Good day and thank you for standing by. Welcome to the Owens & Minor First Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you and please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today. Jackie Marcus, Investor Relations.

Thank you, operator. Hello everyone and welcome to the Owens & Minor first quarter 2025 earnings call. Our comments on the call will be focused on the financial results with the first quarter 2025 as well as our outlook for 2025, all of which 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 that reflect the current views of Owens & Minor about our business, financial performance, and future events. The matters addressed in these statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied here today. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs, and projections will result or be achieved. 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 our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call or in our earnings press release are as of today, and we undertake no obligation to update these statements as a result of new information or future events, except to the extent required by applicable law. In our discussion today, we will refer to non-GAAP financial measures and believe they might help investors to better understand our performance or business trends. Information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release. Today, I am joined by Ed Pesicka, Owens & Minor's President and Chief Executive Officer; and Jon Leon, the company's Chief Financial Officer. I will now turn the call over to Ed.

Thank you, Jackie. Good morning, everyone, and thank you for joining us on the call today. We hit the ground running in 2025, and we continue to progress forward on our broader, long-term strategy. Starting with our Patient Direct segment. We've had a tremendous start to the year. Our top line grew in the mid-single-digits in the first quarter, and our operating income grew by 31% or $14 million, resulting in a 173 basis point expansion. This exceptional performance was supported by many items. Let me share a few of them with you. Over the last year, we made an investment in the sleep journey. The objective of the Sleep Journey was to streamline the new start process and improve adherence for resupply, making it easier for customers to reorder needed products. The result of this investment can be seen in the first quarter results, which showed a meaningful increase in our sleep starts and high single-digit revenue growth in our sleep supplies for the first quarter. In addition, over the last year, we've invested in additional commercial resources. This has enabled us to streamline territories, while expanding the sales rep's bag, resulting in double-digit growth in three categories; wound supplies, ostomy, and urology. Additionally, we continue to identify therapy categories for expansion. For example, within home respiratory space, we launched an organic expansion into chest wall oscillation therapy. Finally, during 2024, we began to invest in our already strong revenue cycle management process with the goal of enhancing our collection rates. These efforts began with a focus in our Byram division. I am pleased to report that these efforts resulted in a record collection rate in Q1. We are now moving the learnings to our Apria division and anticipate this program will be completed by the end of the…

Thanks Ed and good morning everyone. As I walk through details of the quarter and discuss the outlook for the business, please note that my remarks on today's call will cover only non-GAAP financial measures. All GAAP to non-GAAP financial reconciliations can be found in the press release filed earlier this morning. Now, let's turn to our first quarter results. The business delivered on almost all of our expectations and the Patient Direct segment performed exceedingly well. Our revenue for the quarter was $2.6 billion, up just under 1% as reported, but up 2.3% compared to the prior year on a same-day basis, noting that there was one less selling day in Q1 2025 versus 2024. Patient Direct revenue of $674 million grew by 6% compared to the first quarter of 2024. On a same-day basis, the year-over-year growth was 7.3%. I am pleased to say that almost every therapy category showed good growth and sleep supplies and diabetes once again led the way. Small categories like ostomy, wound, and urology also performed very well. We were encouraged by the continued improvement in oxygen therapy growth, which began in the fourth quarter and still comfortable saying that we have seen the bottom for that category and expect growth throughout 2025. The reported revenue for the Products and Healthcare Services segment showed a decline of 0.8%, while on a same-sales day basis grew 0.7% compared to the first quarter last year. Segment revenue totaled $1.96 billion for the quarter. The Medical Distribution division again showed good same-store sales, but lower year-over-year glove prices and lower international sales offset the net distribution same-store sales growth. We were encouraged to again see an increase in the amount of our proprietary product sales running through our distribution channel, a key strategic initiative of ours.…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of John Stansel of JPMorgan. Your line is now open.

Great. Thanks for taking the question. Just want to dig in on the tariff side of this. Can you talk about the discussions you're having with your customers and how they are or not planning around this, potentially changing behavior or approaching their sourcing? Thank you.

Sure, John. Let me again rescope the tariff exposure. We think it's in the $100 million to $150 million range. We think as of right now, it's on that lower end of the range. But obviously, as product mix changes, that could change. So, that's why we have the range on it. And the bulk of ours is really coming from China and Thailand, obviously, where we make our gloves and then some of the sourcing of more of the commodity-type products. And smaller -- very small impact really related to USMCA type products coming from Mexico. Regarding our customers, look, we've got various contractual opportunities or contractual ability to be able to adjust prices going forward. We recognize from a customer standpoint, it's a difficult conversation. We've done, I think, really a good job over the last several months absorbing a significant portion of it. Again, as a reminder, there were tariffs that put on facial protection as well as gloves that were effective at the end of last year as well as in January 1, plus the additionals. Some of the things we've done to help mitigate that for our customers as we increased our inventory significantly in the first quarter of the year to make sure we have product on hand. But then again, at 1% selling margin in this business, we can't afford to take on 145% tariff, and we have to work together with our customers to work through that. We are working with our customers to identify alternatives, products that can be substituted out at a lower cost. But that's -- those are the conversations we're having and we'll have going forward. I think the other thing we're trying to do is because this is such an administrative burden for customers and they're getting it from various suppliers, not just us, it is to try to do it infrequently, so you don't have so much administrative work associated with it. So, that's where we are in the process. And it's a pretty fluid environment too. But we're going to have the ability to react as things change within the policies and the tariffs, and that's the way we're approaching it.

Great. And then just quickly on FX. Obviously, a headwind, it sounds like in the first quarter, the dollar has moved around a fair amount in March, April. I guess you reaffirmed FX, I think, as of the end of last year. Just how should we think about the impact kind of progressing through the remainder of the year versus your expectations? Thanks.

Hey John, it's Jon Leon. Yes, I think we saw a lot of volatility in the dollar, particularly in the month of March, particularly in the Asian currencies where we do a lot of our manufacturing and sourcing. That has since subsided quite a bit, you're right, the dollar still moves quite a bit. But relative to what we saw in March, things are much calmer now. And if we stay where we are today, I think the guidance will be fine, and we don't expect too much more volatility like we saw in March. And a reminder, it's just in the P&H segment only where we see that. So, what we know today, I think we're comfortable with the guidance for the rest of the year around FX.

Your next question comes from the line of Michael Cherny of Leerink Partners. Please go ahead.

Good morning. This is Ahmed for Mike Cherny. Thank you for the color that you gave on tariffs. I just wanted to clarify, is the $100 million to $150 million the direct impact of tariffs? Or is it just the exposure, the potential exposure. And just to be clear, what exactly is embedded in the guidance? And just if there's any more color you could give there? And as you think about price increases. Will you be able to preserve spread? Or is the goal just to preserve GP dollars? Thank you.

Yes. So the tariff exposure in an essence, if you look at it at a SKU level, if you try to take it to that level of detail, gone through it by country of origin, knowing what the tariff is, knowing what our product costs would go up, that's what it is in totality. And then from there, the expectation is that we're going to cover those dollars that come through. So that's what we're expecting on an aggregate basis. So, hopefully, that helps when we talk about the $100 million to $150 million exposure. That is what is getting passed through so that way can cover our cost increases.

Your next question comes from the line of Daniel Grosslight of Citi. Please go ahead.

Hey, this is Louise on for Daniel Grosslight. Just a quick follow-up. What is the split between the 100 and 150 tariff exposure between the P&HS segment and the PD segment? Thank you.

Yes, it's virtually all P&HS segment. I mean we've gone through a detailed analysis for our Patient Direct segment. And within the Patient Direct segment, the vast majority of the products are either made in the U.S. or qualify under the Nairobi protocol. So, there is very little exposure within our Patient Direct segment today associated with it. The one area, and it's a small category for us, you would think would be something like a bent metal area where you do have some of that stuff made overseas. But again, the $100 million to $150 million, it's virtually all in our P&HS segment.

Appreciate it. Thank you.

I'm sorry, I'll just add one more comment on tariffs. And again, recognizing that there's a lot of conversations we have to have with customers. But in the industry today, we're not the only ones trying to pass this on and needing to pass it on. So, really across the industry, it's manufacturers and/or distributors and/or suppliers that are needing to do this because of such the margin rates we have within the space.

All right. Your next question comes from the line of Kevin Caliendo of UBS. Please go ahead.

Morning guys. Thanks for taking my questions. First one, I just want to understand a little bit on the guidance. The Rotech financing is in place, but it doesn't look like the interest expense has changed. So, is that like how are you accounting for that in the guidance? Or are you just not going to -- is the financing set up such that it won't really start to pay until the deal closes. And so you'll update the guidance then. I just want to understand how that dynamic works.

Yes, Kevin, it's Jon. So, the once the debt comes on to the balance sheet until we actually close the deal, the B loan -- the Term B loan will begin to accrue interest before the end of May, keeping in mind that we are expecting to hear from the FTC in early June. So, at that point, once we hear from the FTC, then it gives an opportunity to close the deal to review the guidance. But without knowing exactly that outcome and not having the debt on balance sheet right now, we've left the guidance alone and not impact any -- the EBITDA from Rotech or the debt. Does that makes sense to you?

Yes. No, that's helpful. I know that, that came in more -- maybe at a higher rate than you had expected. Are any of your assumptions around Rotech accretion changed in any way, shape or form? Or how should we think about that? It's not in people's models or most people's models yet, but I'm just wondering how you're thinking about it? Or are you going to just plan to update us when the deal closes?

Yes. Well, you'll recall that we had it neutral in the first full year then accretive in the second year. I think it was like $0.10, $0.15 on exact number, but we'll certainly update upon closing. But you are correct, the debt came in roughly 50 basis points than we had anticipated at the time of the deal.

Okay. And just one last one on free cash flow, sorry if I'm hogging the phone here a little bit. But in the last quarter, you gave kind of a cash flow bridge, right? EBITDA with CapEx of around $260 million, and the interest expense guidance, which remains the same. So, one thing, I guess, that's different now is obviously the working capital looks a lot different than maybe you had anticipated. The last commentary you made to us publicly was that there would be like $100 million to $150 million of cash flow available depending on working cap. Do you still anticipate, given what you did with inventory that the free cash flow this year would be meaningful or $100 million or more? Is that still in play?

Yes, that's still in play. No change to the outlook for the cash flow. You're right. There's a lot of numbers in play this quarter, I would say, most were largely anticipated. I would offer probably the cost around the strategic initiatives, both the planned Rotech acquisition and the potential sale of P&HS, a little higher than we thought, particularly on the Rotech side. But other than that, it's as we expected. So, there's no change to the outlook for cash flow for the year. We still expect to be able to generate good free cash flow and use it to pay down debt.

Fantastic. Thank you so much.

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

Thanks. Good morning. I have a few. I'm curious if you could share with us the incremental tariffs that you actually realized in Q1 from those that were all in effect and those that went into effect January 1. What was the impact on the quarter itself? Obviously, some of the pricing decisions hadn't gone into effect at that point on your side.

Yes. I really didn't -- based on the inventory we had in place, Eric, it really did not have an impact on Q1.

Okay, good. And then the second quarter here, the quarter that we're in, I'm curious just from easing standpoint with the models, you were just asked about the Rotech debt and when the financing comes in. And it sounds like maybe there could be a slight mismatch on timing on the term, the coming in, in May. But there's also the tariff increases and you're talking about pricing that starts to go into effect, I believe, in early June. So, is there a bit of a gap here for a couple of months before your pricing efforts take effect? And if so, what is the potential impact of tariffs here in the second quarter? Or would you be on still a bit of a delay because of the timing of when inventory flows?

Yes, I think at a high level, Eric, the way you think about it and the way we thought about it and the way we've done it from a timing standpoint, by having the new pricing in early June, based on what's in inventory and what our normal flow-through should be and based on the inventory we had in the first quarter, that's when we need to start to do it as the higher-priced stuff starts to flow through our system. So that timing lines up pretty good on when the products go flow through our system when those price increases go into effect.

Got it. And then -- what happens in the scenario? I completely understand what you're saying and most others are saying in terms of having to pass the pricing on to a large or entire extent. Some of your competitors may not pass all of the pricing on. They may use that as a bit of a competitive advantage or take advantage of a tough situation for clients and use that to gain share. Some manufacturers have said they're not going to raise prices or not going to raise them fully. And then some manufacturers have also said they're going to spread tariffs across all products and so not go SKU-by-SKU, country-by-country. So, there could be some mismatch in the pricing on specific products. If you're, for example, taking 145% on a certain China product, but competitor might be taking a lesser amount on that particular product. So, we also have a hospital and maybe more health systems that have said they're just not going to take price increases. I mean Vanderbilt's been pretty clear on this. So, what happens if a customer says, no, do you just lose the sale? Or you bend a bit? I'm just curious what happens in these situations where maybe the pushback is great.

Let me take -- there's a lot in that question, Eric. So, let me just take first is the approach on tariffs. If others are blending or using a weighted average tariff approach, it's completely not aligned with what the tariffs are -- were implemented or designed to do. So, I'll give an illustrative example here. If you've got a Chinese product selling for $1 and a U.S. product selling for $1.30. And the company decides to do -- instead of doing the 145% tariff on the dollar product decides to just spread it at 25% across everything. That means that dollar product goes up to $1.25, and it's still below the U.S.-made product price. And you're still encouraging people to buy the lower-cost Chinese product. That is not the intent of the tariffs. In tariffs. The tariffs, they're increasing costs for Chinese-made products that ultimately will help lean towards buying products that are either made in the U.S. or in tariff-friendly or U.S. friendly countries. So, that's why we've taken the approach to actually implement the tariffs based on the way they have been laid out, not use -- not turn around and blend it and raise prices on every product regardless of where it's made. So, we've taken a pretty direct approach on that. Second of all, there's requirements that don't enable that will stop us from selling products at a loss. And we just can't do that due to various requirements that are out there. And I think with our customers, we're going to work with them. We're going to work with them aggressively to find them other products potentially that are lower cost than what the tariff implemented product is and focus on that. That's what we have to do because, again, what we can't do is sell products and that have significant loss on them because we're absorbing the tariff cost. So, that's the intent of what we're going to do within this.

And then the -- thank you for that. The last one for me. Rotech, the -- Jon mentioned the debt was about 50 bps higher than originally forecast that that process since you first announced the deal has been going on for nearly a year now. As you've reported in your various debt and financing presentations. As you reported over time, Rotech's financials actually did deteriorate a bit revenue and margin profile came in I'm curious now that a year has passed, is the acquisition target performing at the levels you built into your original base case of neutral in year one and $0.15 accretive in year two?

Yes, it's Jon. Yes, the answer to the question is yes. Rotech continues to perform as we expected. 2024 came very much right on top of our deal model. The declines that people saw were largely anticipated and largely resulted from a lot of COVID era benefits that the industry got to realize that fell off. It's been early 2024, like 75/25 PHE going away. We sold the same thing in our current patient direct business. So, we fully anticipate those changes in 2024. And overall, Rotech performed exactly as we expected in the deal model and doing so through the first quarter of 2025.

Okay. Thanks very much.

And that concludes our Q&A session. I will now turn the conference back over to Ed for closing remarks.

So, thank you, everyone. And really, I appreciate you taking the time to join us this morning. I'm excited about where we're going as a company. And we really have a bright future ahead of us as we continue to operate and execute on our long-term strategy. With that, I look forward to sharing progress with you later this summer. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining.