Awesome. Thank you everyone for joining this session of the Leerink Healthcare Crossroads Conference. I'm Mike Cherney, the healthcare tech and distribution analyst. Much more importantly, though, we have Ed Pesicka, President and CEO of Owens & Minor, along with Alex Bruni, CFO. We're just gonna get into a bunch of questions- Sure. 'Cause I feel like it's always more fun that way. You know, maybe just thinking about, you know, building off of some of the recent trends of the quarter, recent performance, you know, as you think about your business, I'm gonna. I'll start on the Products and Healthcare Services side. Okay. just 'cause it's smaller, smaller EBIT, but the legacy of the business. Yep. But obviously, you're tied to areas of just broad-based healthcare utilization- Mm-hmm. particularly inpatient, but others. But so how, how are you thinking about what you're seeing right now from a trend perspective in your business and the moving pieces for your underlying customers- Sure. - which obviously are being combined with what's been a pretty nice string of recent customer wins on the distribution side? Sure. It's something we, excuse me, as we think about it, we started talking about it the last couple of quarters. We call it same-store sales. I think that gives us a feel for utilization. You know, 'cause you always have noise of, you know, wins, losses, things like that in there. And, you know, we've seen some nice, nice same-store sale growth progress, really starting at the end of last year and continuing into Q1. You know, and there's no reason to expect that the same-store sale slows down. You know, you're seeing higher utilization, I think, within the hospitals. If you look at some of the public companies that are hospitals, we've seen them report out that higher utilization, and that translates into, you know, increased same-store sales for us at the same time. I think we also gotta remember that while utilization's important, you know, the other aspect in that business that's important is, you know, the continued ability to grow our proprietary products within our channel and outside of our channel. So while utilization is important at a high level, it gives you the macro picture. You know, what we have to do is continue to look at how to take those same-store sales and drive more of our proprietary product within the PNHS segment. Obviously, it's very different in the Patient Direct, but, you know, overall, we've seen nice same-store sales growth. We've seen it, and we see, we expect that to continue as the year progresses. You managed to lead me right into the next question- Uh-oh. Love, which is that proprietary product side. Sure. Obviously, this is, you know, built significantly through the Halyard acquisition, I guess, six years ago now? About that, yeah. Time flies. Mm-hmm. We have a global pandemic. You know, as you think about, especially in this post-elevated PPE world, what are some of the strategic discussions looking like, both with existing customers as well as prospects, on the best way to utilize your portfolio of products from both a quality but also pricing perspective? Yeah, I think what we, let's take it again at a macro level. What we've seen is, we've seen differences across categories and across different hospitals. So, you know, in the Acute Care Space, you've had some hospitals that did have excessive amounts of, I'll call it safety stock, and as they've burned through it, we've seen that reorder come back, too. And we started talking about the last couple of quarters, too, was where we've seen the demand and the volume start to... You know, it flattened out, and it's starting to increase. And as we think about that, specifically around PPE, is making sure that within the key channel where we have the business, are there opportunities for us to continue to drive, you know, more purchasing of those standard PPE, PPE products? It's varied from N95s to facial protection, to wrap, to gloves, and it's varied across the board. But, you know, that's one of the key focuses we talked about on Investor Day, and we're gonna continue to drive towards that. And with regards to that, like, how do you think about... your products have components of differentiation to them, but- Sure ... the whole dynamic of your portfolio is meant to be commodity-level products, right? Just- Basic reusables. Yeah, to some extent, yes. Yeah. And to some extent, some differentiation. Yeah. And so I guess along those lines, how do you think about innovating your portfolio? Sure. 'Cause to your point, it's not just, you know, a simple glove that has no differences to it. You wanna have differentiation. So how do you think about the push and pull on where you're spending time to make sure that your products still remain highest quality, best-in-class products? Yeah, so I think on that, you know, there's a couple of different factors we think about. So, you know, take gloves. You know, we believe our gloves from a quality, from a standpoint of value, you know, is one of the leading gloves in the marketplace today. You know, partially that is because a good portion of those we're making in our own factories, we have control over the manufacturing. Same thing with facial protection. Again, we're making the bulk of those products within our own factories, and we have control over the quality. You know, our products are made in different geographic regions than other people's products. You know, some of our competitors, the vast majority of the products are coming from China and other parts. Ours are coming from U.S., Mexico, Honduras, and Thailand. You know, so that has enabled us to have a better control over quality. That has enabled us to have a better control over the development of new products. So let me talk about that a little bit. We've talked about how we take gloves and move from gloves in the traditional exam gloves into surgical gloves, into clean room gloves and other parts, you know, where those products are needed, you know, both in industrial markets, healthcare as well as industrial and retail markets. So relative to PPE, this could also be category-specific- Sure ... but obviously, you were incredibly important partners during the outbreak of COVID. You built, you know, additional manufacturing capacity. You mentioned the onshore, nearshore side. Where do you, where do you sit right now? And you can go category by category- Sure ... as needed, on both a demand level versus pre-COVID and also a capacity utilization level, manufacturing capacity versus pre-COVID. So let me cover that, and then I'm gonna cover a different topic of where do we see the opportunity to in the future. Absolutely. So if we think about it, N95s. When you think pre-COVID, nobody even talked about what an N95 was. I don't think most people in America knew what an N95 was. You know, we went from producing very few to, you know, millions and millions, and millions, and millions of N95s. That volume demand has almost gone back to where it was pre-COVID, which is virtually nothing. You know, so that's probably the one category of all categories where we've seen this huge spike, and now it come back down to pre-COVID levels, and even less than pre-COVID levels because hospitals have N95s, and people just aren't using them. On the other stuff, we continue. You know, what we've seen on the other side of it is, you know, glove. Glove demand skyrocketed. Excuse me. Glove demand skyrocketed, and now it's leveled back off, you know, to where it was at pre-COVID levels. So that utilization is at a nice pace of where we had before. And then facial protection, we're seeing, we saw the same thing, the spike, but now leveling back off to pre-COVID levels. And actually, both of those, we're starting to see demand for the volume, unit volume, start to increase again, which tells us that most of the stockpiles within other distributors and within the hospitals have diminished significantly from where it was. I think we got to think about these products as we talk into the future. You know, one of the things is, we look at always is our manufacturing footprint. So our manufacturing footprint for gloves is in Thailand, not China. Our manufacturing for third party, where we source some of our gloves, is again in Thailand, not in China. Our manufacturing for the bulk of our other PPE, all the fabric-based, is either U.S., Mexico, or Honduras. You start to think about some of the tariffs that potentially are gonna get passed. You know, that's gonna enable... That's gonna create a competitive change in the marketplace, where those who are sourcing their products, low-cost, cheap products from China, are gonna eventually have to have higher priced products come back into the U.S. market, which is gonna create competitive, you know, a different competitive dynamic than we have today. We believe that as we continue to produce. You know, we're constantly looking at our products we're producing today in both a make/buy analysis. Where does it make sense to make it? Where does it make sense to buy it? Those tariffs have an implication on the make/buy analysis as we look forward. You know, we think that our footprint, you know, being able to run our plants, you know, at a high level of capacity, you know, enables us to compete and enables us to continue to win in the market. You know, and ultimately, our customers are really looking for three things. They're looking for service, they're looking for savings, and they're looking for some level of flexibility within the distribution business. You know, and that's critical, and what we can provide them is also consistency. With our manufacturing footprint, with our ability, where we're making the product, both onshore and nearshore, we can be competitive, we can have quality products, you know, especially as the dynamic and some of the tariffs start to impact our competitors probably more than it'll impact us. Got it. Just because you brought it up, you view your current exposure to the proposed China tariffs coming out of the White House as fairly limited? Fair, fairly limited relative to our peers, I'll tell you that. Yeah. Because, again, our proprietary product portfolio is more narrow. You know, it's shaping our decisions, too, as we expand our proprietary products. You know, we've made a commitment at Investor Day that we're gonna broadly expand in our portfolio of proprietary products. And those products we've changed from our legacy view of we have to make it to it's a make/buy decision on those. Can we be competitive? Can we get the right quality? So as we expand that portfolio, we have this other indicator now we have to consider, is where we're gonna manufacture those or where we're gonna have a third-party manufacturer because of those tariffs and the potential tariffs in the future. Turning back to some of the broad-based customer dynamics, you've talked up your recent customer wins, and- Mm-hmm. That was after a period of time where, if I'm misstating the term, please let me know, but you walked away from some lower-margin We have. -customers that- We have. Yeah. We're less impactful. As you think about some of the recent wins, what do you think have been the key strategic drivers for the selection? And maybe if you can just remind us, a question for Alex, on some of the cash flow dynamics that's impacting the working capital inventory management that you have as these new customers come on board. So I like to simplify stuff, and, and I, I think I said it in the previous comment: customers are really looking for three things, distribution customers in the medical distribution, acute care space. They're looking for savings, they're looking for service, and they're looking for some level of flexibility. You know, they, they don't just want the same process because a large hospital is different than a small or medium-sized hospital. An academic medical research hospital is different than a non-academic medical research hospital. You know, the hospital that has plenty of storage is different than a hospital that has a lean operations that doesn't have storage. So that's the flexibility aspect of it. So as we think about it, you know, one of the things the customers are looking for is savings, and we can provide that in, in different ways. Savings, not just in a product savings, but also our ability to deliver, you know, what we call a logical unit of measure, meaning instead of them showing up with a case that they have to then unpack, put away, and then throw the cardboard away, we can show up with a tote with the stuff pre-picked that goes exactly in their bin, so it saves them labor time. Not only that, they can store less inventory on site, you know, with some of our processes, whether it's our SurgiTrack, our QSight, or even our Kanban system, which lets them be more lean within their operations. You know, so that's one of the aspects they're looking for, is savings. Again, you know, looking for us to make sure there's product savings. They're looking for us. Since we don't ask for a high product penetration, our own proprietary product, how do we make sure we provide data and information tracking of where price increases are happening so they can identify opportunities for savings, you know, as well as the labor efficiencies? And then service, you know, that's the other reason why I think we're winning, is the expectation of service. You know, are the right products showing up at the right time?... to the right location? And then in addition to that, you know, are we making sure that the billing is getting done accurately and quickly? You know, that's another critical factor. You know, as we've seen during the years, we've seen service levels go up and down, but when we're running at one of the industry-high levels, we have less noise and continue to see stickiness within customers and then winning. And then lastly is the flexibility why we're winning. We're not just saying, "Okay, we have a robotic warehouse that ships exactly the same way to everybody, regardless of the circumstances." We have the ability to adjust on the fly. We've had the ability to add the right level of automation to drive lines per hour increases through our facilities and then turn around and provide what's needed. You know, whether that's, you know, putting in a warehouse dedicated to that customer, or whether that's taking over, you know, warehouses that customers have had, or whether that's winning a new business that says, "You know what? We don't want our distributor to be pushing 40% of their own proprietary products, 'cause then the leverage switches, and we lose control. You know, we're okay with 15%-20% penetration of the products, because then we have flexibility to bring in the best products from third parties, as well as have some level of competition from both a product price, as well as a product quality, as well as a product efficiency. So those are some of the reasons why we're winning business in the market. On the other side of it, look, if, you know, customers are focused and saying: "You know what? We just want you to drop a box off and be done with it, and we want the lowest cost, and we don't care if, you know, the product's made in China 'cause it's a lower cost. That's all we care about." That has a different profile for us. So those are some reasons why I think what's important to our customers, why we've continued to win in the marketplace, you know, why there is some business that we are walking away from. And then now to the cash flow dynamics. I know it's a, it was a big piece of the most recent earnings call. Yeah. So we've been talking about for a little while that this year we would expect less free cash flow than last year. Obviously, last year was just tremendous. We had $740 million of operating cash flow. And knowing that we're onboarding at least one sizable customer here in Q1 into Q2, we talked about how we were gonna invest in inventory for that customer, as well as a little more broadly, just to support customer service levels, given some inbound supplier performance. And so, you know, with that, we've talked about how Q1 is our most challenging quarter. We've obviously got some impact of the inventory. When you bring on a new customer, it also has the tendency to stretch accounts receivable, and that'll sort of dissipate over time, and so we do expect cash flow to improve as we head through the year. Logical reasons, but good just to check in on that. Yeah. I guess just because I have you, how is that large customer onboarding going? Oh, from a service standpoint? Service, yeah, like financial effect, yeah. I wish I could... I should have brought them, but the reviews internally from the customer have been phenomenal. I mean, we had the right level of inventory in place. We had the right level of pre-planning in place. You know, what the customer is seeing is just a very high level of service compared to what they had before. You know, they're really pleased on their ability to have choice on both product portfolio. You know, we continue to see enough of our products continuing to be sold into there. You know, so overall, the team, I would say the joint team between the customer and our internal Owens & Minor teammates, really did an excellent job to make sure that on day one, you know, everything worked smoothly and better than what it was working with their previous supplier. You're welcome to bring a customer up here anytime, by the way. Definitely. It would make for fun conversations. Turning to Patient Direct- Sure. which, you know, interesting to think when you, you know, did some of the, you know, first the Byram deal and the Apria deal later, how this has now become such a bigger portion of - proportion of your EBITDA. You bet. Even though the, you know, seemed felt like last quarter, kind of more stable and straightforward, and so maybe more questions on the other side of the business. But, you know, as you think about the Patient Direct side, you know, you laid out some of the categories of size and growth in a very helpful way at the Investor Day. How do you think the... Have any of the dynamics changed in your excitement over certain categories, respiratory, sleep, diabetes, and where you see the biggest pockets of growth, especially as new products either come to market or with some of the cleaning up you've seen on the sleep side? Maybe just give a, you know, six-month later refresh on how you see the product distribution across the Patient Direct business. Yeah. I don't think there's a lot of change from where we were in December, you know, when we had Investor Day. I mean, diabetes is still one of the fastest-growing categories. Sleep is still one of the fastest-growing categories. Not only the fastest-growing, but some of our largest categories, too. You know, home respiratory seems to have starting to recover post-COVID. It had very similar, I mean, during COVID, whether it's NIV, whether it's oxygen, you know, it was a big growth and kind of settled back in. You know, so those are still the main categories for growth. You know, the other thing we talked about in Investor Day, and we talked about Q1, was we're gonna add 80 or so additional sales people for organic growth. You know, the bulk of those people were in place in Q1, as we talked about on earnings call. You know, so we've got those expenses in the business right now. We know it takes about a year for them to break even, but we know that over time, they will help drive top-line growth. You know, and in a market that's so fragmented today, I think it creates opportunity for us to drive organic growth. But again, back to, you know, the big, the big categories, sleep and diabetes are still the big categories. Home respiratory is there too, and then all the other categories continue to do well, whether it's, you know, incontinence, urology, ostomy, and others. We continue to see, you know, nice growth in those. And sleep and diabetes being the two biggest, obviously, have had very different product dynamics- You bet ... recently. Yeah, sleep, obviously, with the CPAP recalls from one of the manufacturers, diabetes with what feels like new product introductions every other week on... And so I guess, how do you make sure as an organization that you're staying on top of... the best product availability, the best changes and innovation, so that you're making sure to maximize value for your customers by having the most robust product suite and the right product suite available to them. Yeah, I think, I think what's interesting is, you think in the sleep world, there is one major player now, you know, at least in the U.S. Outside the U.S., there's multiple players, but right now there's one major player, a provider of the, of the CPAP as well as the consumables. You know, and we had a great, we have a great relationship with them. You know, we were primarily partnered with them, you know, pre, pre-COVID, and we were primarily partnered with them through COVID, you know, when, when the other major player had their recall or, or. You know, so for us, it hasn't been a big impact on us. You know, there's still strong demand. We still get, you know, our, our quantity, our allocation, our amount, everything we need to fill orders. So it really hasn't changed our ability in that space. You know, we believe that over time, there'll be other competitors from the manufacturer side that enter the space. You know, we'll just keep an eye on that and where the appropriate relationships need to go. Yeah. And then, and then the flip side, diabetes. How, like, how do you think about the patient needs- Yeah and offering the widest suite, from strips to CGM to pumps to everything? Yeah. When When you think about, we think about strips is, you know, that was the thing maybe a decade ago, and, and that moved into CGM, and then now insulin pumps and kind of CGM and insulin pumps working together. You know, there's two major players in the manufacturing side on the CGM, and, you know, we have relationships with both of those. You know, some of it comes down to what the clinician wants prescribed, you know, and that- that's an important factor in it. But, you know, we have the broad category within diabetes, which is why year after year, you know, we continue to win awards as a, as one of the top DME or home providers of, of diabetes products to the, to the end users. Again, I think what can't be missed in the patient-direct space is about 80% of all insured Americans we have access to, meaning we have relationships with the payers, whether it's public or private payers, and that's the critical factor is you have to have that to be able to have entry into the game, and then you have the opportunity to compete after that. And broadly, across your portfolio on the patient direct side, how do you see pricing currently shaping, trending? And margins have been strong here, even with the absorption of the new sales reps. So how do you think about the underlying dynamics of where you can and can't generate better price? You know, so the uniqueness of the industry is, you know, it's really the payer and the government that help set that and drive that. You know, I think, you know, we're continuing. We've done a nice job working with the payers, that as costs have gone up, and we've been able to create operating efficiencies to offset some of that, to work with the payers to also, you know, help manage through some of those inflationary times we're in. And I think there's still a long way to go on that. You know, there's still some debate within the U.S. government on the 75-25 reimbursements. You know, I think that's important to get right because we need to make sure that there's not gonna be a lower level of service to the rural communities. So I think it's important that, you know, that continues to get supported in D.C. and we continue to push forward on that. Because, again, you know, we have to make sure that the rural communities get the same level of service as the non-rural communities. Thinking back again, using the Analyst Day as a framework, you talked about the expansion beyond current categories, expansion to new products. Sure. Give us a little flavor on how you're thinking about that now, six months down the road, what you're seeing, where you've generated expansion within some of your existing categories? Yeah. You talked about, you know, ostomy and wound therapy there- Yeah going well, and then attractiveness of other categories and, and how fast you wanna move. Is it gonna be a bit by bit piece- Sure ... category by category, or is it something where you wanna do something more big bang? So, I think the way we think about it in the Patient Direct, separate from PNHS, 'cause PNHS is launching their own proprietary brands, products, and that's expansion. Right. But I think this question is specifically on Patient Direct. You know, as we think about other categories, and we talked about it in Investor, we talked about orthopedics, we talked about several others, you know, the way we'll do that is, is piece by piece, you know, if we're gonna do it organically, right? I mean, it's still an extremely fragmented market in the Patient Direct space. You know, if there's opportunities to do some M&A work that, you know, can be isolated and help us grow into that space, we're looking at that. So across the board, our portfolio expand or vertical, I'll call it... We call it the verticals. You know, whether it's diabetes, incontinence, urology, you know, traditional wound care, there's a new vertical we wanna get into. We'll look at it both ways. Organically, and do we have the payer contracts to make sure we can get into that space? Or inorganically, that says, "Okay, we wanna enter this space to start to learn it." We could do it from an inorganic standpoint also. Got it, and nothing, no progress. I mean, you haven't introduced new categories since the Investor Day. We, we haven't. No, we haven't said, you know... We haven't gone out and launched into, you know, orthopedics, for example. Yeah. You know, the investments we're making right now in the new salespeople are in the categories we're in today or the verticals we're in today. You know, our view on that is, that's our expertise. Let's get that right first. After we get that right, then we can start to look into those other verticals we may not be in today. Got it. Yeah, we'll stick to it and then to see. Yeah - how that progresses. Kind of, more real-time topic right now is this, the introduction of risk with the bird flu. You've seen some of the issues with some of the dairy farms- Sure - and some potential human transmission. How much are your customers coming to you with worries, concerns? Is, is that top of mind right now, or are we still just more- ... Wait and see. I wouldn't say it's, I would say it is not top of mind. I wouldn't say it's top of mind today. It's more wait and see. You know, I think this is just my perspective. There was so much learned during COVID that, you know, if we do need that, the playbook exists. You're not creating it on the fly anymore. So but we haven't seen any large influx in demand on anything specifically related to that. Got it. Yeah. You never know if- That's right. If and when something may come up. Tying back to Patient Direct, I guess one thing I missed is the idea and role of competitive bidding. I know this is something that 15, 20 years ago was in Apria, uncertainty, maybe not so much anymore. What's built into your multi-year guidance on any potential new category competitive bidding processes, or is that not something that you're currently expecting anytime soon? Sure. Yeah. So obviously, it's an area that we watch, you know, very carefully. We don't expect anything in, until at the earliest, 2026, and we feel really good about our team having navigated, as you mentioned, you know, multiple rounds of competitive bidding in the past. So I think really having a knowledge of, you know, if and when it were to come, how we would navigate that is super important. So within our guidance, we have basically not taken any headwinds or tailwinds associated with competitive bidding. What we have seen historically is that competitive bidding for those large players that are knowledgeable about how to navigate it, it actually turns out better for them than for the smaller players. And so, you know, we feel good that if and when it were to come, that we would handle it in a way that, you know, continues to support the business. Got it. You have a number of targeted enterprise cost initiatives that you've been executing on, working on, seen some very good progress on so far. Yeah, as you think about the rollout towards your 2028 targets, right? 2028, I think I always forget which companies have which years for the- 28 for us. That's right. Any year. Yeah. What—you know, use a terrible analogy. What inning are we in on where you've been on the, on the cost takeout versus the opportunities that you have over time, like the sales force expansion to drive more margin expansion? Sure. through better revenue growth? I'd say what inning? I mean, we're one quarter in a 20-quarter plan, so we're very early in if, if it's a five-year strategic plan. There were some cost programs before. Yeah. No, I know. I'm saying high-level strategic plan. Yeah. Now, look, I mean, when we launched the Operating Model Realignment Program, we thought it would take us about three years to get through everything. We're about a year and a quarter through that right now, you know, so we're 5 quarters out of the, what is that? 12. So we're in, you know, we're still in the first half of the game, I would say. You know, and we've done a really good job taking costs out. But the thing I'm proud of what the team has done is the focus to reinvest back in the business. You know, the focus to add the commercial resources, the focus to add the category managers, you know, the focus to add, you know, other resources to make sure we can grow in the operating room. You know, versus in the past, it would have been just take out the cost to potentially increase the short-term profitability of the business or take out the cost to offset, you know, some headwinds, and that's where the focus was. This is, yes, we're taking out cost. It does help offset some of the inflationary headwinds. Yes, it does help offset some of the pricing dynamics, but it also is enabling us to reinvest back in the business. So we're early on in the three-year operating model realignment. We're about almost halfway through, not quite halfway through, but we're at a good pace through that, and we're just early on on the investments to provide the returns for the business. Fair. You touched a bit also on M&A and the ideas of potential for inorganic growth- Sure. But beyond, where do you think, both from a financial and organizational perspective, you sit right now to absorb M&A? Obviously, the balance sheet's one component, but relative to the company as a whole, it seems like across both major segments, you're ready, willing, and able if the right deal were to present itself, at least- Mm on a medium size. So just curious how you think about that dynamic and how prepared the organization is right now to execute on the right deal? No, I think, I think that's right. The organization's ready. You know, we did a really good job doing the acquisition of Apria and layering in those two businesses. You know, I still think that the Patient Direct segment is just hugely fragmented. You know, that fragmentation, it creates opportunities both for small, mid-size, and larger, larger transactions. You know, I think on that, you know, we have to make sure it has the right fit and then the right strategy on the implementation, because the acquisition strategy is going to be a growth strategy, not just to add the revenue, but then take those two entities and grow at the top line faster. So, you know, I really think in the Patient Direct, there's significant opportunities for that growth path as we move forward. It just, the right opportunity has to come at the right time. And the other side of it is, I think we've done a really good job in 2023, getting our balance sheet in a much better place when we brought down, you know, almost a turn last year, to continue to be able to then look at where the opportunities are. You know, we have the cash on hand to take out our 2024s by the end of this year, and our real next set of, next set of debt doesn't come due till close to 2029. So, you know, we have the ability and the flexibility, I think, to do a transaction if the right one comes along. And I think internally, we're ready to do that also with the talent we have within the organization. Awesome. Well, we're out of time. Ed, Alex, thank you so much for being here. Appreciate it. Thanks. Thanks, Mike. Appreciate it.