Owens & Minor Management Discusses Q2 2012 Results - Earnings Call Transcript

Owens & Minor (OMI)

Q2 2012 Earnings Call

July 24, 2012 8:30 am ET


Craig R. Smith - Chief Executive Officer, President, Director, Member of Executive Committee and Member of Strategic Planning Committee

Trudi Allcott - Director of Investor & Media Relations

D. Andrew Edwards - Interim Chief Financial Officer, Principal Accounting Officer, Vice President and Controller

James L. Bierman - Chief Operating Officer and Executive Vice President

Olwen B. Cape - Former Principal Accounting Officer, Vice President and Controller

Robert K. Snead - Operating Vice President of Corporate Development


Glen J. Santangelo - Crédit Suisse AG, Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

Steven Valiquette - UBS Investment Bank, Research Division

David Larsen - Leerink Swann LLC, Research Division



Good morning, ladies and gentlemen, and welcome to the Owens & Minor Second Quarter 2012 Earnings Conference Call. My name is Kevin, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Craig Smith, President and Chief Executive Officer of Owens & Minor. Please proceed, sir.

Craig R. Smith

Thank you, Kevin, and good morning, everyone. Welcome to the Owens & Minor Second Quarter 2012 Earnings Conference Call. We'll review our results and take your questions in a moment. But first, let me introduce my colleagues on the call today: Jim Bierman, our Chief Operating Officer; Drew Edwards, our Interim Chief Financial Officer; Grace den Hartog, our General Counsel. And joining us today is Robert Snead, our Operating VP of Corporate Development, who lead our efforts on the Movianto transaction.

Now before we begin, Trudi Allcott from our Investor Relations team will read a Safe Harbor statement. Trudi?

Trudi Allcott

Thank you, Craig. Our comments today will be focused on financial results for the second quarter of 2012, which are included in our press release. The press release, as well as the supplemental slide presentation, can be found on our website at owens-minor.com, where we will also archive the webcast of today's call.

In the course of our discussion today, we may make forward-looking statements. These statements are subject to risk and uncertainty that could cause actual results to differ materially from those projected. Please see our press release and our SEC filings for a full discussion of these risk factors. Thank you. Craig?

Craig R. Smith

Thank you, Trudi. And I'd like to call on Drew Edwards to brief us on the numbers. And then Jim Bierman will provide an operational overview. So let's start with Drew.

D. Andrew Edwards

Thanks, Craig, and good morning, everyone. Let's take a look at our second quarter financial results. Revenues for the second quarter improved $54 million, or 2.5%, to $2.19 billion when compared to last year's second quarter. For the year-to-date period, revenues increased $148 million, or 3.5%, to $4.4 billion when compared to the first 6 months of 2011. The increase in year-over-year quarterly revenues resulted primarily from growth in sales to existing customers while the year-to-date revenue growth mainly came from both increased sales to existing customers and new customers.

On the gross margin front, our year-over-year gross margin percentage for the quarter declined 47 basis points. However, on a sequential basis, gross margin was about the same as the first quarter of this year. The reason for the decline in the year-over-year quarterly gross margin percentage is similar to what we discussed last quarter, which is primarily the result of changes in our customer mix, including lower margins from large integrated health networks, as well as competitive pressures.

As we have discussed in the past, achieving synergies and optimizing performance on large integrated network accounts can take time. Cost control continues to be a bright spot for us. Second quarter SG&A declined by $6.1 million and was 45 basis points lower as a percentage of revenue compared with last year. This improvement more than offset the year-over-year decline in gross margin dollars and percentage.

The factors that contributed to favorable SG&A performance for the quarter were: first, a $4.3 million improvement in fee-for-service operating expenses. You may recall that at the same time last year, we were incurring expenses for the transition of a major 3PL customer; second, a $1.8 million decrease in traditional distribution and operating expenses despite an increase in related revenues of $54 million. Our improvement in traditional distribution costs were due to the realignment steps taken in the fourth quarter of last year, as well as a keen focus on managing expenses.

The story on SG&A for the first 6 months of this year is the same as the story for the second quarter with the expenses declining $1.4 million on revenue growth of $148 million and more than offsetting the $1.1 million gross margin dollar decline that occurred during the same timeframe.

As part of our strategic initiatives, we continue to invest in our infrastructure, which resulted in a $300,000 increase in depreciation and amortization expense to $8.5 million for the second quarter. Year-to-date depreciation and amortization was $17.1 million, essentially unchanged from the year before. The changes in depreciation and amortization primarily resulted from investments in warehouse equipment technology and leasehold improvements, partially offset by lower amortization resulting from the expiration of noncompete agreements.

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