Owens & Minor's Q3 2025 Earnings Call: Free Cash Flow Challenges, Kaiser Contract Loss, and 2026 Growth Uncertainty

Date of Call: None provided

Financials Results

• Revenue: $697.0M, up ~1.5% YOY (vs ~$687.0M in 3Q24; 9M revenue nearly $2.1B, up 3.4% YTD)
• EPS: $0.25 per adjusted share, down ~30.6% YOY (vs $0.36 in 3Q24; 9M adjusted EPS $0.80 vs $0.64 prior year)

Guidance:

• Full-year 2025 revenue guidance: $2.76B to $2.82B (company expects results toward the bottom of the range)
• Adjusted net income (EPS) guidance: $1.20 to $1.70 per share
• Adjusted EBITDA guidance: $376M to $382M
• Interest expense allocation increased between continuing/discontinued ops; management expects this to be offset by lower stock compensation, leaving EPS guidance unchanged

Business Commentary:

* Strategic Divestiture and Business Focus: - Owens and Minor announced a definitive agreement with Platinum Equity to sell its Products and Healthcare Services segment, which includes the Medical Distribution and Global Products divisions. - The divestiture aims to align the company around a single business, Patient Direct, to advance the future of home-based care and improve cash flow consistency.

• Market Trends and Opportunity Areas:
• The company identified growth opportunities in diabetes and sleep apnea management, with estimates of 37 million diabetics and 85 million adults with OSA in the U.S.

• Owens and Minor plans to focus on technology and automation investments to enhance patient experience, scale business, increase awareness, and reduce costs in these areas.

• Financial Performance and Guidance:

• Revenue for the third quarter was $697 million, representing a year-over-year increase of 1.1%.

• The company affirmed its 2025 guidance for revenue between $2,760 million and $2,820 million and adjusted net income between $1.2 and $1.7 per share.

• Profitability and Cash Flow:

• Adjusted EBITDA for the third quarter was $92 million, with a reported 6.3% increase year-to-date compared to 2024.
• The company generated $28 million of free cash flow in the third quarter and $78 million through the first nine months of the year, driven by strong cash flow from continuing operations.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly described the outlook as "very bullish" and "exciting," highlighted being "thrilled" to become a pure‑play home‑based care company, and emphasized growth opportunities from Optum and chronic-condition tailwinds while prioritizing debt paydown and tech investments.

Q&A:

• Question from Dan Clark (Leerink Partners): At a high level, how should we think about the durability of these trends going into 2026? And how is selling into the Optum channel going thus far?
  Response: Optum preferred‑provider deal is early stage but promising; management will not issue 2026 guidance yet and warns a known large customer loss in continuing operations will impact 2026, though absent that loss they expect a fairly strong 2026.

• Question from Kevin Caliendo (UBS): How should we think about the company's outlook for 2026 and modeling run rates? Any color on free cash flow for 2025 and beyond? Also, any covenant risk post‑divestiture?
  Response: Absent the specific large customer loss, expect decent organic top‑line growth, margin and cash‑flow improvement; Q4 continuing‑ops should resemble Q3; 2026 will include divestiture‑related one‑time costs and stranded‑cost reductions over time; covenant compliance is reported as comfortable.

• Question from Daniel Grosslight (Citi): How do preferred‑vendor agreements work and how many would you need to fill the Kaiser hole from a profitability standpoint? Also, can you explain the PNHS issue weighing on free cash flow?
  Response: Preferred‑provider deals like Optum can replace lost EBITDA with relatively little revenue because the lost Kaiser contract was low‑margin; the PNHS free‑cash‑flow headwind stems from overbought inventory tied to startup of a new kitting facility (outside the U.S.), which should burn off over the coming months.

Contradiction Point 1

Impact of PNHS on Free Cash Flow

It involves differing explanations of the issue with PNHS impacting free cash flow, which is crucial for financial planning and investor confidence.

How is PNHS negatively impacting free cash flow? - Daniel Grosslight (Citi)

2025Q3: It involves a new kitting facility startup with over-acquisition of inventory. This issue will resolve through the next quarter plus. - Ed Pesica(CEO)

How will free cash flow conversion and CapEx change after the P&HS transaction? - Daniel R. Grosslight (Citigroup Inc.)

2025Q2: Annual EBITDA of $376 million to $382 million, net CapEx of $135 million to $140 million, interest of $97 million to $100 million, discontinued operations interest of $30 million to $35 million. Expect free cash flow in the $60 million to $70 million range. - Jonathan A. Leon(CFO)

Contradiction Point 2

Patient Direct's Contract with Kaiser

It pertains to the timeline and impact of the loss of a contract with Kaiser, which could affect revenue projections and operational strategy.

Can you elaborate on preferred vendor agreements? How many agreements are needed to address the Kaiser profitability gap? - Daniel Grosslight (Citi)

2025Q3: We lost a unique, non-margin, and cash flow-positive customer. Covering the loss won't require much additional revenue. - Ed Pesica(CEO)

Should we annualize the second-half run rate of Patient Direct due to the potential loss of the Kaiser contract, and can you still grow in 2026? - Kevin Caliendo (UBS Investment Bank)

2025Q2: Limited impact in 2025, with bulk transition happening in 2026. There will be an opportunity to drive stronger bottom line even with limited top-line growth. - Edward A. Pesicka(CEO)

Contradiction Point 3

Optum Channel Sales and Impact on 2026

It involves the impact of sales into the Optum channel on the company's outlook for 2026, which is crucial for investor expectations.

How durable are these trends through 2026? How are you selling into the Optum channel? - Dan Clark (Leerink Partners)

2025Q3: Selling in the Optum channel is new, and we're tracking as expected. Full 2026 guidance will be provided when we report fourth quarter results. - Ed Pesica(CEO)

Can you outline the revenue and EBITDA guidance by segment for 2025? - Eric Coldwell (Baird)

2024Q4: Helping clients optimize their supply chain and reduce cost is our specialty. We're pleased to have been selected by Optum as their preferred medical and surgical supply partner. This agreement provides us with a preferred position to support Optum's network of more than 1,300 hospitals and 25,000 healthcare providers. - Edward Pesicka(CEO)

Contradiction Point 4

Inventory Impact on Free Cash Flow

It pertains to the impact of inventory levels on free cash flow, which is a critical financial metric for investors.

Can you explain why PNHS is affecting free cash flow? - Daniel Grosslight (Citi)

2025Q3: It involves a new kitting facility startup with over-acquisition of inventory. This issue will resolve through the next quarter plus. - Ed Pesica(CEO)

How does the $100 million buyback align with your cash flow needs? - Kevin Caliendo (UBS)

2024Q4: We expect free cash flow margin to improve sequentially but will remain below historical levels primarily due to the effects of Rotech and inventory build in the PHS segment. - Jonathan Leon(CFO)

Contradiction Point 5

Patient Direct Segment Growth and Performance

It highlights discrepancies in the growth expectations and performance of the Patient Direct segment, which is a key driver of the company's growth strategy.

What is your outlook for 2026? Are there any emerging trends? How should we model run rates and free cash flow? - Kevin Caliendo (UBS)

2025Q3: Increases in both Medicare and commercial volumes were broad-based across all product categories, driven by improved execution, new customer wins and investments in digital fulfillment capabilities. - Ed Pesica(CEO)

Can you break down the growth components for Patient Direct, including volume, price, and market gains? - Michael Cherny (Leerink Partners)

2024Q4: Patient Direct saw mid-single-digit growth in 2024. Growth was driven by diabetes and supplies, with investments yielding positive results in smaller categories. Home respiratory and NIV/Oxygen remain underperforming, but efforts are focused on turning those into growth categories. - Edward Pesicka(CEO)