Good day and thank you for standing by. Welcome to Owens & Minor's First Quarter 2022 Financial Results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. [Operator Instruction] Please be advised that today's conference is being recorded. [Operator instruction] I would now like to hand the conference over to your first speaker today to Alex Jost, Director of Investor Relations. Please go ahead.

Thank you. Hello, and welcome to the Owens & Minor First Quarter 2022 Earnings call. Our comments on the call will be focused on the financial results for the first quarter of 2022, as well as our full-year outlook for 2022. Both are included in today's press release. The press release along with the supplemental slides are posted on the Investor Relations section of our website. Please note that during this call, we will make forward-looking statements. The matters addressed in these statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied here today. Please refer to our SEC filings for a full description of these risks and uncertainties, including the risk factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q. In our discussion today, we will reference certain non-GAAP financial measures, and information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release and on our annual report on Form 10-K. Today, I'm joined by Ed Pesicka, our President and Chief Executive Officer, and Andy Long, our Executive Vice President and Chief Financial Officer. I'll now turn the call over to Ed.

Thank you, Alex. Good afternoon, everyone and thanks for joining us on the call today. I'll review three areas this afternoon in my prepared remarks starting with the strong performance that we delivered in the first quarter of 2022. This is a result of our great execution and the expected momentum we carry from a record 2021 as previously discussed in our Q4 2021 earnings call. Secondly, how the Owens & Minor differentiated model led to another strong quarter. And finally, our continued focus on disciplined investing and operational execution to deliver long-term profitable growth. Starting with Q1 2022, I am very pleased to report another strong quarter. As we saw the momentum from the record setting 2021 carry into the start of the year, largely as we had expected. Revenue was up year-over-year in both our products and healthcare services segments and our patient direct segment. However, it should be noted that our patient direct segment led the way at over 25% growth, driven by Byram strongest performance in two years. Once again, Byram's growth is well ahead of its market. Now moving on to operating profit, we knew going into this quarter that we faced unprecedented year-over-year comps. But our year-over-year growth in revenue, our operational execution, combined with our unique business model, enabled us to deliver over 90 basis points of operating margin expansion sequentially from Q4 of '21 to Q1 of 2022. Now looking ahead at adjusted EBITDA in the first quarter, we delivered over $118 million of adjusted EBITDA, which was nearly 22% higher than Q4 of 2021. We also saw strong cash flow generating $80 million of cash from operations during the quarter. And in addition to that, we were able to reduce our debt ahead of the Apria acquisition. And finally, I'm also…

Thank you, Ed. And good afternoon, everyone. Today, I'll review our financial results and key drivers for our performance in the first quarter. And then I'll discuss our expectations and assumptions for 2022, which reflect the completion of the Apria acquisition, as well as the current macroeconomic environment. Our reported first quarter revenue was $2.4 billion, compared to $2.3 billion or 3.5% growth versus the prior year. Both segments contributed to the year-over-year growth with Products & Healthcare Services growing at 1.2%, and Patient Direct growing 25.7%. Excluding the impact of the three days of revenue from the Apria acquisition, the Patient Direct segment grew 20.7%. When looking at the entire quarter, I'm very pleased to report that Apria delivered strong results, including revenue growth of 4.6% despite a headwind from the Philips recall. Turning back to consolidated results. Sequentially, revenue was down 2.4% as expected. Half of this was due to a reduction in glove prices with the balance attributable to seasonality and a slowdown in elective procedures. PPE volume was up slightly versus Q4, which included a significant increase in N95 revenue despite the ending of the government stockpile program in Q4. Much of this increase came from international markets, reflecting the traction that we're getting from our efforts to expand in this channel. From a gross margin perspective, the first quarter came in at 15.5%. This was a year-over-year decline of 350 basis points, which was largely driven by last year's favorable timing of glove costs, as well as the impact of inflation net of mitigation efforts in the first quarter of 2022. On a sequential basis, gross margin was 170 basis points higher than in Q4, as glove costs and prices are now more aligned in Q1 as expected. Our first quarter distribution, selling, and administrative…

Thank you, sir. [Operator Instructions]. I show our first question comes from the line of Michael Cherny from Bank of America. Please go ahead.

Good afternoon. And thanks for all the color so far. Andy, if I can ask just a little bit about the cadence. Thinking about it for the course of the year relative to that 4Q comment being stronger, is the implication that 4Q is going to be stronger than what 1Q was. And just along those lines, if you think about the cadence, what are some of the pushes and pulls that you can expect relative to upside downside drivers that you can control versus the macro dynamics of utilization that obviously still remain potentially uncertain.

Sure, Mike, good afternoon. Happy to take that question. So let's -- I think it's a great question because cadence of the year is really important, and let me talk about the general cadence for the year, and then let me talk about some of the drivers and then we can discuss controllable versus, maybe market driven. So the way I see the year playing out in terms of EPS, I do see the first quarter as being the strongest quarter of the year within $0.96 of EPS. The second strongest quarter of the year I see is the fourth quarter. I think we're going to finish the year very strong and I'll describe for you the reasons for that. And then I think Q2 and Q3, the middle quarters, I think will be the softer two quarters of the year. So It's probably worth talking about some of the key drivers of why, what's driving that. So starting with why we're seeing the change from Q1 to Q2 and Q3, couple of drivers there, first of all, let's look at the effective tax rate. So you probably haven't had that enough time to look at our financial statements yet, but in Q1 we had an adjusted tax rate of 21.4%, but we've given guidance for the year and that 24% to 26% range. So just the math says that the last three quarters are going to be somewhat higher than 25% ,26%. So you've got higher taxes. We do expect higher interest rate - higher interest expense due to higher interest rates. So we have developed our forecast for interest expense in sync and lock step with the consensus out there. We're aligned with the timing, the amount of the Fed increases, which of course will drive our variable…

Thanks. That's quite helpful. And I guess just one last question, relative to, leverage levels. It looks like you're exiting the quarter 3.7 times on a net debt basis. Anything changed about your target leverage levels into the end of this year when you're going to get back to I think it was, around the two times level that you had previously been targeting?

Yes. So there's absolutely no change in our thoughts on that, I think with the strong free cash flow that we think this business is going to deliver over the next several quarters, we believe we can get back into that target leverage range of two to three times and we can do that in the next 18 to 24 months.

Understood. Thanks so much.

Thank you. Our next question comes from the line of A.J. Rice from Credit Suisse. Please go ahead.

Thanks. Hi, everyone. You mentioned a couple of times in the prepared remarks, accelerating installation. Now, you clearly have been able to offset that with some of the initiatives you called out, but I just want to make sure I understood. Where are you seeing in that is that in the patient direct segment or is that across the board? And then also specifically in Apria, we hear a lot about the supply demand issues around nursing. I know that's not their primary clinician that they're dealing with. But what does the market look like for respiratory therapist than the other types of clinicians that they have?

So AJ, this is Ed. I'll take that and thank you for the question. We're seeing inflation. We're seeing it actually in both sides of our business, so both in Patient Direct as in our Products & Healthcare Services segment. And we're seeing it as general inflation, whether it's inflation related to transportation, inflation related to labor, as well as commodity inflation with really transportation fuel probably being the bigger of them. And I think it's important to recognize that -- I think everyone recognizes that the U.S. CPI was coming in at 8.6% in March, was one of the highest we've had in four decades. And it's very different than where we -- when we set our plan and our guidance for '23 back in May of 2021. But I will tell you what I'm proud about, and Andy alluded to some of this and how we offset it, is really what we've done to be able to mitigate that. And it's really what makes us different, and the fact that we're focused on ways to mitigate it using our Owens & Minor business system of continuous improvement, everyday finding ways to take out waste, and continue to optimize our operations. And those are the things we've done really over the last four quarters or so to minimize the impact of inflation. The other thing I don't want the group to miss here is our model is also different in the fact that we have an America's based manufacturing footprint. We're making the raw -- we're taking raw material, making the fabric, making the product. And frankly our transportation costs in that business is very different when we're producing product in North America. So that's also helped us and saved us tremendous amount. So that's why we see that ability to offset that and the ability to minimize it up to this point in time. And frankly, I'm excited that the team continues to be laser-focused on finding new ways, leveraging our business system of continuous improvement to reduce the impact going forward. So that's where we are on that. And then, across the -- go ahead.

That's right. Are you going to say something about the respiratory therapists and the Apria clinicians.

Yes, I'll cover that too. So within our Patient Direct business, again, we're not hiring nurses, we do have respiratory therapists. Our staffing has been a little tighter, but it hasn't impacted our ability to serve our customer base. So we're still comfortable with where we are with that. And you're right, we have talked to our customers across the board where the clinician -- there is tightness in clinicians being able to fill all the open roles that are out there. But from our business, from ourselves, we're in a good position with our respiratory therapists, and we're pretty comfortable with where we are.

Okay. Let me just ask maybe one follow-up clarification on the guidance. Two points. I know you said in the release, elective procedures had ended the quarter coming back to close to pre -pandemic, but slightly below. And I think that's what you've incorporated in your guidance. Is that solely because of what you saw in January? Are you now assuming that elective procedures are a little lower than you had been assuming previously? And I was also going to ask you about the gloves. I think you have that as about a $235 million revenue item this year. Largely no margin associated with it. Has that been updated? Is that still your thought? I didn't -- I don't know. You may have mentioned in the prior remarks and I missed it, but I just wanted to check that.

Hey, AJ, it's Andy. I'm happy to take both of those questions. So the first quarter was really an interesting quarter from an elective procedure standpoint. From what I saw, it was probably one of the more volatile quarters in terms of demand of any of the quarters we've seen since the pandemic started. And we came into the quarter roughly a little bit slow, but it strengthened in mid-quarter and we thought at one point in time that the first quarter would actually be sequentially up versus Q4. We thought at one point in time that would actually be higher than pre -pandemic levels. And then things eased as we moved into March, we actually finished the quarter on elected procedures down sequentially and actually down versus pre -pandemic. And when we put our original guidance together for the year, we saw that strength in the first quarter at one point in time. So our calenderization was stronger in the first quarter, weaker in the second so that the entire year was flat year-over-year, flat to pre -pandemic. Now with the miss in the first quarter on the elective procedures, we've chosen to let that miss flow -- just let that flow through to the year, rather than just stacking it onto the end of the year and making it a go-get for us. So the way I look at it as should elected procedures improve, that would be upside to where we are today in terms of our guidance. Part two of your question on gloves. You're absolutely right. If you look at the glove pricing that we experienced in 2021, we did communicate at our last earnings call that we thought glove pricing would ease between $400 million to $450 million netting to the number that you referenced. I would say no major changes in that, if anything, we might be operating in the lower-end of that range. But that's our current thinking on glove pricing.

All right, great. Thanks a lot.

Thank you. I see our next question comes from the line of Kevin Caliendo. Please go ahead.

Thanks for taking my call. I have couple questions. The first one, what kind of benefit did [Indiscernible] get from Apria in the quarter? Was there [Indiscernible] anything in particular or not that hasn't really started to sell through yet?

I'll start that and then kind of tremendous amount of feedback.

Is that better?

That is. So for the quarter alone, there was slight revenue lift and that's why from reported revenue, about 25% growth on the Patient Direct segment down over 20% growth when you pull out the three days in the quarter. So there's only three days in the quarter. And it had a minimal impact overall to the company for the quarter. But let me add on to the question a little bit is one of things we talked about was this being a revenue synergy play and that's really how we were focused on it. And we talked about where we think this is going to go longer-term with $80 million to a $100 million of topline synergies over the next several years from a run rate standpoint, another $40 million to $50 million of EBITDA run rate. But here's how what we've done already. We've had it for five weeks and we initially thought we would see some of the revenue benefits maybe late in the fourth quarter. But after only five weeks since we closed on March 29th, our commercial teams are hardy engaged. They're already working leads together, they've already closed some new business, which to me is extremely encouraging. If we told you that this was going to happen and now we're ready the team is starting to deliver on some of the revenue synergies, albeit small but they're starting to get traction with that already. And the expectation is that continues to ramp as we move through the year Q2, Q3 to Q4 to start to get the revenue ramp going. And look, the other part of our DNA as a company is obviously the five-weeks we're in so far.

We're going to continue to look to find additional ways that we think this can drive value. And it's something we're going to continue to do. So it had very little impact in Q1 because of only three days as part of -- as part of our company for three days, but we're already seeing traction on the synergies and the ability to drive revenue growth overall.

Okay, that's helpful. Two quick follow-ups. With the Apria business -- I know this only came out last night, but were you able to review the FDA's communication about the potential that the manufacturers might have to provide some kind of give back to the -- to Apria and the other players in the industry? Reimburse them for lost. Is that something you've contemplated or have you thought through how that might impact your numbers?

With it that recent, no, we have not.

It was last night so I assumed that.

Yeah.

And then one last one. In your 10-K, you had mentioned the Health Trust renewal was due in April. Is there any update on that?

Yeah. It's been renewed and it's been renewed for a four-year term.

Any changes to the economics or anything we should note?

No. The answer -- the simple answer is no. No changes.

Great. Thank you so much.

Thank you. Our next question comes from the line of Daniel Grosslight from Citi. Please go ahead.

Hi, guys. Thanks for taking the question. Maybe I'll stick with kind of that HPG type of question. In your core acute distribution business, I'm wondering if you're seeing any health systems and hospitals push back, and [Indiscernible] push back on pricing, because if you look at 1Q results for the publicly traded hospitals, they've all been really impacted by higher labor expenses. So I'm curious if they've started to push on pricing negotiations with you to try to offset some of their higher labor expense they've all experienced.

What we've seeing is really -- let's call it more of a balanced approach. They recognize that continuity of supply is important. They recognize that that's a component of price. I think our transparency has been well-received. And the fact that where we've had price increases, we've been open and transparent on why. Frankly, we've minimized those as much as we possibly could. I would tell you that I also see some hospital networks willing to think differently about operations on how we serve. So that way it can drive efficiency for them, efficiency for us, and we both win. And then the same sense though, there is also the normal process of wanting to continue to find more and more value, and there's different ways where we can help them with that. So specifically related to wage increases and other inflationaries, coming back to [Indiscernible] specifically on that, I haven't seen that specific ask. But again, it's really been focused on the value that we can provide.

Got it. Makes sense. And then the longer-term question for you just on the Byram business ex - Apria. So just looking at Byram. If we go back to your Investor Day last year, did you expect that business to grow to around $1.4 billion by 2026, which would imply around an 8% CAGR from 2021. That's a step down from the 32% growth you experienced from 2017 to 2021. Obviously, you're growing off of a larger base now, but it's a pretty steep step down. And also if you look at the growth this quarter except those three days -- that 20% you mentioned, it's still a pretty big step-down. Curious if there are any updates on how you're thinking about the longer-term growth of the Byram business? And if there's any temporary tailwinds specifically that you don't anticipate repeating longer-term.

So specifically with the Byram business, obviously, when we get to Investor Day this year, we'll revise guidance. There is no individual tailwinds that I can point to on that. And third is our expectations for that Byram business is to continue to perform at a very high level. But we will give final numbers when we get to Investor Day and update the long-term 2026. But look, there performed -- they performed extremely well last year. They are performing extremely well right now. And our expectation as a business is that you don't take your foot off the gas, you continue to accelerate, and you continue to do what we can to drive, again, back to our [Indiscernible], the long-term profitable growth, which is really what our ambition is.

Looking forward to that thank you.

Our next question comes from the line of Eric Coldwell from Baird. Please go ahead.

Thank you very much and congrats on putting up good numbers here, despite the macro headwinds. The first topic you've addressed it in a couple of different ways. I wanted to be a bit more specific. You talked on the call prepared remarks about your appreciation for the macro environment driving you to maintain what you view as a "abundantly cautious guidance outlook " even though you've maintained the core. I know elective as you did not. I guess anticipate a catch up on the lower activity in Q1, it sounds like one of the areas you've stayed cautious. But I was hoping you could identify other areas where you've potentially erred on the side of caution when thinking about the range for the year.

Yes. So obviously we talked about inflation. There's -- we've talked about elective procedures. We had a tremendous -- I'll add a couple of other ones. One is we had tremendous amount of wins last year. And we've implemented customers as fast as 45 days, and at times it takes six to nine months. I think with some of the global supply chain issues, those implementations are going a little bit slower to make sure we don't miss -- mess up because of global supply chain issues of products that are being -- of leading brand products that may be manufactured offshore. So we're a little cautious there. And then really you talked about some of the global supply chain pressures, that's the other one. Well, it's not impacting our manufacturing model, but it does have an industry-wide impact. And last thing I would explain on this one, Eric, is on inflation. And I want to be clear on this. Absent of inflation, we would've raised our guidance, but because of where that is and being cautious, that's the -- that was one of the factors. But again, if that didn't exist to the rate it is, the accelerating rate it's going to or it's at, we would've raised guidance.

Okay. Thank you for that. And I guess I'm more of a glass half-full guy when thinking about your results. But the second topic is on Apria. Talked a little bit about the performance they've had and how the integration started off well. I'm curious if you could give us a sense on what you're expecting Apria to grow for the remainder of the year, both with and without the CPAP headwinds. Obviously that's -- sleep and respiratory therapy is a headwind for anybody in the market in the short-term. But I'm curious what you see their growth rates looking like with and without those headwinds.

Yeah, Eric. Good afternoon, it's Andy. I'm happy to answer that question. So yeah, there's certainly been a lot of discussion on the impact that that's had on the Apria business that we've had with the management team. And certainly even some of that information just coming out very recently, as recent as last week. But overall, I think the Apria team has done a fantastic job of navigating this very difficult situation. I think they've been in just constant communication with the equipment manufacturers, so I think they've been looped in and up-to-date on all the latest. I think the team's done a really nice job of looking for alternate sources of equipment. They've purchased equipment where it's possible to reduce the impact. So I think they're doing all the right things. Probably the only other thing I'll add is that up to and including the information that was released last week by one of the equipment manufacturers, our guidance for the year -- our expectations for Apria's growth in excess of $900 million of revenue over the course of the last nine months of this year reflects that impact. Certainly, if the manufacturers of equipments can exceed their timelines, that would certainly provide upside to our forecast.

Andy, you may not be able to share this or want to share this, but clearly, we can take the $900 million-plus and compare it to the past. I'm just curious what that $900-plus might have been absent the incremental prolonged reduction in revenue potential from C-PAP, i.e. if growth was -- is going to be X, it might have been X plus 3%, 5%, some higher number in a normal manufacturing and supply chain environment, just to give us a sense on what kind of a recovery we might see moving into '23 and beyond.

I mean, I think as I look at that, I think the $900 million is a very balanced figure. And I think that is our stake in the ground at this point in time, and going forward, I think if schedules change, if remediation plans change, I think we'll be happy to plus minus off of that and share the impact that this will have. But right now I think 900 million is a fair and balanced rest of the year forecast that reflects all the information that we know up to this point in time.

Okay. Thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of Michael Minchak from JP Morgan. Please go ahead.

Good afternoon and thanks for taking the questions. I was just wondering if you could talk about the new business pipeline in the Acute Care distribution business. Is there any way to quantify the size of that pipeline maybe relative to where we were at this point, a year-ago? What are customers -- what are perspective customers focused on most? And have you seen any change in the competitive dynamics on that side of the business?

And so let me start working backwards. So as of dynamics, we're seeing consistent. It's really consistent with what we've seen over the last several quarters from a competitive dynamic standpoint. I talked a little about this last quarter is that we continue to have a really robust pipeline. The pipeline right now is as strong as it's ever been. This quarter alone from a revenue recognized revenue realized revenue. We saw what I would say it's pretty good growth related to wins and implementations of wins that we had last year. We will continue to look at whether it's renewals or business. What we look at is we want to drive long-term profitable growth. So we parade owed our customers. We know by product, by skill as well as by delivery route how we can maximize our operations, which also should benefit the customer. And again, we'll continue to look at our business that way. But high level pipeline is still strong. We've got a focus on business development. The quarter from a recognized revenue or realized revenue, we showed growth again, both gross and nets, which is really helping pave where we want to go into the future.

Got it, that's helpful. And then just I wanted to drill down a little bit more on gloves. In the past, you've talked about a new facility that's coming online. Can you talk about when that is expected to be fully up and running. And then once it is, how much of your glove production will be coming from your own facilities versus third-party manufacturers. And then maybe just to level set. Are you able to quantify how much of your business comes from the sale of gloves versus other segments of the PPE market.

Yes. So the glove manufacturing facility, our expansion in our facility, it's producing gloves. We told everyone it would be producing gloves this -- in the first quarter and we're delivering on that promise. In addition to that, we would expect it to ramp over the next three quarters, meaning that the lines are in. You're not going to get fully optimized lines on day one and it's going to slowly tweak those going forward. We're going to add close to a billion-and-a-half units of gloves coming off of those lines. And it can be varying from a simple exam glove all the way to a chemo or surgical glove. Be able to do both simple as well as complex gloves within those production lines. Right now we're at -- call it 40% to 50%. And this is going to add another 10% to 15% of capacity there. So north of 50% of what we sell will be our own products. That could be as high as 60%. In addition to that share, we're continuing to look at other partnerships and opportunities to expand our capability in gloves. So that's where we are in that. And I've said this many times. It's rare in your career do you get an opportunity that you can add capital -- or spend capital for expansion and know that either you could produce more technical products offer there that have a different margin profile or a favorable margin profile, or worst-case scenario, you can in-source product that you're outsourcing, which also provides margin expansion. And then lastly, by adding that capacity, there's additional fixed cost overhead absorption there that takes our -- it conventionally will -- once it's up full and running -- running at full speed, excuse me, will be able to take the piece price down.

Got it. Appreciate the comments.

Thank you. I'm showing no further questions in the queue at this time. I would like to turn the call over to Mr. Ed Pesicka, President and CEO for closing remarks.

Thank you. So first, I'm extremely pleased with the quarter. It really is a continuation of the fundamental changes that we've made in the business over the last three years. If you think about some of those changes, many of those actions that we've taken help mitigate various pressures in the market. It's really been focusing on improving our efficiency and productivity of these businesses. What's important about that is that these benefits will far last into the future, and I truly believe that we'll come -- and I truly believe that over time, we'll come out of this cycle we're in today, and we're going to come out of this cycle stronger than when we entered it. Ultimately, we're going to continue to use the Owens & Minor business system in a differentiated business model to deliver another strong year, and to remain on track to achieve our long-term goals. And really to minimize the impact of the environment we're in today, that being the macroeconomic concerns that are out there. Thank you, everyone, and look forward to talking to everyone again next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.