Good day, and thank you for standing by. Welcome to Owens & Minor’s Second 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] 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, everyone, and welcome to the Owens & Minor’s second quarter 2022 earnings call. Our comments on the call will be focused on the financial results for the second quarter of 2022, as well as our outlook for 2022. Both 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. 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. 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 morning everyone, and thank you for joining us on the call today. Today in my prepared remarks, I will cover our second quarter performance, the current market landscape, and why I remain bullish on the long-term prospects for the company. First, I am extremely pleased with our second quarter results. Our strong performance in our ability to manage through the macroeconomic headwinds in this quarter is a result of the following. One, our Owens & Minor business system of continuous improvement driven by our dedicated teammates that continue to deliver operating efficiencies, eliminate waste, and provide productivity improvements. Two, our unique and differentiated business model with vertical integration that limits our exposure to certain macroeconomic conditions impacting others. And three, our increased presence in the Patient Direct space, supporting patients with chronic lifelong conditions. While the external conditions have become even more challenging over the second quarter. It is clearly visible that once again our team performed very well. We were able to report strong results with both of our businesses continuing to operate at a high level. We remain focused on providing value for our customers, and service at the highest possible levels. Both of which are central to our mission and our demonstrated every day, as we as woven the Owens & Minor business system into the fabric of the company. Over the second quarter, our approach to provide value and service continue to pay-off, our customers value the consistency with which we provide industry-leading service, especially given the degree of unpredictability that healthcare has faced over the past two years. This was proven once again in the second quarter, as our Products and Healthcare Services segment continue to take share by adding high quality wins as we work to optimize our customer base.…

Thank you, Ed, and good morning everyone. Today, I’ll review our financial results and key drivers for our performance in the second quarter, and then discuss our revised expectations and assumptions related to our full year outlook. First, let me start with our second quarter results. Our reported revenue in the quarter was $2.5 billion up slightly from the prior year. Gross margin of $533 million or 21.3% of revenue was up to 520 basis points from prior year. The growth reflected the first full quarter contribution from Apria sales, which have a higher margin profile. Foreign currency translation had an unfavorable impact on gross margin of $6.9 million or 28 basis points for the quarter. Distribution, selling and administrative expense was $453 million driven higher primarily from the addition of Apria expenses and ongoing inflationary pressures, partially offset by stringent cost control and operating efficiencies. Interest expense was $36 million in the quarter, which was $24 million higher than the prior year given that this was the first full quarter of higher debt related to the financing of the Apria acquisition. Given the rising rate environment, we took action in early April by entering into an interest rate swap. This increased our proportion of fixed rate debt to approximately two-thirds of our overall borrowings. The effective tax rate this quarter was 25.6% compared to 21.8% in last year’s second quarter. The change in rates resulted primarily from the non-deductibility of certain acquisition related expenses. Our GAAP net income for the quarter was $29 million or $0.37 of share. Adjusted net income in the second quarter was $58 million compared to $80 million last year. Current quarter adjusted EPS was $0.76 compared to a $1.06 in Q2 of last year. However you need to consider the impact that foreign currency…

Thank you, sir. [Operator Instructions] And I show our first question comes from the line of Kevin Caliendo from UBS. Mr. Caliendo, your line is open.

Hi, thanks for taking my call guys. I just want to – I guess I want to explore a little bit the comments around the Apria business and CPAPs and the higher CapEx, and let’s just talk through expectations there for that business and how they’ve changed a little bit? You’re spending more, now you have more access to CPAP. So, when do you think the sort of bolus that might be out there patients, do you see that coming through in your 4Q guidance? Or is this just, you have more access to CPAPs now than you thought you are going have?

Yes, I’ll start and let Andy, you had some colors. So, we really think that’s going to really impact significantly the fourth quarter, the way we see it and we look at it is, we look at our back orders right now. We roughly have about three months to four months of normal month usage on back order right now. And as the suppliers and the manufacturers start to be able to produce more products and get it out to us, we’re going to be able to fill those orders, starting filling those orders at a higher rates probably later in the third quarter and then significantly in the fourth quarter. The other benefit of it is, we have seen some additional product coming through right now. And the beauty of that is once those products come in; you then start to get that recurring revenue of the consumable. So that’s also going to help us, that the products that are placed in Q3. That’ll help drive that also in Q4. And then we really think about the brightness of it going into 2023. And as we get that, that several month back order filled the recurring revenue going forward.

And Kevin, it’s Andy. Just, the only thing I would add to that is another piece of good news that we received in the quarter is that the FDA did approve the Philips remediation plan on ventilators. And so, that kind of gives us confidence that, we will have the equipment needed for ventilation throughout the end of the year and what we need to support the fourth quarter. But it’s also a cash flow issue too. Right? So now that we can start returning the ventilators that we have on end to get those refurbished and put back into the field, that’s going to reduce our cash flow. We’re not going to be spending as much on ventilators because of what we have already getting refurbished. We may not have patient related CapEx on ventilators until, early 2024. So it’ll be a cash flow benefit.

Got it. Can I – if I can ask a quick follow up, I just want to make sure I understand that the guidance change. It looks if we’re doing our math right. That the vast majority of the change is both FX and higher interest rates. Is that a fair way to characterize the reduction in guidance, just looking at the math around the FX impact and backing that up and higher interest rates?

Yes, Kevin it’s Andy. Absolutely. So the way I think of the $0.30 reduction in the midpoint of our EPS guidance, you’re absolutely right. As I said, in my prepared remarks, the combination of FX and higher interest rates will combine to contribute about $0.10 of that $0.30, but the single largest driver will relate to lower procedural volumes. And you’ll note that the midpoint of our revenue guidance came down about $150 million, that $150 million is a 100% attributable to our Products and Healthcare Services segment. And in terms of calendarization of that $150 million, I’d say some of that we saw in Q2, but the lion share of that reduction is going to happen in Q3 and the margin impact from that think of it, because it’s in the Products and Healthcare Services segment that still be about a 10% pull through contributing, $15 million of bottom line profit of $0.15 of EPS impact. And that 10% pull through think of it as, we’re not going to get really aggressive in taking variable cost out because we see this shortfall as being very temporary in nature. We’re not going to be pulling out, variable costs just only have to put them right back in the fourth quarter. That’s really not a smart move. So, we’re not going to get aggressive on cost cutting, hence to pull through on that. And that leaves about $0.05 for net inflation. And I stress the net because again, it’s impacted inflation very – you’ve seen the CPI continue to climb as we’ve moved throughout the year. So it’s that inflationary pressures net of what we’re going to be able to offset that. So that’s going to be hitting us in the third quarter, pretty hard, and our remediation, steps that we take to mitigate that through our business system. Those take a little bit longer to gain traction and we’ll see the impact of that benefit in Q4.

Great. Thank you so much for all the color guys.

Thank you. Our next question comes from the line of Daniel Grosslight from Citi. Mr. Grosslight. Your line is open.

Hi, thanks for taking my question, excuse me, my questions. I was wondering if you could put a finer point on some of the product availability challenges in the acute care setting. I get the labor shortages that’s been, widely reported on, but I’m a little more surprised on the product shortages. And I think in your prepared remarks, you mentioned it was really kind of the diagnostics side of things. So, I was wondering if you can go into a little more detail about the shortages you’re seeing there, what’s causing those shortages and what’s going to alleviate some of those pressures on the product side?

Yes. So Dan, yes, the product side, it really… [Technical Difficulty]

[Operator Instructions]

Hello.

Yes. You’re back in line. Yes. You’re back in line, sir.

Great. So, Dan, apologize about that. We had a little technical difficulty here, lost the phone connection, but I’ll just give you on the product side of it, it’s products that we’re procuring from external manufacturers and other suppliers that we then turn around and distribute to the customer. I’ll just give you one example while there’s several out there. A simple example would be contrast dye, where there is a shortage of contrast dye. It’s impacting the ability for our customers to be able to do the diagnostic tests, their prioritizing their diagnostic test, but that’s just one simple example of a diagnostic product that’s unavailable. And look our manufacturing partners and those who make these products are working hard to improve their productivity or improve their output and increase, excuse me, I should say, increase their output. And we’re seeing that happen already, but we expect that to remain, in several of these examples to remain low in the third quarter, but start to recover in the fourth quarter.

Thank you.

And I show our next question comes from the line of Hannah Lee from Bank of America.

Hi, this is Hannah Lee. I’m on for Mike Cherny. Thanks for taking my question. Just in light of ongoing cost pressures. Can you talk about some of the pricing power you have in both lines of businesses?

Some of the price power, yes. So the way I really think about pricing power, I got to think we think about it differently with really our different businesses. So, pricing power let me start with our Patient Direct business. The reality on pricing power and our Patient Direct business is really limited to our ability to work with the private payers to adjust our reimbursement rates. And we sit down with them and we have those conversations and we explain through and, times we’re successful and at times, we hold off on some of those. The other aspect of it in our Patient Direct business is really CMS funding and that’s relatively locked in, so I think, there’s limited on that. On the product side, we’ve been relatively successful. I would say with having the open transparent conversations with our customers. And I point to the glove cost pass through, we were clear with our customers of what cost increases we had. We laid those out to the customers. We directly explained what the drivers were, and they found that we were able to pass those costs through as they went up. But in the same sense, we brought them down as product costs came down. So, I think that transparency model has been clear and it shows that we’ve had the ability to both pass on cost increases and then quickly take the cost back down as our cost went down. On the medical distribution side, there’s really not a lot of margin to play within that business, because of the – but the nature of the model, it’s such a low margin business, but on certain areas, we will work with our customers. We work with our customers, not necessarily on product costs because that’s decision is between the manufacturer and the end user. So, we will work with them on other things like optimizing freight and looking at different ways to take those costs out cost that it. So, I think overall in the pricing power, it’s different by each of the different aspects of our business. I would say in our products business or manufacturing business, we’ve done a very, very good job of passing on those costs, but it’s been because we’ve been open and transparent with our customers. On our Patient Direct business, we’ve done a very good job working with our external, the external payers to make sure they understand the dynamics. And we’re appropriately, we have been able to get some adjustments. And then on the distribution side, again, it’s really been focused on how do we optimize our operations and take waste out of it to offset that.

Thank you. And I show our next question comes from the line of Eric Coldwell from Robert W. Baird. Please go ahead.

Hey, thanks. Good morning. I have a few questions here. Some of them are very technical. I’ll just start off with FX. I just want to make sure we’re clear on the guidance impact across FX inflation and interest rates. Can you tell us what the original FX headwind expectation was, where it was recently in the last update and then the incremental addition for FX in this update?

Yes, Eric it’s Andy, good morning. Happy to take that question. So, maybe I’ll just start by describing a little bit more of the nature of FX and then we can get quantitative, but again, the strengthening dollar has primarily hit us in our selling currencies, right? So the euro, the pound, the Japanese yen, so where we’re converting local currency into U.S. dollars, we’re taking the hit there. We’re not seeing, the strengthening dollar help us much on the cost side, because again, most of our manufacturing footprint is in North America. And quite frankly, where we have production outside the U.S., Honduras and Mexico, the dollar’s been relatively stable. So, we’re not seeing as much of a corresponding benefit on the cost side. In the current forecast. And what’s changed from where we were last time we talked at the Q1 earnings call with that dollar strengthening sharply during Q2. We expect that to be probably contributing about $0.05 of FX headwind from where we were last time we talked. And again, we’re using the June 30th FX rates as the basis of our guidance for this time, this forecast. I know that FX rates have eased a little bit here in July, if that continues, that could provide us with a little bit of lift. But at this point in time, we’re using the June 30th rates, the original guidance when we came out in the fourth quarter was based on December 31st FX rates.

Okay. And that original guidance, can you, us what the original expectation was?

Eric, I would actually have to get back to you on that. I don’t recall how much I think.

No problem. And then could we get the Apria’s EBITDA in 2Q?

So, what I’ll say is, we haven’t given quarterly amounts, but what we have confirmed is our expectation for the year and that I’ve made earlier comments that on a full year basis, I expect. And when I say full year, I mean like a pro forma 12-month basis, we expect Apria to contribute $240 million of EBITDA. And for the period of ownership, post-March 29th of this year, we do expect to have in excess of $180 million EBITDA contribution and under our definition and that is right on track, I feel very good about that forecast.

Okay, great. And then on the glove pass-throughs a $100 million in the quarter, can you remind us how that’s stacked up versus your expectation? And then I don’t think, we saw a specific update on the $400 million to $450 million range for the year.

Yes. So, I would say that the a $100 million of headwind was probably a little bit slightly less than what we had expected. And in terms of the update on the full year, we haven’t changed our guidance, but I would say we’re at the lower end of that range.

Okay. And then final one from me. And thank you for all of this with the revenue headwind in distribution and products, here in the quarter, and then as well as the outlook, it sounds like the vast majority is really related to distribution, but I want you to clarify that or quantify that if you can making sure that we’re not missing something on products, we’ve all expected in easing of demand through the year, but it feels like the majority of this guidance reduction is related to the volume situation as opposed to products being materially lower than you expected. Is that correct?

Yes, Eric. It’s Andy, no, I think you fit the nail on the head. I think, the $150 million reduction in guide guidance, as I mentioned earlier, is all Products and Healthcare Services. And although it’s, hospital utilization driven, which is primarily medical distribution, I don’t want our audience to forget that we do have a portion of our product portfolio that’s non-CPT. So there is a portion of elective procedure related products in our proprietary portfolio, albeit smaller than the overall CPT. So there is a little bit of impact on the proprietary product side, but you’re absolutely correct the lion share that is going to be in medical distribution.

Okay. Thank you very much.

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

Thank you everyone. Thanks for joining on the call this morning. And I really there’s a couple areas I want to cover is obviously, I’m really pleased with how our second quarter turned out. As I stated in my prepared remarks, we continue to gain share, and win some meaningful high quality customers. I think the other thing that’s important to note is that the fact that within our Patient Direct business, we really continue to diversify the total company revenue and EBITDA. And we’re doing that really in two ways. One is the strong growth from our Byram business again, in the high teens of growth, as well as the Apria acquisition that will continue to expand and help diversify the total company revenue and EBITDA. And again, we saw great growth in Apria for the quarter in the mid-single-digits. So continuing to see the beginning of our synergies and the integration work very, very well, And ultimately, I think historical the last three years, we’ve shown our ability to demonstrate, as well as the effectiveness of our long-term strategy, our operational excellence and our business challenge. And we’re really looking forward to the back half of this year and, and really continuing our strength going forward. So thank you everyone. And look forward to talking again next quarter.

Thank you for attending today’s conference. This concludes the program. You may all disconnect.