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Owens & Minor Inc. (OMI)

March 13, 2013 2:00 pm ET

Executives

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

Analysts

Kipp R.F. Davis - Barclays Capital, Research Division

Kipp R.F. Davis - Barclays Capital, Research Division

Good afternoon, everyone. My name is Kipp Davis. I'm on Barclays healthcare distribution and tech team. We're pleased to have Owens & Minor back with us at the conference this year for Day 2. And happy to have Jim Bierman, who's EVP and COO for the company. And also, you served in the CFO capacity as well, so plenty to talk about I'm sure. We've got the presentation for the next 25 minutes and then we'll also have a breakout session that's in Poinciana 4, which is just down the hall to the left as you walk out. Thanks, Jim.

James L. Bierman

Thank you. Thank you, Kipp. Good afternoon, everyone. And thank you for your interest in Owens & Minor. We'd point you to our regulatory filings and the Safe Harbor statement accompanying our filings with the Securities and Exchange Commission. Let's talk a little bit about the vision for Owens & Minor and some of the more significant changes that we've seen certainly during the last several years, but stressing a little bit more the focus on 2012 and what the implications are for 2013 and beyond.

I think if you had to characterize the Owens & Minor of today, I think we migrated from being varied provider-centric to an organization that is equally balanced at looking at serving the manufacturing community of healthcare products as well as the provider community. And as we describe that in a single sound bite, we would say that we strive to connect the world of medical care products to the point of care. And that's an important distinction within the distribution side of our business and even more importantly, as we think of ourselves in terms of medical products logistics company.

So let's talk a little bit about our progress in doing so. We're a company that was founded 131 years ago, dedicated solely to healthcare and the distribution of medical products. We have a national distribution center network of 48 distribution centers that pretty much run the gamut of the entire continental United States. Our capabilities are extensive within that distribution network. We have, what we call, low-unit-of-measure delivery capabilities. We have voice technology capabilities. All of which, enhance our ability to take product from the manufacturer, often times delivered in bulk or pallet form and break it down to the level, the unit, that the customer, the hospital, actually needs.

We have offerings that run the gamut of the acute-care space. And by that, it can be an acute-care hospital, a tertiary hospital or it can be a physician's office practice, an ambulatory surgery center. We do tend to focus though on those facilities that are tied to a larger IDN-type organization. Our IT systems are truly state-of-the-art. They're mostly homegrown and have proven to be the backbone of our back office processing for generations.

As we moved forward from a domestic platform, one that was primarily focused on the provider network, we began to expand and think in terms of where the market is going. And the first step we took was towards the area of private label sourcing. We do have a private label offering. I would say our strategy is to be the distributor of choice for branded manufacturers. And as that is our strategy, I think we fill the need of our provider customers in instances where there may be a gap in terms of the product available to them at a price point that makes sense. Our private label offering tends to be lower-end, commodity-based, disposable-type product, done in normal circumstances and situations where it doesn't tend to compete with the branded manufacturers.

In order to be price competitive and meet the needs of our hospital customers, we moved to establish a sourcing operation in Shanghai, China. We partnered with an existing company there, company by the name of Amsino, to create a joint venture named Mira MEDsource, to source product from China. Even in those situations, we do not own manufacturing facilities, either here in the United States or in China. It is an operation that sources the product on our behalf for our private label offering or for any of our hospital customers' interest in having a product that is labeled under their IDN name or brand.

We went from the success of this venture in Asia, which we launched a little over 2 years ago, to setting up a third-party logistics business here in the United States, a domestic offering. We look to expand our offering to the manufacturer community through initially an acquisition. We looked around to see if there were companies here in the United States that could serve as a platform for our third-party logistics business. And we found that most of the companies serving that space already were not dedicated solely to healthcare, that they were third-party logistics businesses for other industries as well as healthcare. And we found that to be a -- what we thought, was a critical omission or difficulty in looking at an acquisition that crossed several industries. Stated another way, the healthcare industry is unique enough that it is extremely important that you be dedicated solely to it, particularly as it relates to the supply chain.

And so we began a de novo operation in the U.S. to establish our third-party logistics footprint. We opened 2 distribution centers within the United States, one in Louisville, the other in Redlands, California, that enabled us to begin to establish our footprint in our offering for the manufacturing community. We used that as the basis for the fourth step in our migration, which occurred last August. We announced the acquisition of a European third-party logistics business by the name of Movianto. It was a company that was owned by the larger European company, Celesio. They -- Celesio, had a change in management and with it, came a change in strategic direction. They offered this asset up for sale. It had been an asset that we had coveted for a period of time in advance of it being put up for sale, we thought it would be a perfect complement to our de novo third-party logistics business. So we were familiar with the asset. It was the competitive bidding situation and we were successful. It is an asset that we think will provide the foundation for expansion of our U.S. and European capabilities and I'll talk about it in a minute in greater detail.

So the progress over the last several years has been significant, 2 international expansions, first to China, for our sourcing; secondly, to Europe, with Movianto, and expansion of de novo capabilities here in the United States with the third-party logistics business.

During this timeframe, the industry, as you all well know, has gone through unprecedented change and transformation. If we start with the 2008 financial crisis, the challenge for the last 5 years has been formidable and one could say, almost unprecedented. Some of us had been in this industry a long time, and we've seen the introduction of the prospective payment system, the DRG system. We've heard other calls for changes that were allegedly transformational, we'll see how this plays out. But certainly, the Affordable Care Act, coupled with the economic challenges of the last several years have positioned the industry for some, at the very least, unusual challenges.

As we move into -- at the end of 2012 into 2013, there is greater clarity. The elections have been held at the end of 2012. Supreme Court opined on the Health Care Reform Act. So there's a little more direction understanding as where we will be going. The unknown remains with the impact of the additional covered lives will be, that number we've heard estimates of anywhere from 30 million, 32 million to 15 million, 16 million additional lives through the system. Personally, I'm bullish on the opportunities that affords all of health care to have this bolus of additional covered lives. But we'll see how it plays out in 2014, '15 and beyond.

As we'd look though at these megatrends going on in the industry, what we saw in the provider side was a couple major things that -- or trends that have really sustained for a little over 1 year now. The first is we have seen a consolidation or an aggregation in the hospitals. Now this can occur through affiliation or outright acquisition. Stated another way, what we're seeing in the marketplace is the big systems are getting bigger. And the smaller systems, probably those in poorly served geographical areas will continue. But the middle range is proving to be somewhat of a suboptimal size as the larger institutions are acquiring them. We, correspondingly, have seen an increase in the acquisition of physician practices. And so the large IDNs are expanding not only horizontally but vertically as they look to expand their offering and their reach as healthcare goes through its transformation. And then the third piece is we are beginning to see, for the very large systems, an interest in developing their self-contracting, their own purchasing groups and attempting to attract hospitals to affiliate with them because of the advantages that they can offer in contracting and in purchasing.

We see similar megatrends occurring on the manufacturing side. We see in manufacturing of the products -- manufacturers of the products that we distribute a fair degree margin compression. There's no question their pricing is being squeezed. One of the ways that this is occurring is through the expansion of preferred product formularies. So hospitals creating these buying groups, creating relatively strict product formularies for manufacturers to make price concessions in order to be listed on the product formulary. And finally, we are seeing increased commoditization of products as more products move to the company's private label and become more price competitive.

So with both these sets of trends occurring, our strategy and really more, I'd say, our tactics in the near term are really pretty simple. We are focused intently on financial discipline around our network and our offering. And that may occur, it can create situations where we need to exit certain markets or change our offerings. And it is a process that is continually ongoing, one that we made some small adjustments to at the end of this last year and we would attempt to make additional adjustments as we go into 2013.

Our distribution network is one of those areas that we look at to make sure they were optimized for efficiency. In 2013, we'll be launching a new regional center in the Midwest in conjunction with our signing of a extremely large IDN system located in the Midwest and the need to have capabilities to meet the needs of this extremely important customers. As the big get bigger, it calls to question our servicing model, our sales model, and there, again, our adjustments and modifications made into the structure we use to deliver our offerings and to serve our customers.

As there is a centralization in more of these larger systems, there are less needs to have salespeople calling on the individual member customers. But maybe, the individual calling at the consolidated level needs a broader array of talents and perspective in order to have a really fulsome C-suite-type conversation. Our focus with be the expansion of our logistics capabilities is on the manufacturers in addition to the providers. And as we see them undergo this margin compression, we believe that we can help offset parts of that by enhancing the supply-chain efficiencies within their own companies as well as the health care system.

And then finally, information technology, we're in the second year of a third year -- a 3-year program of upgrading our information technology platform, really creating a situation where we have greater flexibility to implement best-of-breed solutions on specific applications going forward.

As you look at our operations in Europe, the Movianto transaction enabled us to have 23 logistic centers in 11 countries and enables us to have access to over 23 countries throughout Europe. We have over 600 customers that we inherited as part of the transaction and just under 1,800 teammates. We put in place, within the last 90 days, a new CEO for the European operations. He is Dutch by nationality, has worked in Europe his entire life and in fact, has worked with his U.S. counterpart of ours, Brian Shotto, significantly in the 3PL space over the last 20 years.

Our suite of services in Europe are significant. They run the gamut of warehousing, transportation, order to cash and some value added additional activities. So the opportunities in Europe are significant. And our capabilities that we purchase, we think, match up nicely with capabilities here in the United States and really provide a total solution for multinational companies looking to come either from the United States into Europe or needing logistics systems in -- as European companies look to enter the United States.

As I've said, we've been in business over 131 years, and I believe ever since 1930, we've been paying dividends to our shareholders. Our Board of Directors are committed to being a dividend-paying company. We have a relatively small share repurchase program, a 3-year program for $50 million, that's been in effect. This will be the third year of it. If you take the dividend that we paid in 2012 and the shares that we repurchased in 2012, we returned over $70 million of cash to our shareholders. Our dividend yield is just over 3%.

So when you think about Owens & Minor from the investment pieces is really quite straightforward. We are the sole pure play distributor, and I'd say, healthcare logistics company in the space connecting manufacturer to the point of care. Our competitors on the provider side, tend to be companies that manufacture product first and distribute secondarily. And our competitors on the logistics manufacture side tend to be transportation companies that move all sorts of products not dedicated to just healthcare.

In making the move that we have with Movianto and our expansion as a logistics company, we see ourselves having actually doubled the addressable market that we are facing. Prior to these moves, we would define our market as being roughly just under $20 million. As we have expanded our third-party logistics capabilities, those medical products that go through that channel in addition to the products we have presently, create a market of about $40 million.

Our strategy has been well articulated and executed, and that is we look to partner with the winners in healthcare. And that we identify as the winning provider systems and large IDN systems that we think will be the survivors, as well as the manufacturers that are nimble and responsive to the changing landscape.

And then finally, we made the investments necessary to support the evolving provider need, the manufacture need, and most importantly since we are a service-based business, the almost 8,000 teammates that we have serving these healthcare customers as we go forward.

So with that, I will draw this to a close and invite all of you to participate in a question-and-answer session to the left. Thank you.

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