Owens & Minor Inc (OMI) 2013 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Owens & Minor first quarter 2013 earnings conference call. My name is Janine, and I will be your operator for today. At the time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over for your host for today's call, Mr. Craig Smith, President and Chief Executive Officer of Owens & Minor. Please proceed, sir.

Thank you Janine, and good morning everyone. Welcome to the Owens & Minor first quarter 2013 conference call. This morning, we will review our results and then take your questions, but first let me introduce my colleagues on the call today. Jim Bierman, our Chief Operating Officer, Grace den Hartog, our General Counsel, and Randy Meier, our Chief Financial Officer, who is participating in his first Owens & Minor earnings call today. I would like to welcome Randy to Owens & Minor, he brings a great deal of finance and operations experience from the manufacturing side of healthcare, and international experience in companies that were engaged in global commerce. I am very pleased to have him as the newest member of our leadership team. Before we begin, I am going to ask Trudi Allcott from Investor Relations to read the Safe Harbor statement. Trudi?

Thank you Craig. Our comments today will be focused on financial results for the first quarter of 2013, which are included in our press release, in our discussion today we will reference certain non-GAAP financial measures. Information about these measures and reconciliations to GAAP financial measures are included in our press release, and in the first quarter supplemental slide presentation, both of which are posted on our website. Our call today will also be archived on our website. In the course of our discussion today, we may make forward-looking statements. These statements are subject to risks and uncertaintiesthat 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. Finally, upcoming investor events are spelled out in our press release. Thank you. Craig.

Thank you, Trudi. Now I would like to call on Jim Bierman for an operational overview, and then Jim will hand it over to Randy to provide an update on the numbers.

Thank you Craig, and good morning everyone. I would like to join Craig in welcoming Randy on board as our new CFO. Since Randy is going to review our financial results this morning, I will focus on the qualitative and strategic aspects of our operations. After taking over as Chief Operating Officer a year ago, I have been working with our sales and operations leadership to streamline and update our approach to a changing market. I will highlight some of the progress in this effort, and then comment on the status of our GPO contract renewals, as well as provide some operational context for Randy's review of our financial results.

As the wave of hospital affiliations and consolidations has continued, we have made a concerted effort to work with the large hospitals and IDNs that will be setting the direction for the future of healthcare. I visited with folks from several of our country's largest healthcare providers this past quarter, and believe more than ever that the changes we see in the market are validating our strategy. In looking at our quarterly results, we see the positive impact of these large customers, and we are seeing signs that we are beginning to achieve our targeted operating performance. As these trends are ongoing, we will continue to streamline our domestic and international networks, and our approach to the market to meet the evolving needs of our customers.

For example, we accomplished certain planned distribution center consolidations in the first quarter. The financial affect of which is included in our exit and realignment charges. These first quarter actions were designed to consolidate our footprint, both in the Midwest and in Europe. Despite the fluidity in the market, we continue to invest in our Company for the long-term, as we said at our November Investor Day,we are working to connect the world of medical products to the point of care, and we have made significant progress in the last two years. We have achieved two international expansions, first in China with our sourcing joint venture, then in Europe with the acquisition of Movianto, which has greatly expanded our third party logistics platform.

As we also highlighted in November, we are migrating from being predominantly a provider-centric company to a Company that is more equally focused on healthcare providers and manufacturers. But this transformation does not happen overnight. It will take several years. In 2013, we are entering the second year of a planned 3-year $50 million information technology strategy, that is designed to improve efficiency, our flexibility, and our ability to handle new lines of business. As our customers get larger and expand along the continuum of care, we believe the investments we are making now will ensure we continue to add value as their supply chain partner. For example, we are currently working on implementing new and more comprehensive productivity standards in our warehouses, that should improve efficiency over time and enhance our ability to serve both our provider and manufacturer customers in new ways.

Turning now to an update on our progress with the GPOs. As we have said, we successfully negotiated and signed the Novation and Premier contracts last year. This year, we have contract renewals with MedAssets and HPG. At this point, we are progressing with the negotiation, and we will update you once those agreements are signed. By the end of this year, the majority of our distribution business will have been re-signed with new multi-year GPO contracts.

Now I would like to provide some context for Randy's financial review. In the healthcare market, Owens & Minor, along with other healthcare companies, has been experiencing the impact of lower utilization trends for some time. We saw the continuation of these trends in our book of business for the first quarter, which we were also validated by several recent reports from other healthcare companies.

As for our domestic operating earnings and margin, as Randy will further discuss, we did report an increase in operating earnings as a percentage of revenues for the quarter. This improvement occurred even as we saw an increase in our SG&A expenses as a percentage of revenues. This does not come as a surprise as comparable period domestic revenues declined slightly, and given that a portion of our expenses are fixed, one would anticipate the expense as a percentage of revenue to increase. We are well aware that careful expense management is essential for Owens & Minor, and we have a long track record of successfully controlling our costs. I would also point out that part of the reason we have continued to maintain some of our expenses is because of the ongoing investments in operational improvements I mentioned, that will benefit us in the long run.

Looking ahead to the rest of the year, we will be focused on continuing to deliver our industry-leading distribution and logistics services to our provider and manufacturer customers. Our teammates have done a great job in a challenging market, and we are confident that they will continue to excel in serving our customers and our Company. Thank you, now I will turn it over to Randy.

Thank you Jim, and good morning everyone. First, I would like to thank Craig and Jim and all of the teammates for making my transition to Owens & Minor a smooth one. The team has been very welcoming, and I am excited about the opportunity to participate in the growth of Owens & Minor, both domestically and internationally.

That said, let's turn to the first quarter results. Consolidated revenues for the first quarter were $2.28 billion, up 2.6% compared to the prior year quarter. The increase in the quarterly revenues resulted primarily from the positive impact of Movianto, which contributed $121 million to the first quarter revenues. First quarter domestic revenue declined 2.8%, but when compared to the per day basis, domestic revenues declined only 1.3% versus the first quarter of last year. When compared to the first quarter of last year, the domestic revenues declined partially as a result of our rationalization of smaller, less profitable healthcare provider customers and suppliers.

Quarterly domestic revenues were also negatively affected by trends that we have been seeing for some time, including lower hospital utilization rates and reduced government purchasing. Consolidated gross margins were $279.1 million for the quarter, were 12.26% of revenues compared to $214.3 million, or 9.66% of revenues in the prior year quarter. And looking at the first quarter gross margins when compared to last year's first quarter, the improvement came primarily from our fee for service businesses, primarily driven by Movianto.

You may recall that Movianto's business has a variety of revenue models that include both buy-sell and fee for service arrangements that can very significantly in terms of gross margins. For the quarter, distribution gross margins benefited from supplier price changes and associated benefits. For modeling purposes, we continue to believe that consolidated gross margins for the full year 2013 will fall within the range of 11.75% to 12.25% that we provided in our November Investor Day.

Moving to operating expenses. Consolidated SG&A expenses were $217.7 million, or 9.57% of revenues for the quarter, up from $155.6 million last year. The $62 million increase in SG&A for the quarter resulted primarily from the addition of our international operations, which includes labor, facilities, and delivery costs, as well as ongoing costs for information technology and other transition services. While many of these costs vary as business activity changes, a portion of the labor and facility costs act more like fixed costs. As a reminder, the incremental costs of transitioning Movianto's information technology and other functions from our former owner are reported as acquisition-related charges, outside of SG&A expense.

Domestic segment SG&A as a percentage of revenue was 7.31% of revenue, compared to 7.01% for the same period last year. As Jim indicated in his remarks, much of this increase in the SG&A as a percentage of revenue can be attributed to the small decline in revenue compared to last year's first quarter. However, we did experience increases in workers' compensation and consulting expenses, which we do not expect to have a meaningful impact on the full year.

Adjusted consolidated operated earnings for the quarter were $50 million, or 2.19% of revenues, a decline of $2 million compared to the prior year quarter. Primarily due to the operating loss of $3 million in the international segment. For the first quarter, domestic segment operating earnings were $53 million, or 2.46% of domestic revenues, up $1 million from the prior year quarter.

As for the international segment, during the quarter we completed key management changes in Europe, with our new team in place, we are focused on achieving reductions in our cost structure, while we steadily work to optimize our capacity in the network. In addition, we took some initial steps in the first quarter to reduce costs in Europe, including the closing of one small facility. As we move through the year, we expect to see the benefit of these actions. For the balance of 2013, our strategy with Movianto is to achieve an improved cost structure without affecting our ability to grow in 2014 and beyond.

For the quarter, interest expense was $3.2 million, while our tax rate increased to 41.6% from last year's 39.4%, largely reflecting the impact of foreign taxes. Operating cash flow for the quarter was $155 million compared to $102 million for the same period last year. Much of the quarterly increase resulted from a $98 million increase in cash flow related to Accounts Payable. Timing played a role in this quarterly increase, and it is something that we see from time to time. For the year, we would expect to see moderating trends in our Accounts Payable.

The Company continues to report strong domestic asset management metrics, such as DSOs of 19.6 days and inventory turns of 10.6 times. So for the first quarter of 2013, adjusted consolidated net income excluding pre-tax charges of $2 million for the acquisition-related and exit realignment activities was $27.6 million, or $0.44 per diluted share, compared with $0.46 for the prior year quarter. Included in these results is the previously mentioned pre-tax quarterly operating loss for the international segment of approximately $3 million, or $0.04 per diluted share.

Considering our fourth quarter results and looking toward the rest of the year, our guidance for 2013 remains unchanged. As a reminder, we are targeting revenue growth for 2013 of 2% to 4%, and adjusted net income per diluted share of $1.90 to $2.00 per share for the year, which includes operating results from Movianto, but excludes exit and realignment costs, as well as acquisition-related costs. Thank you, and with that I would like to turn the call back over to Craig.

Thank you, Randy. Now that Randy and Jim have given you really a thorough update on our first quarter financial and operational results, I would like to just make a few comments before we go into Q&A. The first thing I want to do is thank all of our Boston teammates who responded during a very terrible tragedy during the Boston Marathon. Our hearts and prayers goes out to the victims and those who suffered. I want to personally thank all of our Boston teammates who worked throughout the night and during the day, to make sure that our hospitals and patients were taken care of in the Boston market.

Now we are celebrating our 131st anniversary this year, and that means we have learned a few things about operating in healthcare. We are staying very focused on the long-term strategy of the Company. We have and we will continue to invest for strength and flexibility. We are making sure we are serving the needs of our customers, and as you heard Jim say, he has been out visiting with customers and I have, so we get a lot of input from our customers throughout the country, and we try to respond and maintain our flexibility, as they are clearly changing in a very quick, quick environment changing healthcare environment.

We are also staying very true to our values, and no matter what is happening in the market or the economy, we are staying very true to our culture. I was talking with someone recently that said that Owens & Minor is a good company in a tough neighborhood, and I think that is pretty appropriate for our Company. We always try do the right thing. We are always working hard. The last two or three years have been a little challenging, but I think we are making good progress. We are really successfully working through some of these challenges, and I am very pleased that our teams in the US, Europe, and Asia are demonstrating really a great sense of urgency, and they are making things happen every single day.

Now with the investments we are making in our domestic business to improve flexibility, lower costs, and serving the right customers, we are also making the right investments in Europe, and I believe we're in a very strong position for the future. Now with that said, we would be happy to open it up and to take your questions. So, Janine, I'll turn it back over to you.

Thank you. (Operator Instructions). The first question comes from Robert Willoughby of Bank of America. Please go ahead.

Craig or Jim, is it possible to get some kind of quarterly run rates for Movianto? It has been a little bit more volatile out of the box than I would have thought, so any guidance on that front would help. It looks like the CapEx as well as some of the additions of software, et cetera, running about twice as they were last year. Where is that investment going?

Bob, this is Craig. I am going to answer the first question on Movianto. Of course we have had that business for six months, and I think if you look at the run rate at the end of the fourth quarter and the first quarter, I think we are in a ballpark that I think we are still operating in. It is going to be a little more choppy maybe than the core distribution business, maybe a little bit more seasonality, but I believe that at Investor Day and at the end of the first quarter, we had worked you to a number that I think we are still fairly comfortable with. I don't have it right in front of me, but I think there was a high number of over 5 and a low number of 4, and maybe somewhere in the middle there would probably be where we would want to look at.

Okay.

Robert, on the CapEx side, we had a little bit north of $11 million domestically on the CapEx. A lot of that went towards the IT strategy and the long-term capital investment plan that you have heard a fair amount. Then we had a little bit more than $3 million being spent over on Movianto in the international business.

Okay. And the additions to computer software and intangibles, this doubled year-over-year, that is on what?

That sounds about right.

What is it in support of though?

First of all, Bob, there is a three-year IT initiative and we are in the second year of the third year, so I think you are going to see the CapEx up a little bit higher on the IT piece, which we talked about in terms of upgrading our warehouse systems. We are actually upgrading some programs and services for customers, then we are actually upgrading some of our internal and external tracking mechanisms for our customers and for us internally. So this, if you remember, we are right about in the middle of our $50 million IT upgrade, and that is where we are looking at Best-of-Class systems, and we did the Microsoft mainframe lift and shift, so we are right in the middle of that piece, so we have probably got another 18 months on that.

Okay. Thank you.

The next question is from Eric Coldwell of Robert W. Baird. Please go ahead.

Thanks very much. Good morning. First off, on utilization trends. I understand what you have been communicating there, but could you give us a better sense on utilization overall? Are you seeing results decline sequentially? Is it a negative number now, or is some of the influence on your overall revenue growth simply the selectivity, such that you are seeing your core account base, your same store account base actually growing a couple of percent, perhaps? Thanks.

Yes, Eric, great question, and the answer, we have various data points, some are in conflict. Let me start with as we look at the first quarter, we continue to experience a situation where there is little to no product price inflation, and in fact, there could even be deflation going on, so there is not the normal lift that would exist in a cost plus kind of environment with product price inflation. If you get to then the root issue that you raise, which is what are the actual procedure activities, and what are we seeing within our customers, we continue to see a trend that we called out, now it is almost a year and a half, two years ago, where our larger customers are experiencing higher utilization or growth than the average that we see.

Now some of that may be due to various acquisitions that they may be doing that are relatively small and have an influence, but we are not able to identify them as unique reasons for an increase, but there is no question our larger customers are increasing at a faster rate than our smaller customers. Just as we called out before, it continues on this quarter, the smaller customers are actually experiencing negative growth. Overall, utilization was flat. I think the way we would look at it on a sequential basis is that it was down from the fourth quarter, but again, that is, much of that is the reasons for it are anecdotal as we talk to our larger customers, and we zero in on the quantitative data related to those larger customers.

Hey Jim, let me just throw out a comment that you made with something in the press release. I think you said little to no product inflation, maybe some deflation, but the press release also says that operating earnings in the domestic segment benefited from supplier price changes. What price changes are you referencing, given those recent comments on the call here?

As we look, and I am going to convert over to a bit of a financial accounting-related answer, and I would defer to Randy in a heartbeat on this, but I think what we are referring to there is a phenomenon that those of you that have been with us for a while have seen in other quarters, where the mix of product pricing within our inventory valuation shifts, and there is either a benefit or negative impact to the margin, and I think that is what was being referred to in the press release. Again, any further details I would defer to Randy on.

I would agree with what Jim said. I think as a new person sort of getting an education on inventory and how it is managed here, certainly we see with the diversity in their product line, we saw both price increases and decreases, but how it flows through the income statement has more to do with our product mix at the end of the year based on inventory on-hand, and how those price adjustments are then reflected, both in the cash flow statement and then through the income statement. So overall, I think we tried to make an accurate statement that supplier price was both positive and negative in terms of across the board, but as the net result to us was somewhat positive to us in the quarter, and we would expect to have that a follow-on impact a little bit in the second quarter.

If I could just squeeze one more in. Jim, you said, obviously, it is not a surprise to see SG&A increase as a percent of revenue in a period where domestic revenue is off a little bit. Some fixed costs in nature. At the same time, your guidance for the year is maintained and your original SG&A guidance was 8.9% to 9.3% of revenue, this quarter came out at 9.6%. Are we trending as we look at the rest of the year, are we trending to the higher range of that original guidance range, or are you perhaps suggesting that the first quarter was somewhat of an anomaly, and we would see SG&A as a percent of revenue to come back into the range to true-up the full year between 8.9% and 9.3%?

Sure, Eric. I think a couple of things. I think, first of all, the SG&A results were within a reasonable range that we were targeting for the quarter. You will recall and I think it is largely because of the nature of our workforce that there is some seasonality in our expense run rates, and we do see some higher expenses in the first quarter related to payroll taxes and various other incentive-related things that occur in the first quarter versus later quarters. I think all-in-all, we are within a comfortable position of the amounts that we put forward as targets at Investor Day.

As you also well know, we are probably not going to fall into the trap of beginning to triangulate or narrow those ranges, at least with only one quarter behind us. We are satisfied where we are. We do understand and I think the investment community who has been with us for a while understands this, too. Our major cost is people. That cost structure is semi-fixed or technically it is step variable, so a relatively small variance in revenue, it is tough to titrate the expenses as narrowly as one might think.

Thanks very much.

One other comment. The increase year-over-year in SG&A was about $62 million, and the vast majority of that was Movianto, so I think as we move forward the variance in the North America business in terms werevery small. Again, I think being relatively new here, the expense control and our ability to manage that I think is still at a pretty high level, that is why I think our confidence to manage to inside the range still remains very high.

The next question is from Lisa Gill of JPMorgan. Please go ahead.

Thanks very much, and good morning everyone. I just had two questions. First, Craig, just a bigger picture question. You started out the conversation today talking about working with the largest IDNs. Can you talk about how those relationships are changing, and as their buying positions and taking more of the services within the IDN umbrella, how does that impact Owens & Minor?

Lisa, this is Jim Bierman, I will answer first and then Craig can supplement it, because I think I was the one that actually said that they with have had meeting with the larger IDNs. Yes. It is really quite interesting and it is exciting for us here, because the nature of the conversation with the provider thought leaders that are out there, those that are really going to move the needle is totally changing, and that discussion is becoming way more strategic as to how they can dramatically change the landscape, as opposed to highly tactical, or as Craig likes to say, very price-driven. I think we are excited about this. Now where that goes, whether or not the momentum is sustained and fundamental changes can be made, remains to be seen, but clearly the nature of the conversation is shifting, and we think we are uniquely positioned to take advantage of that shift. Craig?

I just would say, Lisa, actually I am very pleased with what is going on in the marketplace with our customer base. A product like PANDAC, which has been around for 40 years now, it has still got a lot of legs and a lot of momentum, and it is actually becoming a piece of a bigger service that we are offering. So the discussions have really changed to, and I think you have heard me say this before, if you want do a price deal, can you maybe on a large customer, a customer might save $1 million. We are talking $5 million, $10 million, $15 million, $20 million, where these systems just have very, very large numbers to try to get to.

I think the bigger part as they bring these systems together, as they go out and acquire, they need help with their physician practices, they need to tie them into the integrated delivery network, technologically and supply chain-wise. They are also adding hospitals that historically may be still behind the curve, on the IT curve, and they have got to accommodate them and bring them into a bigger system. I think all of the things that we have invested in over the last five to ten years are actually playing very well in our hand right now to really help these bigger systems get at a bigger number. So I would say, overall I am feeling very pleased with where these larger systems are going.

What do you think that means though, Craig? From our side we think about things in numbers. So you did you expect that you are going to see big growth in the big guys, the smaller guys continue to fade away? How should we think about that in the next couple of years?

Lisa, I think we are already seeing that, and I think maybe for lack of a better word, have been a little bit coy about it. We are actually seeing better utilization in the larger systems. We are seeing better penetration. From a sales growth standpoint, we are seeing sales growth in those IDNs. We are seeing a better acceptability of our programs and services, so that should help us to some degree on margin. We also have a lot of customers that want to aggregate more of their purchases with us in these bigger systems. I think from a numbers standpoint, that is where we think our growth is going to come from, and I think we believe that is where our programs and services will grow over the next three to five years.

Great. I just have a numbers clarification question around the gross margin in the quarter. Randy, can you maybe help us understand, I know you said it is from an accounting prospective, the supplier price increases and the way that it impacted things. Right now your gross margins are at the upper end of that guidance range that you have given. Is there a way for you to give us some idea of how much impact came from these price increases, and how we should think about gross margins for the rest of the year, because we would have to assume if you keep the guidance the same that gross margins are coming down from the first quarter? Thanks.

I think probably the best way to describe this is to give you some trends about where we see our gross margin going. In the first quarter, we did have a positive impact from some of the supplier-priced changes, and we expect that will be somewhat diminished as we progress through the year. I think as we go to the second quarter, there will be some small benefit as a residual impact, then as we get into the second half of the year, we will see less of that going forward.

We continue to feel comfortable at this point in the year with the gross margin range, and certainly I would expect that we would fall as subsequent quarters fall inside of that range, so I would expect to see some slight decrease going forward, but I wouldn't say it would have a significant impact on overall profitability. Overall, I think we are very positive year-over-year, when you look back a couple of years ago at the overall trend in our gross profit margin, so I think that is really what we are focused on here, and continuing to expand gross margins on an annual basis year-over-year.

Okay, great, thank you.

The next question is from Robert Jones of Goldman Sachs. Please go ahead.

Thanks for the questions. Craig, just wanted to go back to a comment that you made around the top line, and just trying to figure out how to forecast the two segments for the balance of the year. Seems like we are honing in a little bit more on a run rate for Movianto, and say we do get towards the upper end of that range. It would imply that the domestic business would see a pretty decent sequential acceleration from where we were in 1Q through the balance of the year. Is that the expectation that you guys have based on the 2% to 4% guidance, and if so, what are the main drivers or what gives you confidence that you will see an acceleration in the domestic business?

Yes, Robert, I am not sure that your math works with where we are headed on Movianto. I am not sure we are seeing, we would mathematically come up with a significant acceleration of domestic revenue. I am struggling a little bit with that. I am working on it. But I don't have a good answer.

If you did $500 million in the international business I think it would imply that the negative 2.8% decline that you saw this year would obviously have to improve?

Bob, let me jump in and see what we can go here. I think we are within of the guidance that we gave for the year, and the $500 million is actually probably a little bit high in what we have been talking about, and again, the only thing that I would say, and I am not trying to take you off of the domestic business, but I think that there is probably some feeling that Movianto will contribute a little bit more this year than perhaps the domestic, but there is some seasonality to it, but we are clearly right in the guidance range of what we gave for 2013, but I am going to turn it over to Randy, maybe he can give a little more color on that.

I guess one comment I would make, is if you look at where we were in the first quarter with Movianto, I think we are comfortable with that number and the continued progress we will make there, which will contribute to sort of sustaining an overall top line growth rate. But one of the things that I would point out, is even though we did see slightly more than a 2% decline in the domestic business. If you look at it on a daily basis, it only declined 1.3%, and that is an important metric that you should look at. The domestic business is not declining as much as the headline number might suggest. We did have one fewer day this year than we did last year, and as you know, in this business that does matter. I would sort of look at more of the 1.3% as sort of the domestic number, rather than the 2.6%.

Got it, that is helpful. Just a follow-up around Movianto. Any update or comments or additional thoughts around where, when you think that business could turn profitable? Thanks so much.

I think, Bob, we are going to guide you back to the guidance that we feel we are clearly in the guidance for the year. We are making good progress at Movianto, as I have said publicly, it is more of an expense opportunity for us as we build the pipeline for sales. Originally, we had said it was a bit of a capacity opportunity I think. We have got an expense opportunity, too. I think Randy put it very poignantly in his remarks. We are getting the business ready so we can see some great progress in 2014. We are taking our time, we are getting our business right to where we want it, we are building the pipeline. I think we are doing all of the right things. We have a new leadership team in place. We now have a new COO under the CEO who has got great operating experience. So all of the things that we are doing are building blocks to really position us for 2014.

Appreciate all of the comments. Thanks.

Thanks, Bob.

Your next question is from Steven Valiquette of UBS. Please go ahead.

Thanks. Good morning, Craig and Jim, and also Randy, congratulations on joining OMI. Good to hear your voice on some conference calls again. Couple of questions for me. I guess we have to wait for the 10-Q for the gross margin split between domestic and international, or is there any chance you could give any color on that?

I think we haven't in the past and I think that is probably a good practice. I think from where we are, we want to keep with the long-term strategic view of moving more towards fee-for-service type businesses, while we continue to aggressively manage the distribution business forward, and focus on leveraging our provider customers. I think we are going to try to focus on a consolidated gross profit margin and how that translates into operating margin. I think we will guide you that we saw some nice progress, and we were very happy with our gross margins domestically, but overall we are looking at our broader product mix and the consolidated gross profit margin.

Did the Movianto acquisition help you win any domestic 3PL business in the US in the quarter?

I would say we are making good progress on several companies. I wouldn't have that right in front of me. I think we gave you a little bit of a score card at the end of the fourth quarter just to give you some feel about some positive movement. I would say we are still having positive movement in the first quarter, and we are having discussions with companies that we probably would not have had, had we not done the Movianto acquisition. Overall, I am pretty pleased with the discussions that we are having on a global and a domestic basis.

Okay. I guess going forward, let's say if you do win a big global 3PL contract. Would you show the P&L implications of that on a split basis between domestic and international segments, or would it just go into one bucket? Trying to think going forward how you would account for that? Going forward, want to be able to track the margins on the domestic business, on hospital distribution versus 3PL benefits, et cetera. Just curious on how you are thinking about it, if you win global 3PL contracts, how you will account for that?

First, let me say that would be a terrific problem to have. As we look forward to making that accounting decision, we will definitely keep you posted on it, but based on our segment reporting right now, I would say we would probably split it between domestic and international. I look forward to having that opportunity.

Okay, that is helpful. One last real quick one here. On the discussion before on the inventory, I may have missed this, but did you give the change in the LIFO provision in the quarter?

No, we did not. As we start looking, again, I think this goes back to the strategic change in the organization, as we move forward and continue to see increases in our fee-for-service business, that is going to have less of an impact overall, so we decided that this was not really a valid data point, given that the overall changes in inventory and the impact on cash flow is really impacted by a variety of areas, so we decided that we would not be providing that on a quarterly basis any more. Annually, we will be sort of showing that sort of inventory adjustment with the LIFO to FIFO sort of adjustment and what we will show, and we can talk about it at that point. Overall, I think the impact of a variety of things afflicting our inventory levels was really positive to the overall performance of the Company in the quarter, so we will give more trend information on a going-forward basis.

Okay. I guess that is a little confusing because on the one hand you are saying brand inflation helped you, but then that would imply that maybe you had a bigger LIFO charge in the quarter. I am just trying to compare that to the $5 million charge you in the first quarter last year to find out if LIFO helped or hurt the earnings in the quarter. I guess we will have to do some guess around that I guess. Alright. Thanks a lot.

Overall, the changes in the inventory had a positive impact on the overall financial statements of the Company in the quarter. I think going forward, if trend information is how that is working, but again, we just think the single data point creates more confusion than it helps.

Okay. Alright, thanks.

(Operator Instructions). The next question is from David Larsen of Swann. Please go ahead.

Can you please talk about the current excess capacity that there is for Movianto? It sounds like you reduced some costs, shut down a facility over there. Is there a way to quantify what that capacity is now? Thanks.

To be quite honest with you, it is probably relatively close to what I said last quarter. Remember, these deals as we sign these deals do not happen overnight. The more complicated deals will take somewhere between 6 to 8 months to ramp up, to add the capacity, and what I would guide you back to is we are going to fill those buildings up. That has never been a problem for Owens & Minor, and really has never been a problem for Movianto. It is having the right customers and the right product mix within those buildings.

I think our challenge really has been a little bit more around expense than capacity. I do know anecdotally we made good progress in two of the 11 countries in the first quarter, in terms of signing new business, but again, that does take a period of time to bring that over. So I think that actually, we will be fairly successful over the next year to 18 months to do that. Our challenge is to make sure that we have got the right workforce, back to your point, the right buildings, and that we have got the right management in place, so we do have the right management in place. We are working on cost structure of maybe not getting too much in depth, getting things a little bit more organized over there, and I think that is our biggest opportunity for this year, then you will see later in the second half of the year the capacity start to fill up.

That is very helpful. Thanks a lot. And then just as far as the Movianto business itself goes, can you sort of size how much of that revenue is fee-for-service, I am trying to get a sense for like the benefit to the gross margin? And then I am assuming the vast majority of it, 80%-plus is pharma, not Med/Surg supplies, and then the other 20% would be Med/Surg supplies, is that correct or not? Thanks.

I think we will give you, provide some data around what occurred in the first quarter, but I do want to sort of preface this by saying there is a certain amount of seasonality, and the fee-for-service and sort of by itself does change based on the underlying product mix and our customer base. In the quarter, it was about 50/50 fee-for-service and then our buy/sell kind of arrangement. And then I didn't get the second half of your question?

Is Movianto all pharma?

It is about half of it is, more than half of it is the pharma business right now. So relative to the domestic businesses it is a little bit different. But again, longer term we are going to be continuing to focus on leveraging some of our larger global customers on the supply side. And see if we can't change that mix.

Okay, that is helpful. And then just one more quick one, the $2 million in exit costs, can you describe what those were and do you think that there will be more going through the rest of the year, or is that it? And then Craig, I am sorry to keep harping on this, but you put a number out there, I think it was $4 million to $5 million for Movianto, was that $4 million to $5 million in operating losses in terms of operating income for the international?

No, no. Somebody was trying to get a sales number for the year, and threw out a $500 million number, and I was bringing that down from the $500 million. No. I did not give a loss number, that was more on the top line contribution for the year.

Okay. Great.

David, this is Jim Bierman. In response to your question on the exit and realignment charges. As you will recall when we met and talked about the 2013 targeted performance at our Investor Day, we talked in terms of there being about a $5 million exit and realignment charge that we would expect to record over the course of time in 2013. The charges that were taken in the first quarter were totally within the context of that original plan, and we are on target with that plan. Primarily relates to redundant capabilities that we had in certain markets.

Thank you very much.

There are no further questions at this time. I will now turn the call back over to Mr. Smith for his closing remarks.

Thank you Janine. And thank you for everyone listening in today, and we will be active out in the marketplace talking to folks, and we look forward to talking to you at the end of second quarter, and sharing our progress with you for the year. Thank you.

Thank you for your participation in today's conference. This concludes the call, and you may now disconnect. Good day everyone.