover in our DCs, so we remain very focused on that. We still have a goal of delivering $100 million over the next four to five years of operating improvements. And it's been harder again in the distribution network to have those materialize.

Okay. And then in terms of GPO renewals where are we with those please? Thanks. Robert K. Snead - Owens & Minor, Inc.: Sure. We have a renewal next year. And then I think that there's only one renewal towards the latter part of next year and the rest are beyond 2019.

Okay. Thanks very much. Paul Cody Phipps - Owens & Minor, Inc.: Thank you.

Thank you. And we have time for one more question. That'll be from Lisa Gill with JPMorgan. Your line is open.

Hi. It's Anne Samuel on for Lisa. You've covered a lot on the domestic distribution business. Could you maybe touch on what you're seeing internationally and maybe any competitive changes there? Thanks. Robert K. Snead - Owens & Minor, Inc.: Sure. On the international business, we're present in two different ways with the Halyard acquisition we do have a products business in a number of countries such as Japan and Australia overseas. And as I mentioned earlier, overall that business has come in slightly north of what we were originally anticipating. Of course, the actual results vary by country. And then in terms of our supply chain, or manufactured solutions business in Europe which operates under the name Movianto, that business has had, as Cody mentioned, some interesting wins here recently particularly a large customer that we're onboarding here in the fourth quarter. We have had some losses as well. And so we're focused on driving that business forward. We have new leadership that we're putting in place there that we think will help improve and drive performances as we move into 2019. That business has a similar dynamic that Cody mentioned before around the pressures that these manufacturers are facing and the opportunity to outsource in instances where they maybe directed today to drive savings and still maintain visibility within the channel.

Great. Thanks very much. Paul Cody Phipps - Owens & Minor, Inc.: Thank you.

And I'm not showing any further questions. I'll now turn the call back over to Mr. Cody Phipps for closing remarks. Paul Cody Phipps - Owens & Minor, Inc.: Thank you. Despite a challenging year, we are making solid progress in transforming our company. The Halyard acquisition has propelled us forward. It's an attractive asset that is enabling us to enhance our own brand product offerings. At the same time, Byram is growing and it's diversifying our revenue base and opening new opportunities in the large and growing post-acute market. With significant changes to our business model underway, our focus remains on improving our operating performance and on executing our strategy to reposition Owens & Minor for long-term success. We look forward to updating you on our progress on our fourth quarter call in February. Thank you for joining us today.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone have a great day.