Owens & Minor, Inc. (OMI) has reported a robust financial performance in the fourth quarter of 2023, with revenues climbing to $2.7 billion, marking a 4% increase from the previous year. The company's strategic initiatives have led to a substantial reduction in debt, thanks to an impressive operating cash flow exceeding $740 million for the year. Looking ahead, Owens & Minor has laid out a five-year strategic plan aimed at growth and profitability, with a focus on expanding its core categories, optimizing operations, and making strategic investments supported by a solid balance sheet.
Key Takeaways
- Q4 revenue rose to $2.7 billion, a 4% year-over-year increase.
- Operating cash flow for 2023 surpassed $740 million.
- Significant debt reduction with over $575 million paid down.
- Patient Direct segment exceeded market growth, while Products and Healthcare Services (NASDAQ:HCSG) adapted post-pandemic.
- Five-year strategic plan introduced for sustained growth and profitability.
- 2024 revenue forecast between $10.5 billion and $10.9 billion, with adjusted EBITDA of $550 million to $590 million, and adjusted EPS of $1.40 to $1.70.
Company Outlook
- Owens & Minor anticipates continued momentum into 2024.
- Revenue for 2024 projected to be in the range of $10.5 billion to $10.9 billion.
- Adjusted EBITDA expected to be between $550 million and $590 million for 2024.
- Adjusted earnings per share (EPS) forecasted to be $1.40 to $1.70 in 2024.
Bearish Highlights
- The company experienced an EBITDA miss for 2023.
Bullish Highlights
- Strong balance sheet with targeted investments in technology, personnel, and inventory.
- Proprietary product portfolio recognized as a long-term growth and profitability driver.
- Strategic focus on accelerating growth in core areas and enhancing customer experience.
Misses
- EBITDA miss in 2023 due to a $2 million LIFO charge and $23 million in stock compensation.
Q&A Highlights
- Alexander Bruni addressed the EBITDA shortfall, projecting a $50 million combined add-back for LIFO and stock comp in 2024.
- Edward Pesicka confirmed the WVU Medicine deal delay will not affect the 2024 outlook.
- Leadership expressed confidence in the strategic direction and the strength of the team to drive future growth.
Owens & Minor's financial results for the final quarter of 2023 reflect a company that is successfully navigating post-pandemic challenges and positioning itself for future growth. With a strategic plan in place and a focus on key growth drivers, the company is poised to continue its trajectory of profitability and market expansion. Despite a miss in EBITDA for the past year, the management remains confident in the strategic initiatives and the ability of their team to deliver on the company's promises. Investors and stakeholders can look forward to a year of normalization in terms of cash flow and EBITDA visibility, as well as strategic investments that are expected to bolster Owens & Minor's market position and service offerings.
InvestingPro Insights
Owens & Minor, Inc. (OMI) has shown resilience and strategic acumen in its latest financial report, and InvestingPro data further enriches the picture of the company's market position and future prospects. With a market cap of approximately $1.62 billion, the company is a significant player in the Healthcare Providers & Services industry. Despite a negative P/E Ratio of -38.92, reflecting challenges in recent profitability, analysts from InvestingPro anticipate a turnaround, with net income expected to grow this year.
InvestingPro Tips highlight that Owens & Minor is trading at a low revenue valuation multiple, suggesting that the market may not fully appreciate the company's revenue potential. This is particularly relevant when considering the company's strategic initiatives aimed at expanding core categories and optimizing operations. Moreover, the company's strong return over the last three months, with a 1 Month Price Total Return of 15.31%, signals investor confidence in its strategic direction and growth potential.
For investors seeking a more in-depth analysis, there are additional tips available on InvestingPro, including insights into the company's free cash flow yield and its performance within the industry. By using the coupon code PRONEWS24, readers can get an extra 10% off a yearly or biyearly Pro and Pro+ subscription to access these valuable insights. With 12 additional InvestingPro Tips available, subscribers can gain a comprehensive understanding of Owens & Minor's financial health and investment potential.
Full transcript - Owens & Minor Inc (OMI) Q4 2023:
Operator: Good day. And thank you for standing by. Welcome to the Owens & Minor Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to the first speaker today, Jackie Marcus, Investor Relations. You may begin.
Jackie Marcus: Thank you, operator. Hello, everyone, and welcome to the Owens & Minor fourth quarter 2023 earnings call. Our comments on the call will be focused on the financial results for the fourth quarter of 2023, as well as our updated outlook for 2024, both of which are included in today's press release. The press release, along with the supplemental slides, are posted on the Investor Relations section of our website. Please note that, during this call, we will make forward-looking statements. The matters addressed in these statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied here today. Please refer to our SEC filings for a full description of these risks and uncertainties, including the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q. In our discussion today, we will reference certain non-GAAP financial measures and information about these measures and reconciliations to the most comparable GAAP financial measures, which are included in our press release. Today, I'm joined by Ed Pesicka, President and Chief Executive Officer, and Alex Bruni, Executive Vice President and Chief Financial Officer. I will now turn the call over to Ed. Ed?
Edward Pesicka: Thank you, Jackie. Good morning, everyone. And thank you for joining us on the call today. As you saw on our press release this morning, we closed out 2023 with strong positive momentum, and we exited the year in a position of strength. Our Patient Direct segment continued to outpace market growth as we leveraged our proven commercial model in one of the fastest growing areas of health care, the home. Our Products and Healthcare Services segment successfully pivoted as we reset our approach post pandemic. We did this by leveraging the operating model realignment program, executing at a high level and winning new business, which collectively put our P&HS segment on a positive trajectory for revenue growth and margin expansion. We also finished the year by launching a five-year strategic plan to drive growth and enhanced profitability, and we didn't wait until 2024 to begin executing on the strategy as we began to invest in both of our segments during the fourth quarter. And finally, we launched our purpose and vision in the fourth quarter, which will continue to solidify a results-oriented culture at Owens & Minor. I'll provide additional comments on our long term strategy later in my prepared remarks, but now let me focus on 2023. When I reflect on our performance in 2023, I'm extremely proud of how our organization continues to perform against our objectives, and the proof of that hard work and strong execution is evident across our financial results. For example, in fiscal 2023, we generated over $740 million of operating cash flow, which was an annual record for Owens & Minor. This cash flow performance helped to significantly strengthen our financial profile, as we reduced debt by nearly $600 million during the year. And this strengthened balance sheet will support many of the value creation initiatives included in our five-year strategic plan. Next, during the year, we delivered more than $40 million in operating model realignment benefits, and we exited the year with more than $100 million of run rate. This program helped our product and healthcare services segment deliver meaningful revenue growth and profit improvement in the fourth quarter. Finally, we delivered significant sequential improvement in key performance areas, with adjusted EPS growing from $0.05 in Q1 to $0.69 in Q4 and adjusted operating margin improving from 1.9% in Q1 to 4.2% in Q4. While revenue declined 8% in Q1, it increased to a positive 4.1% in Q4 on a year-over-year basis. With our Patient Direct segment leading the way with full year 2023 organic revenue growth of nearly 10% and continues to outperform the market while remaining well positioned for further expansion as demand for home-based care accelerates. So, as you can see, we're excited about our business right now, given the substantial flexibility we've established and the strong performance in 2023. Let me close with a quick summary of each segments. In terms of our market leading Patient Direct segment, we had an outstanding year. We grew the business double-digits, continued to expand the overall profit contribution, further the integration of Apria and began investing in additional growth initiatives. As we look forward, we maintain our belief that we can continue to outpace the market and expand our position as a true leader in home-based care. In terms of our Products and Healthcare Services segment, during 2023, we utilized our operating model realignment program to lower our cost to serve, expand our profits and increase our cash flows, all of which have repositioned the business for long term success. Before I share my thoughts on 2024 and the future for Owens & Minor, I would like to turn the call over to our Chief Financial Officer, Alex Bruni, to discuss our financial performance and our 2024 guidance. Alex?
Alexander Bruni: Thank you, Ed. Good morning, everyone. Diving into our fourth quarter performance. On the top line, we posted a consolidated revenue of $2.7 billion, up more than 4% over the prior year. This uptick in revenue was driven by a nearly 8% year-over-year improvement in our Patient Direct segment, with growth across several product categories. We also saw 3% growth in our Products and Healthcare Services segment compared to the prior year. Notably, there was growth in both the medical distribution and global products divisions in the quarter. For the full year, we reported revenue of $10.3 billion, up 4% year-over-year. Our fourth quarter gross margin was $570 million or 21.5% of revenue compared to $407 million or 16% of revenue in the fourth quarter of 2022. Full year gross margin was $2.1 billion or 20.6% of revenue, up 221 basis points. Our gross margin improvement can be attributed to the growing contribution from our Patient Direct segment and the efficiency and productivity gains in the Products and Healthcare Services segment. Additionally, the comparison to the prior year was impacted by the non-recurrence of the fourth quarter 2022 inventory valuation adjustment of $92.3 million. Turning to expenses, distribution, selling and administrative expenses for the quarter were $457 million, making up 17.2% of revenue, in line with the fourth quarter of 2022. For the full year, DS&A expenses were $1.8 billion or 17.5% of revenue. The DS&A percentage of revenue reflects the growing contribution from Patient Direct, including a full year of Apria. GAAP operating income for the quarter was $60 million and adjusted operating income was $111 million. For the full year 2023, GAAP operating income was $105 million and adjusted operating income was $305 million. These results reflect a notable improvement in operating income, increasing by 212% and a 65% growth in adjusted operating income compared to the fourth quarter of 2022. Notably, both the Patient Direct and Products and Healthcare Services segments exhibited sequential increases in segment income from the third to the fourth quarter of 2023. Interest expense for the fourth quarter was $37 million, a 10% decrease from the fourth quarter of last year, largely due to our significant debt reduction during the year. Interest expense for the full year was $158 million, a 23% increase from the prior year, driven primarily by the funding from the Apria acquisition in early 2022. GAAP net income for the quarter was $0.23 cents per share and adjusted EPS was $0.69. For the full year, GAAP net loss was $0.54 per share and adjusted EPS was $1.36. Adjusted EBITDA in the fourth quarter was $170 million and for the full year was $526 million or 5.1% of revenue. For the operating model realignment program, we delivered in excess of $40 million of adjusted operating income benefit, exceeding our goals of $30 million in the year and exiting the year with an annual run rate of over $100 million. Moving to cash flow and the balance sheet, we continue to generate substantial operating cash flow of $112 million for the quarter and reached a full year total of $741 million, driven by robust working capital management and operating results. As a result of this significant cash flow, we reduced total debt by $49 million for the fourth quarter and by $403 million for the full year, bringing the balance to $2.1 billion at year-end. In addition, we reduced net debt by $76 million in the fourth quarter and by $577 million for the full year, bringing the balance to $1.9 billion. Net book leverage was 3.5 times at the end of the fourth quarter. Now, let's look at our full year 2024 guidance. Consistent with what we discussed on the third quarter call and at Investor Day, we expect net revenue to be in the range of $10.5 billion to $10.9 billion, adjusted EBITDA to be in the range of $550 million to $590 million, and adjusted EPS to be in the range of $1.40 to $1.70. Also, as previously discussed, we expect the earnings trajectory to follow our normal seasonal pattern throughout the year. To help some of you with your models, we'd expect that seasonality to lead to a roughly one-thirds/two-thirds split across the first and second half of the year from an earnings perspective and we'd expect to deliver improvement in each sequential quarter. Looking ahead, we remain committed to delivering the outlook for both segments, having outpaced market growth in our Patient Direct segment and delivered year-over-year profit improvement in Products and Healthcare Services. As we enter 2024, we're excited to sustain this momentum and to continue on the initial phase of our five year strategy and investment plan, laying the groundwork for continued future success. I'd now like to turn the call back over to Ed for his thoughts on 2024 and Owens & Minor's role in the future of health care. Ed?
Edward Pesicka: Thank you, Alex. So, again, we had great execution in 2023 and we remain laser focused on maintaining and accelerating our business momentum as we move forward in 2024. At our Investor Day in December, we shared our Vision 2028 plan, and I outlined three key pillars that are critical to our future growth. These include accelerating growth in the high potential areas of the business, optimizing all of our businesses to drive stronger long term profitability, and leveraging our strong balance sheet by investing across our platforms to drive long term value. In terms of the near term priorities that support these pillars, let's start with our growth engine, and that's our Patient Direct segment. We have a proven commercial model across our core categories, including sleep, home respiratory, diabetes, ostomy, urology, and wound care. These are areas for investment, as we fill geographic gaps, add commercial resources, and invest in technology to improve customer satisfaction, grow revenue, and expand margins. The technology investments will include ecommerce enhancements in our patient management platform and innovative digital marketing. Overall, we will use technology to rethink the patient journey. Lastly, we'll focus to grow outside of our traditional areas and into adjacencies and other comorbid conditions. The results of these investments, combined with continued strong execution, will enable the Patient Direct segment to continue to grow above market rates. And we believe we can continue to do so by at least 200 basis points per year. Moving to our Products and Healthcare Services segment, we're going to optimize this business by better leveraging our scale, growing our proprietary product portfolio and expanding into adjacent markets and channels. As you can see from our results, we are already making progress in delivering on our promises. Andy and his team are investing where the customers find differentiation, and they're taking costs out where they don't, ultimately lowering our cost to serve. They are also looking at our footprint to make sure our distribution and manufacturing costs are optimized. While lowering cost to serve remains a priority in P&HS, we are also investing to expand our higher margin proprietary product portfolio, combined with investments to enhance the customer experience. And finally, we're investing in our business and our teammates for both short and long term. As I mentioned earlier, during 2023, we generated over $740 million of operating free cash flow. That's a tremendous number. We've also had over $575 million in net debt reduction, another incredible milestone for our company. So with this momentum in mind, we are focused on deploying capital both thoughtfully and timely, with a focus on supporting expansion, technology, and investments in inventory to support new win implementations, enhanced service and portfolio expansion. We'll also continue to explore additional M&A to expand and scale our business. In conclusion, I'm incredibly excited about the momentum we're bringing into 2024. And I look forward to sharing our progress with all of you as the year progresses. I'd like to now turn the call over to the operator to open it up for questions. Operator?
Operator: [Operator Instructions]. Your first question comes from the line of Daniel Grosslight from Citi.
Daniel Grosslight: Good to hear that, in P&HS, it's both products and the distribution that's growing this quarter. I had a question just around PPE inventory levels at your clients and how that's shaping up for 2024. Some of the large hospitals have commented that they're hoping to save money on inventory. Curious how that may impact you. On the third party distributors who are buying your PPE, any more clarity on how their inventory levels are shaping up?
Edward Pesicka: I think the first factor is, and you alluded to that and you said that upfront is, we actually saw growth in both parts of the business this quarter, both Products and Healthcare Services as well as Patient Direct. And if think about the divisions within Products and Healthcare Services, we have seen – I don't want to say the bottom, but we're starting to see – we've seen it level out within our products business specifically. While the demand has been consistent, we're now starting to see that slightly uptick. We do still have some customers that have some additional stock, and we're helping them burn through that. Now, we've also done a nice job beginning to burn through some of our excess inventory during 2023. So, as we look into 2024, we expect that the start to ramp in the upward direction and provide some momentum. So, that's how we're thinking about the PPE specifically. There's some categories where we're seeing faster growth than other. I think surgical is a great example of that, and we're starting to see demand for PPE escalate as people have burned through those products and we're seeing the surgery rate starting to slightly increase. So that's how we're seeing it from a qualitative standpoint.
Daniel Grosslight: You kind of alluded to this as well at the end here. But one of the key initiatives of the model realignment plan is rethinking your manufacturing footprint, including potentially producing more products overseas. I'm curious if the current conflict in the Red Sea (NYSE:SE) has changed how you're thinking about your manufacturing footprint, potentially keeping more sites in North and South and Central America, or anything has changed?
Edward Pesicka: Just sort of high level, one, we really haven't – let me step back. When we think about where our manufacturing footprint should be, we don't think it should be in one specific geographic location. We take all the different circumstances and all the different issues that potentially can run as we look at it. And if you look at our footprint today, it's primarily in the Americas, both North America, Central America, with the one exception is our gloves, which are in Thailand. If we think about where our shipping channels are today, it really is not impacted by those issues that are in the market today because we're shipping really directly to the West Coast. And if we do, we go through the Panama Canal, if we have to get to the East Coast. And we look at our shipping partners on the Panama Canal, we have preset slots that enable us to get through. And we've seen about a one to three day delay at most within that, but generally speaking we have our time slots, we have it lined up, and it hasn't impacted us. As we think about the manufacturing footprint more broadly going forward, we'll continue to look at where does it create opportunities for us to get the products that we need at the right price that the customers demand and be able to service them? So, I guess, overall, the current situation in Suez Canal is not impacting us because it's not a primary shipping channel for us. If we think about where we are today, if we have to use one of those canals, we use Panama Canal where we ship to the West Coast. And based on our footprint, it's a different footprint we have today. And as we go into the future, we'll take those things into consideration as we continue to remap out our manufacturing footprint.
Operator: Your next question comes from the line of Kevin Caliendo from UBS.
Kevin Caliendo: I want to go through the EBITDA guidance for 2024 and just sort of understand what some of the assumptions are in there. First, how much is embedded for the cost savings realignment. You mentioned there was a run rate of $100 million exiting 2023? How much of that is sort of captured in the $550 million to $590 million? And also, can you talk about the net headwinds? Or is there a net headwind from the DME POS benefit versus the 75/25 rule?
Edward Pesicka: Maybe I can start and then Alex can add some color. So let me just talk a little bit about just the operating model realignment and the carry forward, and the bulk of that is going to end up in actually our profits or earnings before the interest, really the earnings part of EBITDA. And one of the things I think we've tried to clearly state both at Investor Day as well as on some of our prepared remarks was the fact that the savings that we've gained from that, in addition to the run rate we have, the vast majority of that is going to be reinvested back into the business. And we're pretty comfortable in the range where we are from both EBITDA as well as EPS for 2024. And if I think about some of that, I think it's important understand where are the big buckets we're going to be investing in that, and I'll talk about it in the two segments. One is on the Patient Direct side. So, we're aggressively adding commercial people because we believe, with the proven commercial model we have, as we scale that up, that can drive long term growth and we started adding personnel in the fourth quarter, teammates in the fourth quarter. We're continuing that in Q1 and Q2. What also should be noted is, if we're going to add, call it, 70-plus percent teammates in the commercial organization on that side of the business, those teammates don't have a positive return or they breakeven after around 12 months and then they start to show very strong positive returns. So that's an example of taking some of that profit or savings and putting it into long term profit investments. The other thing in Patient Direct is really around focusing on the sleep journey and making sure that we can have unique technology to capture and maintain our patients in that side of the business. So those are just two simple examples on that side of the business. The other aspect on the savings is, again, pouring it back into investments and, again, not just pulling it through to earnings. But on Products and Healthcare Services, it's really around a couple areas. It's around our investment in our category management. And I think the thing that's important on that is, as a company, we've been talking for years about expanding our proprietary portfolio. We're putting in the infrastructure, so that way, we can do that. So there's significant investment being made in personnel to expand that proprietary product portfolio, understand the marketing, partnering with our customers, and then the commercial front end of that. In addition to that, investments in technology around some of our services we offer, as well as in data analytics. I say that as a backdrop because what I don't want the market to get confused on is we have operating model realignment that generated more than $40 million of benefit this year$, 100 million run rate that all of that is going to get pushed through to the bottom line, we're actually taking that and reinvesting that in the business for future growth and future EBITDA benefits as we move forward. So that I think helps capture the earnings part of EBITDA. Alex, I think if there's any other highlights outside of that, besides covering in the operating model realignment, how that carries through?
Alexander Bruni: On adjusted EBITDA, we are obviously working hard to deliver in line with our guidance last year and fell a little bit short, frankly, of where we expect it to be. And so, as we head into 2024, we do feel good about where we've reset for the year. And it does reflect, as Ed mentioned, the investment. It also reflects some of the normalization of PPE pricing. So, for gloves, for instance, at the end of 2023 and into 2024, we think that that sort of normalizes here in in the first half of the year. So those are a couple of areas from a broad brushstroke standpoint. As we think about the complexities around LIFO and stock comp, we expect both of those to normalize this year, which should provide us greater visibility and less volatility around adjusted EBITDA.
Edward Pesicka: I'll add one last comment on the 75/25 comment. Legislation continues to be discussed throughout Congress on that. But the way we thought about it is we built in the impact that it would have on us. In addition to that, identifying ways to offset that as we move forward throughout the year.
Kevin Caliendo: Just in terms of free cash flow this year, I know you had some benefits from working capital in 2023 AR and the like. Would you expect the free cash flow to sort of match what you did in 2023 and 2024? Is there any directional guidance you can give us around maybe working capital if you don't want to give us the free cash flow numbers?
Alexander Bruni: In 2024, we expect cash flow to normalize. We obviously had an extraordinary year in 2023. We expect to end the year with some debt paid down and just to be slightly north of the 3 times leverage.
Edward Pesicka: I'll just add one other comment. As we start to see growth in our medical distribution and our global products business, whether that's through implementation of new wins, whether that's through expanding our proprietary product portfolio, we are going to make the appropriate investments in inventory. So that way, as we scale and that business grows, we have the ability to service our customers. In addition to that, just so everyone understands, the cycle of bringing on new proprietary products, generally, you're going to have them in inventory before you start to sell them in the market. In addition to that, you want to make sure you bring in the right amount. So as that ramps, you don't have service issues. So there are going to be some investments in inventory in 2024 really related to three things. One is new win implementations. The second aspect of that is proprietary product portfolio expansion. And third is your ability to drive higher levels of service. And those are all good reasons to add inventory.
Operator: Your next question comes from the line of John Stansel from J.P. Morgan.
John Stansel: Just kind of following up around the new SKU launches that you highlighted at Investor Day. It sounds like what you're saying is that this is part of the driver for SG&A uptick and it'll be more of a contributor in 2025. Is that the right way to kind of frame the significant investment you're making in product line expansion? Or should we think about it as a near term driver?
Edward Pesicka: No, I think it's more of a long term driver. And I used two examples, one on both sides of this each segment on the personnel adds and the teammate adds on the commercial side in our Patient Direct business. We know clearly, after 12 months or so, that becomes breakeven and then highly profitable as it accelerates. So, yes, on Patient Direct side. And then very similar on the Products and Healthcare Services side of the business, building out the teams to do that, that is going to be an SG&A investment upfront, with benefit as time progresses.
John Stansel: Just going back to the Investor Day, you called out a new medical customer win, I believe. Can you just help qualitatively frame how that's contributing to the 2024 guide and what services are being sold there?
Edward Pesicka: Yeah, that's one that should start to implement – it's going to start implementing in March. So next month, we'll start to implement that business. We haven't quantified the dollar amount, but it's a meaningful win. It'll end up being one of our top 10 customers overall once we put it into the system. And it is a combination of a portion of our customers we did have an expansion. And so, it's a meaningful win and that'll begin in March.
John Stansel: If I can just squeeze one quick one in at the end. It's more of a long term question. I know that, in December, there were some chatter around potential changes to CMS reimbursement for CGMs. Now I know only 20% of your Patient Direct revenue comes from government sources. How are you thinking about potential changes around CGM reimbursement from someone like CMS? As you think about out years, that is meaningful or not really for the Patient Direct business?
Alexander Bruni: It's Alex Bruni. This is certainly something we continue to watch. We noted the press release in November with the OIG looking into CGM reimbursement. They don't expect to have findings until 2025. So we'll continue to watch this space, but we don't expect any implications at this point for us.
Operator: Your next question comes from the line of Stephanie Davis from Barclays (LON:BARC).
Stephanie Davis: While I understand the ramp to the 2028 plan wasn't meant to be linear, the 2024 EBITDA guidance does imply a pretty healthy step up in the out years. So I was hoping you could help us bridge this and call any maybe one-timers or areas of potential conservatism in order to get you there?
Edward Pesicka: Stephanie, you're right. It's not linear. And we wanted to make sure that – when we talked about at Investor Day, we gave a 2028 full-year end-of-year target there. And part of it is the investments that are being made. Again, I use two different examples. Again, one is on the commercial aspect of what we're going to do in our Patient Direct business. The second aspect is some of the technology we're using in Patient Direct, both of those are going to have benefits associated with them. And again, they're going to have benefits after they get implemented. So those are things that have meaningful paybacks 12 months plus out. I think very similar on the Products and Healthcare Services business. You're absolutely right, if we think about the portfolio expansion, those are things that take time to develop. It's something that I was reminded been trying to do for years, but you have to make sure you have the investments upfront, and part of what we're leveraging is the operating model realignment savings we have. We're redeploying that back into longer term investments, like the product aspect. The other aspect is network rationalization and optimization. That's something that doesn't happen overnight. It's something that we're aggressively looking at right now. But we know that's going to take time to execute on and then that will provide material benefits as we get into the future. So, that's why when we looked at our internal strategic plan for the five year period of time, in 2024, if you look at our range, it provides, we think, pretty good reasonable returns, but also it's enabling us to make significant investments to provide those higher, longer term returns.
Stephanie Davis: If I had a bridge from here to here, your long term guidance, is the right way to think of this as 2024 is more of an investment year and then we'll start to see a step up in 2025 or is it being more of a gradual bridge as some of these things come through?
Edward Pesicka: I think probably your first assumption is closer. 2024 is more of an investment year, but it's still going to provide – if you just take the midpoint of our range, it's still providing double-digit growth in EPS, adjusted EPS at the midpoint of our guidance. In addition to that, so what we're trying to do is balance that as we go through 2024 with the right investments for long term, but still providing the right level of returns in the short term. I think as you exit 2024, there's still some – things are going to take longer. The network rationalization and optimization, that's something that will bleed into 2025. But as we continue to come out of 2024 and into 2025 and then continue to progress, you'll see that ramp, accelerate in the out years even faster. And that's really been the beauty of what we've done with the operating model realignment program, is it's enabled us to take costs out, it's enabled us to drive improved cash flow and profitability, and then take those dollars and invest them in areas that may take a longer term to get a payback, but still not impact the short term returns. Again, taking the midpoint of adjusted EPS from 2023 to 2024, still going to be a double-digit growth while we're still investing materially in the business for long term success.
Operator: [Operator Instructions]. Your next question comes from the line of Eric Coldwell from Baird.
Eric Coldwell: I had a couple here. First on the commentary about cash flow normalizing in 2024. To be fair, Ed, I'm not sure there's really been a normal year since you got to that company. Cash flow, $114 million in 2019, then it was $280 million, then it was $74 million, then it was $158 million. Of course, this year was a blowout. What is normal? And do we just take the simple average of the four years before this year and call it $150 million of free cash flow? Or is there a ratio you can share with us that you think is a normal ratio of some sort to get a better sense on this year?
Alexander Bruni: This is Alex. So it's definitely a fair question and a fair observation about not having a normal year. So as we go forward – at Investor Day, we talked about having $400 million of free cash flow, operating cash flow in 2028. So I think as we see the impact of the investments that Ed has talked about this morning, we would expect to ramp up over the next few years to be in line with that, that we think that that reflects kind of a good goal of operating cash flow once our investments take place.
Eric Coldwell: Would 2024 be in theory – I know things can bounce around a lot and even calendar days can have an impact each year, but is 2024 in theory the low point and then a ramp up to that $400 million in 2028 pretty linear. Is that the process?
Alexander Bruni: I'm not sure it's exactly linear, but I think that's a fair approximation of how I'd think about it.
Eric Coldwell: On EBITDA, I know there are some variables that are included in your EBITDA add-backs that are probably next to impossible to precisely forecast. So, definitely give some hall passes on that, but technically you did miss EBITDA by about $10 million to $30 million on the range for 2023. And I think a chunk of that was a lower LIFO charge add-back probably than you expected in the fourth quarter. I was hoping you could quantify that. For 2024 guidance, again, you said LIFO would normalize and, frankly, just not sure what that means. What is the 2024 guidance inclusion for a LIFO charge or credit or whatever it is and how does that compare to the absolute amount in 2023? A - Alexander Bruni On this complexity here, so just to kind of go back, when we reset or redefined the adjusted EBITDA in Q1, we talked about having $25 million in 2022 and about $30 million in 2023 combined for LIFO and stock comp. That is roughly where we ended the year, although I will say our projections did fluctuate. And so, that was part of the difficulty in 2023. There was about $2 million of LIFO in 2023 and about $23 million in stock comp. We expect that to normalize in 2024 and to be just north of $50 million combined.
Eric Coldwell: $50 million of addback?
Alexander Bruni:
Eric Coldwell: And last one, I'm going to go a little away from the call here. We did recently notice a headline that the West Virginia University, WVU, medicine deal has been delayed – or at least some of the ramp, the build out of the site has been delayed by a year. Can you tell us what's going on there? And is that having any kind of an impact on the 2024 results or outlook?
Edward Pesicka: Eric, no impact at all. It's actually working with the contractor to get the facility built. That's the delay on the construction. We've actually extended our long term deal with WVU. And so, there's zero impact on 2024. That business, we've had for the last two years. It's been served out of another distribution center. It'll continue to be served out of another distribution center until we get the facility completed. WVU has been an incredible partner to us. And there'd be no impact at all in 2024 because we are serving the business out of another distribution center and it's just a matter of getting the new one up and running for them.
Operator: We have no further questions in our queue at this time. I will now turn a call back to Ed Pesicka for closing remarks.
Edward Pesicka: Thank you, operator. First of all, I want to thank everyone who joined us on the call today. Besides those on the call, I want to thank our teammates across the globe that have really worked tremendously in 2023 and to position us to where we are today. I also want to thank our customers, our patients, our partners, as well as our shareholders. As we reflect on where we are, we firmly believe that we have the right team in place. And even more than that, we have the right strategy. That strategy has enabled us to continue the momentum that we've accelerated during the year as we saw tremendous progress from Q1 to Q2 to Q3 to Q4 and exited the year with strength. So as you can see, I'm pretty excited about where we are right now, but even more excited about the future. And I look forward to sharing our progress with you as the year progresses. So just again, thank you everyone for joining us today and look forward to talking again after the first quarter results. Thank you.
Operator: This concludes today's conference call. Thank you for your participation and you may now disconnect.
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