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Executives

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

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

Trudi Allcott - Director of Investor & Media Relations

Richard A. Meier - Chief Financial Officer and Executive Vice President

Analysts

Elizabeth Blake

Adam Noble - Goldman Sachs Group Inc., Research Division

Gavin Weiss - JP Morgan Chase & Co, Research Division

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

Doug Cooper

Owens & Minor (OMI) Q2 2013 Earnings Call July 30, 2013 8:30 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Owens & Minor Second Quarter 2013 Earnings Conference Call. My name is Latoya, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference call 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, Chairman, President and Chief Executive Officer of Owens & Minor. Please proceed, sir.

Craig R. Smith

Thank you, Latoya, and good morning, everyone. Welcome to the Owens & Minor second quarter 2013 call. This morning, we will review our results and take your questions, but first, let me introduce my colleagues on the call today. I have Randy Meier, our Chief Financial Officer; and Grace den Hartog, our General Counsel.

And before we would begin, I would like to congratulate Jim Bierman on his promotion to President and Chief Operating Officer, which will take effect on August 1. Now since Jim joined Owens & Minor 6 years ago, he has truly stepped up to the plate in a challenging time for health care. And furthermore, Jim has done a tremendous job with every assignment I've asked him to take on. During his tenure at Owens & Minor, Jim has proven that he has the leadership skills, the financial acumen and the operational abilities to lead Owens & Minor into the future, and I am truly looking forward to working with him for many years to come. Jim, on behalf of everyone at Owens & Minor, I want to congratulate you on a well-deserved promotion to President and Chief Operating Officer.

James L. Bierman

Thank you, Craig.

Craig R. Smith

Now, turning to the business of today's call, 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 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 second quarter's 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 uncertainties 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 now, I'd like to call on Jim Bierman for an operational overview, and then Jim will hand it over to Randy, who will review the numbers with you. Jim?

James L. Bierman

Good morning, everyone. As we did last quarter, I'll leave the discussion of our financial results to Randy, while I review the operational and strategic progress we have made so far this year.

In the domestic health care market, hospitals and large IDNs continue to consolidate and form alliances that are enabling them to build market share, improve patient care and reduce costs. As we've said many times, our goal is to be the distributor of choice to these large health care systems, which we believe will be the future of health care. We have talked for sometime about how these large health care systems are changing the marketplace. In one sense, they have greater buying power and leverage in their dealings with their business partners. However, the full potential of these alliances will be realized once they standardize the clinical services they deliver, which would enable us to support them even more efficient supply chain solutions.

During the quarter, we brought on a large new health care system that, as a new customer, is a nice win. But more importantly, the factors around the win validate one of our key strategies. The strategy relates to our deployment of resources throughout our distribution network. In this instance, we were able to facilitate an arrangement between 2 disparate health care systems to take advantage of a shared services opportunity. Through our efforts, this new customer and an existing customer agreed to share a dedicated distribution center.

We are enabling these 2 systems to leverage greater buying power, lower their distribution costs and improve product standardization. Under our leadership, these 2 systems recognized the value of sharing supply chain infrastructure. This customer arrangement demonstrates our ability to bring innovative solutions to market. In turn, Owens & Minor will reap the benefits from a fully utilized facility and from the rationalization of suppliers and product choices made available to these 2 hospital systems. We believe this is a prime example of how our ability to serve the market in a new way is directly meeting the changing needs of our provider customers.

We are also implementing certain plan changes in our distribution network to improve efficiency. As planned this quarter, we incurred additional exit and realignment costs as we continued to optimize our domestic network with certain planned distribution center moves and consolidations. As I first mentioned at our Investor Day last November, we are establishing a large distribution center in the Midwest to serve a significant health care system and are planning to consolidate operations there over the next few months. We believe this will be a more efficient means of serving the customer base in this area.

On the West Coast, we upgraded to a new facility in San Diego in response to the needs of a large customer headquartered there. We will continue to refine our network so that we are responsive and flexible in meeting the needs of our customers.

During the quarter, we also made headway on significant planned investments in our IT infrastructure, including investments in engineered standards technology, a new customer self-service portal and a new inventory management and order allocation technology. The network consolidations, the innovative warehousing arrangement with our 2 large customers and the latest IT projects are examples of investments we are making to ensure that Owens & Minor has a solid platform for growth.

We believe the Owens & Minor of the future is fast, flexible, innovative and global, and that's what we're working towards. In fact, we have expanded our presence in Asia. I'm pleased to report that we opened our second Mira MEDsource office, this one in Malaysia. This gives us expanded opportunities to source products and develop manufacturing relationships in the region.

As we have said before, it is extremely important for us to have our own teams on the ground in Asia to carry out quality control and other duties associated with sourcing product. And thanks to the Mira team, our sourcing efforts continue to contribute positively to our operating margin results.

Our teams in Europe also did a good job this quarter. We were very pleased to see that they narrowed our International segment's operating loss for the second quarter, a meaningful improvement over the first quarter. The Movianto team is very focused on signing new business and utilizing existing capacity in our logistic centers. I would note that since we acquired Movianto, we have received a number of inquiries from U.S.-headquartered, multinational manufacturers about partnering opportunities, which we view as strong validation for this strategic investment. As we have been saying for some time, we view our suppliers and manufacturers as an important customer base for our future. To that end, we are working on a variety of strategic partnerships and projects to help them bring new products to market or to achieve more efficient supply chain solutions.

And finally, a word about our -- the status of our GPO negotiations. I'm pleased to report that we signed a 3-year contract with MedAssets. The new contract runs from September 1 of this year through August of 2016. We are pleased to have this contract negotiation behind us. We continue to work on the HPG contract renewal, which is proceeding according to schedule. Once we sign the HPG contract, we will have multi-year agreements in place with all of our GPO partners.

In summary, this quarter demonstrates progress in managing our company in a challenging environment and a changing market. Our teams at the home office, in the field, in Europe and in Asia are all intensely focused on achieving success for Owens & Minor and our customers. I would like to thank our teammates across our system for their efforts. Thank you, and I will turn it over now to Randy.

Richard A. Meier

Thanks, Jim, and congratulations on a well-deserved promotion. Good morning, everyone. We have a lot to discuss today, so let's turn to our second quarter results. For the purposes of comparison to 2012, please keep in mind that Movianto acquisition was not completed until the third quarter of last year.

Second quarter consolidated revenues were $2.27 billion, an increase of 3.7% when compared to the second quarter last year. The increase came primarily from our International segment as Movianto's revenues were $123 million for the quarter.

For the quarter, Domestic revenue declined 1.9%. Factors leading to the Domestic revenue decline were consistent with what we saw in the first quarter, including ongoing rationalization of smaller, less profitable health care provider customers and suppliers, lower hospital utilization rates and reduced government purchasing. For the year-to-date period, revenue increased 3.2% to $4.54 billion when compared to last year. The International segment contributed $244 million in revenues, representing the majority of the consolidated revenue increase.

Gross margin was $273.4 million in the second quarter, or 12.06% of revenues. That compares to gross margin of $211.4 million, or 9.67% of revenues for the same period last year. As for the year-to-date period, gross margin dollars increased $126.7 million to $552.5 million when compared to the prior year. For both periods, the increase in gross margin came primarily from Movianto's revenues, of which approximately 50% of the revenues were derived from the fee-for-service business activities. On the Domestic front, for both the quarter and year-to-date, gross margin benefited from our sourcing efforts as well as from supplier price changes as we saw in the first quarter. These benefits offset the adverse impact of a decline in customer revenues.

Now turning to our operating expense. SG&A expenses increased $62.3 million to $212.5 million for the quarter, and were 9.38% of revenues. For the year-to-date period, SG&A expenses were $124.4 million, or $430.3 million when compared to the same period last year. In both cases, the increase was primarily driven by the Movianto acquisition.

In the Domestic segment, second quarter SG&A as a percentage of revenues, was 7.16% compared to 6.88% for the same period last year, but improved sequentially from 7.31% in the first quarter. During the quarter, we reached a settlement of an administrative review related to certain California Municipal sales tax incentives in the net amount of $3.5 million. Going forward, we expect to receive an ongoing tax benefit based on sales volume as a result of the settlement with the municipalities where we conduct business. As we mentioned in the press release, a majority of this benefit to the Domestic segment SG&A was offset by a number of unusual items, including cost associated with litigation expenses, health care claims, the transition to a new fleet vendor and the adjustment to a benefit accrual.

For the quarter, consolidated operating earnings were $50.1 million, a decrease of about $3 million when compared to last year's second quarter. Adjusted for the impact of acquisition-related and exit and realignment costs, margins were 2.24% of revenues compared to 2.46% one year ago. On a sequential basis, we have continued to see improvement in adjusted operating margins since we acquired Movianto in the third quarter of 2012. In fact, operating margins improved from 1.1 -- excuse me, 2.19% in the first quarter and from 2.01% in the fourth quarter of 2012. For the year-to-date, adjusted consolidated operating earnings were $101 million, or 2.1% of revenues, a decline of about $5 million from the prior year period, driven primarily by the International segment losses.

Domestic segment operating earnings decreased $2.5 million to $51.2 million in the second quarter, and declined $1.5 million to $104.2 million for the first 6 months of the year, when compared to the same period last year. As for the International segment, we recorded a loss of $3.6 million for the year-to-date period.

One should note that Movianto's financial performance improved from a loss of $3 million in the first quarter to a loss of $0.6 million in the second quarter. The Movianto team has done a good job in bringing on new business, improving the leverage in our platform in Europe. We are making every effort to bring expenses in line and reduce our dependence on the former parent company for certain services. We continue to believe that we are working our way toward breakeven this year as we continue to focus on improving the cost structure without affecting our ability to grow the Movianto business in 2014 and beyond.

For the quarter and year-to-date, interest expense was $3.2 million and $6.4 million, respectively. Our tax rate decreased to 38.3% for the quarter from 39.4% a year ago. The decrease resulted partially from the conclusion of the 2009, 2010 IRS tax audit. For the year-to-date period, the tax rate stands at 39.9% compared to 39.4% for the comparable period of 2012. The increase in the year-to-date tax rate resulted primarily from the effect of foreign taxes. For the rest of the year, we would expect our tax rate to be in the 40% range as we indicated back at Investor Day.

Year-to-date, operating cash flow was approximately $180 million. The increase from the year end was driven by a change in working capital due to an increase in the accounts payables, resulting largely from quarter-end timing and a build in inventory in advance of customer conversions. We would expect to see this moderating trend in accounts payable and cash flows in the second half of the year. The company continues to report strong domestic asset management metrics such as days sales outstanding of 19.3 days and inventory turns of 10.3x.

For the second quarter of 2013, adjusted net income was $29.3 million, or $0.46 per diluted share compared with $0.48 for the prior period. For the year-to-date period, adjusted net income was $56.9 million, or $0.90 per diluted share compared with $0.94 per diluted share for the prior year. Included in the first half results are the previously mentioned International segment operating losses of approximately $3.6 million, or $0.05 per diluted share for the year-to-date period. That represents a loss of $0.04 in the first quarter and $0.01 in the second quarter.

Based on our performance year-to-date, our outlook for the remainder of the year, our guidance for 2013 remains unchanged. We continue to target revenue growth in the 2% to 4% range, and adjusted net income of $1.90 to $2 per diluted share for the year, which includes operating results from Movianto but excludes exit and realignment costs, as well as acquisition-related costs. Additionally, we announced our quarterly dividend this morning.

With that, I'd like to thank you, and turn the call back over to Craig.

Craig R. Smith

Thank you, Jim, and thank you, Randy. Now with that overview of our operational, strategic and financial results, I'm going to take just a few minutes to talk about the overall market and our company. Now as you can see from our results, I think it is fair to say that we are making progress. But as we said last quarter, we have a few challenges to work through this year, both domestically and internationally. While the conditions in the overall health care market are beyond our control, we can control our response to the changes. And as a result, we have continued to adapt our approach to the market even as we expanded our opportunities in health care.

In looking at our customer base, we have seen no real change in utilization. Despite this, we are holding our own in the Domestic business. As Jim explained, we are taking positive steps to make our domestic network more efficient and more flexible. We are using innovative supply chain tactics to bring new solutions to market. We see emerging opportunities and the centralization of decision-making by large health care systems. And in just the last 2 years, we have greatly increased opportunities for Owens & Minor by establishing a presence overseas, expanding our sourcing efforts and developing logistic services for health care manufacturer customers.

As for the manufacturers, we have challenged our team to develop and market the services that meet their growing logistic needs. Since we acquired Movianto and broadened our 3PL services overseas, conversations with global manufacturers are on the upswing. The health care market becomes more globalized with every passing day. With a base of operations in Europe, we believe we are well positioned to capture opportunities that arise as economic and market conditions change. However, as we said, our business in Europe needs fine-tuning and that is a high priority.

Movianto made solid headway in the second quarter. They achieved modest improvement in capacity utilization and signed a number of customer arrangements that are scheduled for implementation this year and next. Since the acquisition, we have added new management talents, centralized the management structure and focused the team on establishing tighter cost controls. These actions are helping us to bring results into line. At this point in the year, we remain cautiously optimistic that we will achieve our performance goals. With the investments we have made and continue to make, and with the strong teams we have in place, I believe we are doing the right things for our customers and for our company.

And with that, we'd be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Glen Santangelo of Credit Suisse.

Unknown Analyst

It's actually Diego filling in for Glen. So just to sort of follow your closing comments there, are you guys still comfortable with the idea that Movianto -- with the previously given idea that it was going to be about EUR 300 million for the year? And then anything you guys can give us in terms of helping us think about the kings [ph] of the quarter. I know when the acquisition closed last year, we talked about how it was a seasonally strong quarter for you -- for Movianto, in particular, and so any help there would very, very useful.

Richard A. Meier

Well, I think where we are, halfway through the year, you saw a nice sequential progress in terms of revenue going from $121 million to $123 million. So relative to the comment around -- and I assume you're talking about euros in terms of revenues. We're still comfortable with -- I think we -- the original guidance was the $480 million to $500 million or so in revenue. So I think for the year, we're still comfortable with that guidance. And I think we're just -- we're very comfortable with the progression that we're making as Craig indicated as we move forward. So again, I think, the objective to sort of move towards breakeven this year and positioning ourselves for reasonable growth next year is still our goal and we still feel it's very achievable.

Unknown Analyst

And then just as a follow-up on a separate topic, any sort of updated thoughts on what the ACA implementation might ultimately benefit you guys?

James L. Bierman

Yes, Diego. This is Jim Bierman, we've talked about that on and off since the legislation was passed. And I think our views aren't dramatically different than others in the marketplace. We like the idea of there being a significant bolus of potential patients that are covered that would make their way through the system. However, there is an expectation that -- an understanding that many of those patients are receiving health care in other forms today. So we think, though, there could be an uptick in -- as it becomes operational, but we're not looking for a windfall out of this. And I think that's very consistent with how our manufacturing partners and our provider customers view the market also.

Operator

The next question is from Robert Willoughby of Bank of America.

Elizabeth Blake

This is Elizabeth Blake in for Bob. I guess, obviously, a lot of consolidation in the hospital marketplace. Could you remind us which of the major chains are yours and when do those contracts expire?

James L. Bierman

Yes, Elizabeth. We don't give that level of detail out. But as we look at the landscape, certainly, we're in tune with the major transactions that have been announced. We have relationships with all of the major investor-owned systems of one sort or another. And we view it that we're positioned to help those systems achieve the efficiencies that they put out there. A lot of these deals are dependent on achieving the cost synergies that they identify in their analysis. And we think the supply chain and then supply chain improvements and enhancements that we can help with can certainly help facilitate their success. So we're excited about the landscape and some of the transformations that are occurring. We've been talking about it, certainly, on the not-for-profit side for a period of time. And over the last quarter, there certainly has been some investor-owned activity.

Elizabeth Blake

Okay, and to follow up on Diego's Movianto questions. Do you have any commentary on the third quarter, specifically? Could we see breakeven at that point or is this still kind of a full-year expectation?

Richard A. Meier

Let me take that. I would reiterate that the top line is between $450 million to $500 million on the revenue. And we have been consistently saying that we are working towards breakeven at the end of the year. So I think the good news is we made some really good progress in the second quarter. We added some new customers, we're working on cost, and where we feel we are today is we are on track on our performance goals and we're working to a run rate of breakeven by the end of the year.

Operator

Your next question comes from Robert Jones of Goldman Sachs.

Adam Noble - Goldman Sachs Group Inc., Research Division

This is Adam Noble calling in for Robert. I just want to ask around the $3.5 million California tax settlement benefit. It sounds like you're saying that that should be there for the rest of the year or something in that range. Was this kind of contemplated in the $1.90 to $2 guidance and should we view this as just something for this year and this is something that should kind of fall off going forward?

Richard A. Meier

Adam, probably just to give you a little clarity, the $3.5 million is actually -- the settlement was for $4.2 million when we filed the Q and the net amount, as it works out relative to the settlement because of some prior recognition of some of that, was $3.5 million. So that is a onetime benefit that we're going to receive. There is some ongoing benefits that we'll receive in the future as a result of the sales tax or the resolution of the sales tax issue, which was basically the genesis of the whole issue. So going forward, it's hard to project what it's going to be because it is subject to sales in these various jurisdictions. So there will be a benefit that we'll have going forward. It should be modest. It won't be anything approaching the $3.5 million that we have. That is not in the $1.90 to $2, but it's not going to have a material impact in the second half of the year. Hopefully, that gives you a little better color going forward.

Adam Noble - Goldman Sachs Group Inc., Research Division

Yes, that's very helpful. And I was just wondering, if you could kind of parse out or maybe just give a little directional comment -- commentary around the gross margins for both the Domestic business and International just so we have a, I guess, a slightly better idea of that?

Richard A. Meier

On a consolidated basis, the number we achieved in the second quarter was a little north of 12%, 12.06%, which was down slightly from the first quarter, but right pretty much in the middle of the range that we announced back in Investor Day. So we feel fairly comfortable that moving forward, we'll continue to hit our consolidated gross profit margin goals. We don't give a tremendous amount of color in the segment-related business although we, again -- I think we were fairly pleased with the results of our Domestic business and it continued to benefit from all the operational initiatives that have been implemented over the last few years.

Operator

Your next question comes from Lisa Gill of JPMorgan.

Gavin Weiss - JP Morgan Chase & Co, Research Division

This actually Gavin Weiss on for Lisa. First, I just want to say congratulation to Jim.

James L. Bierman

Thank you, Gavin.

Gavin Weiss - JP Morgan Chase & Co, Research Division

Second, I just wanted to clarify on the tax issue. If I think I heard you correctly, the sales tax benefit going forward is not included in guidance. But was the $3.5 million settlement in the quarter included in the original guidance?

Richard A. Meier

No, it was not. And -- but the offset in the quarter, I think, reflects some unusual items. So we don't see that as being something that will be incrementally beneficial to us in terms of the overall annual guidance. So said more succinctly, the benefit we achieved in the quarter was somewhat offset by a number of unusual items, and we outlined them in both the press release and our comments. But to reiterate them again, we had some unusually high health care expenses. We transitioned to a single vendor in terms of our truck leasing, so as a result of that, we incurred some onetime repair and maintenance costs to achieve that transition. And then we had a true-up to some of our vacation accruals that we needed to do after some review that we -- that took place in the second half of the second quarter. So we don't expect any of that to be recurring.

Gavin Weiss - JP Morgan Chase & Co, Research Division

Okay. That was going to be my next question. So how should we think about this segment, the earnings segment, going forward for the rest of the year? Are you sort of seeing these various buckets of additional cost in the second quarter as nonrecurring?

Richard A. Meier

I think one of the ways I might suggest we look at -- if you review the segment results, the Domestic business generally achieved about a $0.47 quarter. And if you look at that, the quality of our Domestic earnings, I think, are well reflected in that if you adjust out the onetime benefit on the income side and offset that with some of the expenses. So I think the quality of what we're seeing in terms of the Domestic business around that $0.47 or so, I think, is a good way to think about where the quarter was.

Gavin Weiss - JP Morgan Chase & Co, Research Division

Okay, that's very helpful. And then in terms of the Movianto business, I think, earlier this year, you had mentioned capacity utilization was about 60%, and I know you've noted that you have some new customer wins. Where do you stand now on the utilization and where do you see that going forward?

Craig R. Smith

Gavin, this is Craig. We did make some progress on utilization. I think what we'd like to do is -- because we are adding business here, we had some good wins in the second quarter. Rather than maybe scorecard this out as at the end of the year at Investor Day, give you -- probably give you a tally on where we are in utilization, but we are making good progress. Part of the challenge is, is in this 3PL business, as you add these customers on some -- if it's a transportation deal, you can bring them on very quickly. Some of them you win a contract and there's a uptick on implementation. So I would say, overall, we're pleased with the utilization. It's a small increase, but we're seeing good progress on that and think we're on pretty good track this year.

Operator

The next question comes from Eric Coldwell of Robert W. Baird.

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

It's Eric Coldwell for Coldwell. Just a couple of technical things here. LIFO, just curious if you could give us -- I didn't see that. If I missed it, I'm sorry, but was there a LIFO charge or credit in the quarter?

Richard A. Meier

In the first quarter, we made the determination that we were going to stop providing that information, as you recall, and we'll give the footnote at year end and give you sort of the color on that. And again, just to reiterate, we thought that was creating a little bit more confusion than it was adding benefit though of the underlying business. So no, there wasn't any information related to that in the press release or in the quarterly submission.

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

Okay. Shifting gears. I think you addressed this, but the accrual adjustments -- you mentioned a comment on vacation true-ups. Was there anything related to actual performance one way or the other or was this just a review of your policies and kind of a onetime catch-up?

Richard A. Meier

This is just a onetime catch-up, and it had nothing to do with anything in the -- it was just sort of annual review and just making sure we had the right numbers in there.

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

Got it. Other income was a little over $2 million. That line on a quarterly basis has been anywhere from neutral to earnings to adding $0.01 or $0.02 a quarter. I'm just curious if you can give an update on what was exactly was in the Other operating income this quarter, the $2.1 million, and directionally, where you see that trending?

Richard A. Meier

Predominantly, it was a variety of finance charges that we collect from customers. We usually don't have that go through revenue. It usually comes through Other income.

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

Do you see that maintaining at this $1 million, $2 million a quarter range going forward, or was there something unique [ph] --

Richard A. Meier

Not at all. This was predominantly related to Hurricane Sandy and some of the catch-up associated with that.

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

Got it. Got it. Pricing, some comments about some pricing opportunities. And I was unclear whether you meant on the sourcing side or manufacturer price changes from your branded suppliers. So just hoping for a little more detail on that.

James L. Bierman

So I'm not exactly sure, Eric, the context of your question, but let me talk about pricing for a minute or 2 and what we're seeing in the marketplace. As it relates to product pricing, we continue to see this quarter, as we commented on last quarter, little to no price inflation whatsoever. And in fact, in certain categories, we are seeing price deflation occur so -- and that's making its way through the system, if you will. As it relates to pricing of services, as we've said for period of time, beginning with the Novation contract re-sign period through the Premier period and now MedAssets, and as we contemplate bringing the HPG contract to close, it's a competitive market out there, and it's competitive pressures on margin. And we're selective on where we place bets, but we believe it's important to place the bets on those that we think are going to be the winners in health care. So we are definitely aggressively moving to certainly solidifying and expand our position in the marketplace.

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

Jim, sorry. The context of the question was from the press release. Domestic segment operating earnings were also positively affected by certain supplier price changes. That was the crux of the question. What were those price changes?

Richard A. Meier

This was similar to the first quarter where we described some of the benefit that we received from some of the price changings in our inventory at year end, and we alluded at that point that we would still have some benefit of that in the second quarter. So we were just reiterating some of that from the first quarter as it came through and we realized that benefit in the second quarter.

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

Got it. Got it. And lastly...

Richard A. Meier

And again, just to clarify, we would expect to see an offset to that as we move through the year. So net, this is not -- for the full year, we don't expect to see a full benefit of that.

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

Okay, I got it. And then last one, cash flow. Completely understand what's going on with the AP, but curious, directionally, if you could give us some sense on your outlook for operating or free cash flow for the full year?

Richard A. Meier

I think, as we alluded in the first quarter that we again felt comfortable with the number at the quarter, but we haven't historically given a lot of guidance around cash flow from operations. I don't expect just given the noise that we had in the first and second quarter around some timing issues that you're going to see cash flow from operations go up significantly from here. So again, that was -- we were trying to give that with our comments around so the modulating results and sort of AP and some of the working capital adjustments in the second half of the year.

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

That's fair. So it would it be safe to say that what we've seen year-to-date in cash flow is not far off from where we'll finish the year?

Richard A. Meier

I wouldn't argue a lot with you on that.

Operator

Your next question comes from Steven Valiquette of UBS.

Doug Cooper

This is Doug Cooper in for Steven. My first question, I guess, I wanted to talk about -- there's been a number of public hospitals that have reported kind of mix results in terms of volumes, and I was just wondering if you could give us a sense of what level of growth you're seeing in the procedure volumes across your client base?

Craig R. Smith

Sure, Doug. As we look at Domestic utilization, and to a large degree, going back to my answer to Eric's question, that we look at it on a both utilization and potential product price inflation or deflation basis. On a combined basis, we're seeing a neutral to slight decrease in utilization/price changes in the marketplace. And that's not dramatically different than the majority of investor-owned companies and how they reported and how manufacturers have reported. There has been for a number of quarters now a continued decrease in the number of procedures done and number of hospital admissions here, domestically.

Doug Cooper

Okay. That's helpful. I guess, to follow up on that, we're seeing trends kind of -- a little different between large and small hospital groups. Has that difference changed over time, over the past several quarters, or is it pretty much staying relatively constant?

Craig R. Smith

We called that out a number of quarters ago as we began to see this trend, and it still continues today. And the trend is that the big are growing. They're taking share from the smaller hospitals. I think that rate of increase, at least on the total portfolio, may have slowed down a little bit. But some of that may just be that we're now used to it and it's less of an anomaly than it was initially at the outset. But absolutely, we're seeing the larger systems have better growth than the smaller systems.

Doug Cooper

Okay. And a final question on the heels of the product inflation discussion earlier, could you give a sense of when deflation will subside or inflation product inflation will return to the market?

Craig R. Smith

Tough to make a call on that one. I think as we look towards 2014, and this comment is premature to a degree because I would defer to our formal outlook when we get together for our Investor Day meeting. But as we look to 2014 and we think about it as of today, we don't see significant change in the inflationary -- inflation for the products that at least go through our channel.

Operator

And the final question comes from David Larsen of Leerink Swann.

Unknown Analyst

It's Chris Evan [ph] for Dave. As I look back over some of my notes, I think maybe back in, like, 2010 at your Investor Day, you discussed a long term operating margin goal of around 3%. Obviously, this year, there's various investments going on. I guess, I'm wondering, is that still sort of a realistic goal as you've seen a shift towards some of these larger systems? And maybe now that you've gone through most of these GPO renewals and have a little bit more visibility, I guess I'm wondering if there's any updates there.

Craig R. Smith

Yes, that's a great question, Chris, and I think certainly, the investments in Movianto has a major impact on our ability to achieve the target that we had put out in 2010 of achieving 3% operating margin. To be honest with you, I think, as we think about it, we like some of the market dynamics that seem to be moving our way and would speak to our ability to achieve that level of operating performance. Some of it is going to be driven by the pure mathematics associated with the fee-for-service business, as opposed to the buy-sell relationship that we have in a classic distribution model. But I think as we have a new level of conversations with the very large provider customers and the very large manufacturing customers, I think we're feeling more bullish on the opportunity to achieve that level of performance. I think it's a great topic and we'll revisit it as we come around to Investor Day at the end of this year, and look forward to 2014 and beyond.

Operator

At this time, there's no further questions. I'd like to turn the call back over to Mr. Smith for his closing remarks.

Craig R. Smith

Thank you, everyone. Thank you for listening in today, and we look forward to reporting out to you after the third quarter. Have a good day.

Operator

Thank you for participating in today's conference. This concludes the call. You may now disconnect. Good day.

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