Owens & Minor - Earnings Call - Q4 2024

Transcript

Operator (participant)

Today, and thank you for standing by. Welcome to the Owens & Minor Fourth Quarter and Full Year 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session, and if you would like to ask a question during this time, please press star one on your telephone keypad. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jackie Marcus, Investor Relations. Please go ahead.

Jackie Marcus (Company Representative)

Thank you, Operator. Hello, everyone, and welcome to the Owens & Minor Fourth Quarter and Full Year 2024 Earnings Call. Our comments on the call will be focused on the financial results for the fourth quarter and full year 2024, as well as our outlook for 2025, all 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 that reflect our current views of Owens & Minor about our business, financial performance, and future events. 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. Our expectations, beliefs, and projections are expressed in good faith, and we believe there is a reasonable basis for them.

However, there can be no assurance that our expectations, beliefs, and projections will result or be achieved. Please refer to our SEC filings for a full description of these risks and uncertainties, including the risk factor section of our annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call or in our earnings press release are as of today, and we undertake no obligation to update these statements as a result of new information or future events, except to the extent required by applicable law. In our discussion today, we will refer to non-GAAP financial measures and believe they might help investors to better understand our performance or business trends. Information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release.

Today, I am joined by Ed Pesicka, Owens & Minor's President and Chief Executive Officer, and Jon Leon, the company's Chief Financial Officer. I will now turn the call over to Ed.

Ed Pesicka (President CEO)

Thank you, Jackie. Good morning, everyone, and thank you for joining us on the call today. 2024 was an important year for Owens & Minor, and I am pleased with the progress that we have made against the strategy we outlined at our Investor Day in December of 2023. As a reminder, we committed to optimizing our product and healthcare services segment, leveraging our leading patient-direct platform, and building balance sheet flexibility through deleveraging. Within P&HS, we continue to see momentum in the broadening of our product portfolio, developing a streamlined and efficient manufacturing footprint, and enhancing our distribution capabilities. Within patient-direct, we continue to leverage our footprint and broad product offering to support home-based care for millions of patients with chronic conditions. Those capabilities, combined with the positive demographic trends and expanding home treatment options, leave us very bullish on the future of this business.

Finally, we repaid $647 million of debt over the last two years, which helps provide the financial flexibility to pursue the acquisition of Rotech, which we believe will drive long-term shareholder value. As we mentioned in our press release published this morning, we have been actively engaged in robust discussions regarding the potential sale of our product and healthcare services segment and are already well along in the process. Over the past few years, we have focused our capital reinvestment on the higher growth, higher margin patient-direct segment. Accordingly, over the past 18 months, we have considered many strategic options while continuing to work to enhance the product and healthcare services segment. The actions we have taken on realigning P&HS have made it a stronger entity and well-positioned for future growth.

We are excited and encouraged by the strong interest in P&HS business and ongoing conversations we are having in the process. In addition, the press release published this morning also mentioned that our board of directors has authorized the share repurchase program of up to $100 million. Jon will provide more detail later during his prepared comments. Regarding our planned acquisition of Rotech, we are awaiting a final decision from the regulators, and we remain diligent in our planning process as we expect to close in the first half of 2025. We remain incredibly excited by the prospect of a united future together. It is our plan to leverage the existing Apria platform we acquired nearly three years ago to improve service while delivering synergies through the optimization of our operations and interface with our customers.

To the extent possible, we have been using the past few months to further understand the synergy opportunities and create the ability to expedite synergies post-close. Based on what we already know and the work we have done to date, we now believe that our previously discussed cost synergy projections of $50 million in year three are conservative in both terms of value and time. Before I discuss our performance in 2024 and our goals for 2025, I want to take a moment to commend our teammates at Owens & Minor. We saw many difficult and heartbreaking situations in 2024 and earlier this year, including the record-setting hurricanes and historic flooding in the Southeast, the significant winter storms across the Midwest and Northeast, and the devastating fires in Los Angeles.

Facing these extraordinary circumstances, our teammates ensured that our customers and patients received the critical and vital medical supplies they needed. I am incredibly proud of the team that we have assembled at Owens & Minor and that our teammates embody our core belief that life takes care. Now moving on to 2024, while we focused on our long-term strategy, we also delivered mid-single-digit top-line growth and 13% growth in adjusted EPS while continuing to reinvest in the business to drive greater operational efficiencies, improve customer experience, expand our technology offering, and set ourselves up for long-term sustainable growth. Starting with patient-direct, our patient-direct business outpaced market growth with mid-single-digit growth for the quarter and for the year.

In addition, it delivered over $13 million of incremental operating income year over year while making significant progress with revenue cycle management and our sleep journey program, which helped deliver strong sleep supply growth for the year and the fourth quarter. The addition of sales teammates also helped us deliver double-digit growth in many of our smaller categories. Finally, our investments in technology continued as we launched ByramConnect, a digital health coach to help manage diabetes. Overall, significant progress was made in 2024, but we still have ample opportunity for advancement as well as improvement across all of our therapy categories, and we remain excited about the future of patient-direct. Now moving on to our P&HS segment. Our products and healthcare services segment for the full year and quarter continued to show solid same-store sales growth in our medical distribution division, partially offset by lower glove pricing.

Next, I want to recognize that the P&HS team continues to make significant progress in capturing savings and subsequently reinvesting those dollars into driving even more efficiencies and improving our operations. During 2024, we have advanced our proprietary product portfolio, made progress with DC automation, continued with the construction of new distribution centers, and began the consolidation of our fitting footprint. Overall, we made great progress related to our long-term strategy to optimize our P&HS segments. As I look ahead into 2025, the team and I are keenly focused on these areas. One, we will focus on expanding our free cash flow to strengthen our balance sheet, invest in our business, and support our stock as needed should it continue to be undervalued. Two, we will continue to be disciplined while driving profitable growth.

Three, we will continue to take all steps to gain clearance from regulators, and upon approval, we will quickly begin the integration of Rotech into the patient-direct segment. Finally, we will work through the process related to our products and healthcare services segments. As I look forward, I'm excited to build upon the progress we made in 2024 to advance our long-term strategy that we outlined at Investor Day in December of 2023. With that, I'll turn it over to Jon to discuss our financial performance in 2024 and financial guidance for 2025 in more detail. Jon.

Jon Leon (CFO)

Thanks, Ed, and good morning, everyone. I will start with a review of our fourth quarter financial results and cover some of the key drivers and trends from last year, and then dive into our outlook for 2025 in greater detail. Please note that during my remarks on today's call, I will discuss only non-GAAP financial measures. All GAAP to non-GAAP financial reconciliations can be found in the press release filed earlier this morning. With that, let's turn to fourth quarter results. Our revenue for the quarter was $2.7 billion, up 1.5% compared to the prior year. The products and healthcare services segment grew 0.5% overall compared to the fourth quarter of 2023. There was one more selling day this year compared to last year's fourth quarter, which accounted for the segment's growth.

While same-store sales in the medical distribution division have continued to grow nicely year-over-year, it was offset by lower glove prices and the knock-on effects of the IV fluid shortages during the quarter. The IV fluid shortage impacted procedure volume and subsequently our sales volume to some of our distribution customers. Patient-direct revenue grew by 5% compared to the fourth quarter of 2023. Sleep supplies and diabetes once again demonstrated strong growth. As discussed in previous quarters, home respiratory therapies such as NIV and oxygen declined on a year-over-year basis. We expect these therapy categories to return to growth during 2025, and we saw encouraging signs toward this turnaround late in the fourth quarter. Gross profit in the fourth quarter was $580 million, or 21.5% of net revenue.

Margin was essentially flat with last year's fourth quarter and expanded by 93 basis points compared to the third quarter of 2024 and benefited from a $10 million LIFO credit as inventory levels were meaningfully lower at December 31st compared to September 30th. Our distribution, selling, and administrative expenses for the quarter were 18.3% of revenue at $493 million, up from $457 million in last year's fourth quarter when DS&A was 17.2% of revenue. The increase in DS&A was primarily due to increases in teammate benefit expenses and higher workers' compensation costs. Adjusted operating income was $95 million in the fourth quarter, an $11 million increase compared to the third quarter, and $15 million less than the fourth quarter of 2023. The year-over-year change in adjusted operating income can be attributed to modest revenue growth, which was offset by higher DS&A expenses.

Interest expense for the fourth quarter was just under $36 million, down about $1.2 million compared to the prior year's fourth quarter. This change was driven by a continuing debt reduction and was partially offset by less interest income earned versus the prior fourth quarter. Our adjusted effective tax rate was 26.5%, largely unchanged from the 26.8% in the fourth quarter of 2023. Adjusted net income for the quarter was $43 million, or $0.55 per share, compared to $54 million, or $0.69 per share last year. Adjusted EBITDA was $138 million versus the $170 million reported during the fourth quarter of 2023. As previously disclosed earlier this month, we recorded a $305 million net-of-tax goodwill impairment charge in the fourth quarter.

This non-cash charge was primarily related to adverse financial market changes during the quarter and, to a far lesser extent, anticipated future changes in a capitation contract at the Apria division. We do not expect the assumed contract pricing change, including the financial projections that were used in the impairment analysis, to have a significant impact on 2025 results. More importantly, nothing about our positive outlook for Apria's prospects has changed because of this. We generated $71 million in operating cash flow in the fourth quarter, primarily driven by changes in working capital. As often happens, our working capital management yielded better cash flow throughout the quarter than was represented on the last day of the quarter, which allowed us to reduce debt by $31 million.

For the full year, debt was reduced by $244 million, and we have paid down $647 million in debt over the last two years, demonstrating the cash flow capabilities of the business and our commitment to reducing leverage. Now, with the wrapping up of 2024 and start of the new year, we will provide guidance for the full year of 2025. As a reminder, our guidance does not include any impact of the Rotech acquisition, which we still expect to close in the first half of 2025. Also, our guidance shared here today does not include any potential sale of our products and healthcare services segment and does not include any potential impact from future share repurchase activity. For the full year of 2025, we expect revenue to be in a range of $10.85 billion-$11.15 billion, yielding a midpoint of an even $11.0 billion.

Most of the growth will come from mid-single-digit % growth in our patient-direct segment. Adjusted EBITDA is expected to be in the range of $560 million-$590 million, with a $575 million midpoint representing approximately 10% growth over 2024. Adjusted EPS has a guidance range of $1.60-$1.85 per share and a midpoint of $1.73, representing approximately 13% growth. As we think about cash flow in 2025, we expect to see marked improvement from last year. We expect to have at least $200 million available for further debt reduction in 2025.

We believe this is a reasonable expectation as it would be the result of the $575 million midpoint of our adjusted EBITDA guidance, minus the midpoint of our gross CapEx guidance of $260 million and interest expense of $140 million, as well as less cash expected to be spent on items included in exit and realignment and acquisition-related charges. Those items are just detail provide approximately $125 million of cash flow, and we believe another $100 million can be taken out of working capital, a task we have demonstrated in the past that we can achieve. The year-over-year cash flow improvement is expected to largely come from the adjusted EBITDA growth included in our 2025 guidance, the expected lower cash spend on items included in exit and realignment and acquisition-related charges, and the anticipated improvement in working capital management.

We will remain diligent in our efforts to reduce debt levels and attend to use free cash flow to do so. There is no change to our goal of maintaining debt-to-EBITDA leverage between two and three times, and after the close of the Rotech acquisition, we will work quickly to bring down incremental debt levels. As Ed mentioned, our board of directors has authorized a share repurchase program of up to $100 million. We will prudently manage between using cash flow for debt reduction, which remains our leading objective, and share repurchase activity. However, with OMI shares currently so undervalued, and especially so in the last few weeks, we believe share repurchase is a very sound use of cash flow.

When thinking about how our full year guidance will trend over the course of the year, and as is increasingly typical given the nature of our business, we expect at least 70% of the earnings and cash flow to occur in the last two quarters of the year, with the fourth quarter being the strongest. We also expect the usual pattern of our first quarter being the lowest earning quarter, and as we often see, we expect to be a net borrower during the first quarter. As a reminder, our guidance information and other key modeling assumptions were filed this morning under Form 8-K and reside on the investor relations section of our website. I will now turn the call back to the operator for questions. Operator.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Please ensure you are not on speakerphone and that your phone is not on mute when called upon. Thank you. Your first question comes from Kevin Caliendo with UBS. Your line is open.

Kevin Caliendo (Healthcare Equity Research)

Good morning, guys. Thanks for taking my question and thanks for all the details. I guess, why don't we start first with Rotech because I think when the deck came out, the Form 8-K came out, I think people were a little bit alarmed to see some of the trends at Rotech. I just want to ask you, knowing what you know now versus knowing what you knew when the deal was announced, is there anything surprising in the Rotech results over the last year or so? I appreciate, Ed, you making the comment that the cost synergies could be greater than the $50 million and could come sooner. When I just looking at the margins of that business and the growth of that business, is there anything there that's surprising, different at all?

Jon Leon (CFO)

Hey, good morning, Kevin. It's Jon. The answer to the question is no. There are no surprises in what we've seen. I think a lot of people forget that for all of us, 2024 versus 2023 saw a significant impact of the 75/25 legislation leaving, and that had an impact on all of us. I think it's been stated that Rotech has a little bit more exposure than we do to government reimbursement, so maybe a greater impact there. I would say overall, now that we've got a little more clarity, we have a really active, healthy dialogue with the Rotech team. We know how their year is ending up, and no surprises whatsoever. That's very consistent with our deal model.

Kevin Caliendo (Healthcare Equity Research)

Okay. That's helpful. If I can ask a follow-up on the free cash flow, I appreciate the $200 million expected that you can redeploy back for debt repayment. You also have a $100 million share repurchase. Should we be thinking about those in conjunction? How should we think about that $100 million of buyback? Is that the priority first, or is it something over the course of time? Should we just assume the $175-$200 million of free cash flow goes to pay down debt and the buyback is more opportunistic? Just help me understand how you're thinking about deploying that capital this year.

Jon Leon (CFO)

Yeah. I think the first primary objective of the business is to continue to pay down debts. That's extremely important. In the same sense, should the stock continue to be meaningfully undervalued, we will be opportunistic on that also throughout the year. I think that's the way to think about it.

Kevin Caliendo (Healthcare Equity Research)

Okay. Thanks. I'll go back in queue.

Jon Leon (CFO)

Thanks.

Operator (participant)

The next question comes from Michael Cherny with Leerink Partners. Your line is open.

Michael Cherny (Senior Managing Director)

Good morning. Thank you for taking the question. Maybe if we can just start on patient direct and some of the underlying trends. Jon, you talked about mid-single-digit growth expectations on an organic basis over the course of the year. Can you parse that out a little bit in terms of what you expect to see on, roughly speaking, volume versus price versus market gains, the market share gains? I want to try and get a sense on where you see this business evolving and continuing to position itself given your commentary about outgrowing the market in 4Q and the rest of 2024.

Ed Pesicka (President CEO)

Yeah. Maybe I'll start, and then Jon can add some commentary to it. Look, I thought the patient-direct business had a really strong year. I mean, if I think about it again, we had mid-single-digit growth in the business for the entire year as well as the fourth quarter. Not only that, we actually increased full year over $13 million of OP income. If I think about some of the areas where we've had some pretty good success, we've had really nice success continuing with growth in diabetes as well as in sleep supplies. The other area I touched on a little bit in my comment was we did add some resources, and in some of the smaller categories, we saw close to double-digit growth in those smaller categories where we've added resources.

The one area where we're still, I would say, underperforming, and to be completely direct on this, it's really in the home respiratory and NIV and oxygen space. It's an area where we're going to continue to focus on it in 2025 and look to make that actually a growth category for us, which then could help lift the entire business as a whole from an organic standpoint. I think you look at our mid-single-digit growth for the year as well as the quarter, relatively strong, we believe, compared to the market, and some strong pockets of where we're seeing where some of the investments we've made are starting to pay off, like the sleep journey and some of the additional people we've added. Jon, I don't know if you want to add any more questions.

Jon Leon (CFO)

Yeah. The only thing I would add, Mike, to your comment, broad strokes, look at the big picture of the industry. The demographic talent remains very strong for us in the entire space. I think, as you heard and seen from us and others, regardless of the therapies that keep coming out, we still see really good demand for our supplies and services. Broad-based, I think there's plenty of share yet to be gained across all of us for years to come. The demographic talent we get from the demographics is just overwhelmingly positive for us.

Michael Cherny (Senior Managing Director)

Appreciate that. Maybe a follow-up to Kevin's question regarding capital deployment and the buyback. Very much appreciate the dynamic of instituting a new buyback given the recent performance of the stock. That being said, you obviously talked about the beginning of the year being a use of cash component, assuming, as you've said, that the Rotech deal closes, you'll be taking on a meaningful amount of debt near term as you work to pay that down. How should we think about the cadence potential, knowing it's not in guidance of the buyback against your cash flow needs? Why is $100 million the right number given where you see the dislocation in the stock currently?

Jon Leon (CFO)

Yeah. From a cadence perspective, Mike, I think the way we think about it, one, as Ed said, we all believe the stock is just way, way undervalued right now. Wouldn't it help if there's a better ROI out there than buying back our own shares? Q1, as I mentioned, we tend to be a net debtor. Being a little more of a net debtor during the Q1 doesn't bother us that much. We're confident in the cash flow as we get throughout the year. That wouldn't be necessarily a problem for us. We'll just see how the stock performs. Keeping in mind the rules around buyback and given our average daily trading volume, we couldn't get through it all that quickly anyway. We want to be aggressive. The stock remains so oversold.

As we think about overall cadence and why $100 million, again, just given the market cap of where we are today, unfortunately, and given what we see as the cash flow, as Ed said, debt repayment remains a priority. Given the market cap of $100 million, it felt right. We believe the stock will rise, but obviously, if we get through $100 million and the stock is not where we think it should be, the board can certainly revisit a future consideration of greater value.

Michael Cherny (Senior Managing Director)

It's helpful, Jon. Thank you.

Operator (participant)

The next question comes from John Stansel with JPMorgan. Your line is open.

John Stansel (Equity Research VP)

Great. Thanks for taking my question. Just wanted to quickly touch—I do not know if you framed it completely—but on tariffs, I appreciate the commentary changes by the day. Is there anything you can just help size impact potentially from Mexico-based tariffs? Thank you.

Ed Pesicka (President CEO)

Yeah. Again, I'll start, and then Jon can add an additional comment at the end. If you think about tariffs, tariffs for us aren't as significant as they may be for other players in the industry. However, I think, first of all, we got to be clear that as tariffs come in and increase our product costs, we're going to have to pass those on to the customers. Because in our P&HS segment business, with the margin profile as tight as it is, those are costs that we will have to pass on. If we think about impact overall on the business, the vast majority of our products are not made in China.

Let's first take that off the table because that had the highest tariff increases last year with close to 100% on gloves coming through over this year combined with next year, as well as significant on facial protection. That's not an impact to us. Where we do make our products, we do make some of our products in Southeast Asia as well as in the U.S. and Mexico and Honduras. I think that's a pretty fluid situation. If we think about it, our Mexican footprint is really in low single-digits of what we make in our products that we sell through our P&HS segment. Jon, I don't know if there's anything else.

Jon Leon (CFO)

Yeah. No, that's right. Put a little bit of color on that. You think about our Mexican facilities and what comes back into the U.S. is about 1.5% of the total revenue of the P&HS segment. As Ed said, really small exposure to both Mexico and China.

John Stansel (Equity Research VP)

Great. If I can just slide one more in. It looks like SG&A is roughly flat as a % of sales for 2025 based on the guidance. With gross margins and just EBITDA kind of stepping up relatively proportionally. Is there anything you should call out about how you're thinking about investment and kind of your SG&A spend for next year?

Ed Pesicka (President CEO)

Yeah. I think from an SG&A standpoint, we're going to continue to look at ways to optimize it, continue to look at ways to take costs out. Obviously, we can't impact our service to our customer base. That's how we've thought about it as we go into 2025.

Operator (participant)

The next question comes from Daniel Grosslight with Citigroup. Your line is open. Daniel, perhaps your line is on mute.

Daniel Grosslight (Senior Research Analyst)

Hi. Sorry about that. Thanks for taking the question, guys. Just a high-level one on the P&HS sales process. Completely get that you're redeploying capital to higher margin, higher growth, the patient direct. I'm curious, why now is the right time to do this? As we think about a few years down the line, are you going to be 100% dedicated to patient direct, or are there other areas you may look to deploy capital into? Thank you.

Ed Pesicka (President CEO)

I guess on the question, why now? I mean, why now really comes back to we had received inbound interest, so multiple inbound interests on the asset of our P&HS segment. In addition to that, then we worked with advisors as well as our board, and the decision was made to say, "Okay, if we've got this much inbound interest, let's look at a broader process," which that is what we've undertaken. We thought it was important now to make sure that we disclose that this is in process as we move forward because of where we are in that stage of it. The fact that, one, again, significant inbound interest broadened the process.

It actually expanded the interest, and we're moving through this now so that way we could have open dialogue about it, frank conversations with our customers, with our supplier communities, within our own internal teammates, and be able to move this forward and reach decision within quickly versus trying to continue to slow walk this.

Daniel Grosslight (Senior Research Analyst)

As you think about kind of where do you deploy capital next, more so in the medium term, will you be dedicated 100% to patient direct, or are you thinking about other areas of potentially getting into?

Ed Pesicka (President CEO)

I think in the near term, should the transaction happen with our P&HS segment, we will continue to focus on paying down debt. Should the regulators, we get through that with Rotech, it'll be focused on our patient direct segment, paying that debt down, optimizing that business as we move forward. I think if we think about our longer strategy, as we disclosed in 2023 in December, was we expect that that PD business by 2028 to be a $5 billion revenue business through both organic growth and through acquisition. Whether we expand out into other areas, that's yet to be determined.

Daniel Grosslight (Senior Research Analyst)

Got it. Okay. On your commentary around the $50 million of cost synergy from the Rotech deal being conservative in year three, I'm curious if there's going to be any pull forward of that to years one and two, and if there's any change in how you're thinking about accretion from the deal in year one and year two. I think previously you said it was neutral in year one and $0.15 accretive in year two. Any change in how you're thinking about that?

Ed Pesicka (President CEO)

Yeah. Here's what we've done. I think it's important to really step back from this. Obviously, the process has been delayed months now. During that period of time, we've really used these last few months to understand how the two businesses can work together within the guidelines of available information of what we can see and how we can have those conversations. Based on that, we actually believe that there are additional synergies and that the speed to getting them should be faster. Some of the work that would have been done had we closed back in October or November of last year, we were able to do some of that during this next period of time, which is why we think from a timeframe, by the end of year three, we originally talked about $50 million.

We think that that's actually light, and we can bring it up forward. In year one, I think there's still some impact of, as we look through things, there's still going to be some decisions that have to be made in year one that may not expedite it in the first three to six months. In that back half of that first full year is when we should start to be able to see that. I think once we get the regulatory approval on this, we'll come back with adjustments on timing as well as dollars on synergies and the impact it has on the overall financials.

Daniel Grosslight (Senior Research Analyst)

Got it. Thank you.

Operator (participant)

Once again, ladies and gentlemen, this is star One on your telephone keypad to ask a question. Your next question comes from Eric Coldwell with Baird. Your line is open.

Eric Coldwell (Senior Research Analyst)

Thanks very much. First one on the Apria capitated contract. Jon, I heard you say that you do not expect it to have an overly material impact on 2025. My question is, is that because the pricing change happens later in the year, so it is more of a 2026 impact, or just that the pricing change anticipated, or maybe it is already in effect, is just not that material in aggregate? I am just hoping to get more details on that, as well as any discussion you can provide on the size of that contract or how much capitated revenue you have for patient-direct today overall, what the mix is.

Ed Pesicka (President CEO)

Yeah. Maybe I can start, and Jon can talk a little bit about in detail. I think, Eric, appreciate the question. Let's step back from this. First of all, big picture-wise in our patient direct business. Outside of this contract, we have very few capitated contracts. Overall, in the industry today, capitation is really a smaller portion of the industry. I think that that's got to be we accept that as a backdrop. I'm not saying that this is a small capitated contract. This is a large capitated contract. I want to talk a little bit about our approach to this, and it'll tie into Jon's comments about the impact on 2025. We've modeled in assuming either direction, whether we retain it or not retain it, relatively speaking.

When we go through a capitated contract or any contract for that matter in our business, we take an extremely disciplined approach to the contract negotiations, and we look at all factors. We look at what's the service level that's going to be required to serve the customer. Where is our deleveraging point, and where can we go till we get to the point where it starts to deleverage the business? With this contract, we had the luxury of having current volume, and we know the trending of the volume. We know that we see that it's increasing. It gives us the ability to make sure we put a capitated contract out there that's fair and reasonable versus others that may not. Let me talk a little bit about where this has had historically. We've had other capitated contracts.

There was another group that came out with a capitated contract, and we did not win that contract. Others did win the contract. However, within a year or two, the service was not where it needed to be, and they came back and reopened it. Specifically in the state of California, they reopened it, and we retained business and regained business on a fee-for-service type model. I think when we go through this process, I try and paint that picture because of the discipline we take in putting together our bid and our offering. I think the other thing that benefits us overall on this is that rigor and discipline that we have within the business.

With that, Jon, maybe we can talk a little bit about how we look at 2025 and say, "Okay, the impact 2025, it's already baked into the numbers that we have, and it's not going to have a meaningful impact for us.

Jon Leon (CFO)

No, that's right. Obviously, we're two months into the year already under the current contract with the older pricing, if you will, Eric. As I said, it's a large contract. The switching costs on these things are very, very high and take a lot of time. The time to actually switch out under a new contract, until we lose it, it'd take a long time to switch it out. Quite frankly, capitation contracts of this size have a lot of dedicated resources to them. Our ability to flex that and still serve the customer effectively is pretty well known. We feel pretty good about the time included to, if there is a change in pricing or if we were to lose the contract, we can pretty much manage that fairly effectively.

At the end of the day, we feel pretty good about what we've modeled in for this in 2025 and our ability to manage it, whether it's just lower pricing and/or should we happen to lose it, our ability to take the cost out.

Eric Coldwell (Senior Research Analyst)

Fair enough. On the two segments for 2025 continuing ops guidance here, can you give us any framework on what you're thinking for top line and EBITDA performance across the two segments? Any loose ballpark on growth margin profile at the time?

Jon Leon (CFO)

Yeah. As I mentioned, if you're using the midpoint of revenue guidance, I think that's the bulk of that growth is going to come from patient direct. Patient direct top line, we expect to be better growth-wise than it was in 2024. You may recall back in our Investor Day, Eric, we didn't expect much in the other way of same-store sales and medical distribution going forward. We got a nice pleasant surprise on that in 2024. I'm not sure that will continue into 2025. The bulk of the lift overall on a consolidated basis will come out of patient direct. From an EBITDA perspective, I think you'll see margins improve a little bit at both segments, but not significant margin improvement across either. Maybe a little margin lift just given there's more room to grow in P&HS versus patient direct.

There'll be a little bit of margin lift at the EBITDA line for both segments.

Eric Coldwell (Senior Research Analyst)

I know the way you treat LIFO charges and credit has an impact on your reported EBITDA. I think, what was it, a $10 million credit this quarter, if I'm remembering? Sorry, I'm talking about.

Jon Leon (CFO)

$10 million credit for the quarter. It was basically flat to $1 million. I think it was just under a $1 million charge for the year. We are expecting a relatively small charge in 2025.

Eric Coldwell (Senior Research Analyst)

Okay. Can I keep going?

Jon Leon (CFO)

Sure. You got the mic.

Eric Coldwell (Senior Research Analyst)

All right. Sorry. Apologies to the others. Would you be willing to share last 12-month adjusted EBITDA on the P&HS segment? I mean, we've tried to ballpark an estimate, but there are clearly some uncertainties between what's reported in your filings versus what you give in your press releases and allocations of certain expenses, etc. I am just curious if you could give us your framework of what LTM EBITDA was in P&HS.

Jon Leon (CFO)

I would frame it that P&HS is between 20% and 25% of the consolidated EBITDA.

Eric Coldwell (Senior Research Analyst)

Okay. Yeah, that's about in line. Last one for me for now is, are you willing to talk about how your debt financing roadshow went, what you're anticipating for debt cost on Rotech? Has that changed from the expectations that were set in, what was it, July of last year?

Jon Leon (CFO)

Yeah. One of the benefits of a release that was tough for reviews this morning is that we get all this information out into the markets. I think that'll help us have more fulsome, efficient conversations with the debt market. Right now, we're going to remain very flexible in the weeks ahead as that pre-marketing effort went very well. I think we got very good receptivity. As we get into the weeks ahead and actually begin to market, we'll remain open to different structures and expect basically a cost of debt that's still in line with the overall Rotech deal model.

Eric Coldwell (Senior Research Analyst)

Okay. Thanks very much, guys.

Operator (participant)

The next question comes from Allen Lutz with Banf ok America. Your line is open.

Allen Lutz (Senior Equity Research Analyst)

Good morning, and thanks for taking the questions. Jon, you mentioned some encouraging signs in the fourth quarter around NIV and oxygen. Can you unpack that a little bit? What are you seeing, or what did you see in 4Q early in 2025, and what needs to happen to get those categories back to growth?

Jon Leon (CFO)

Yeah. Yeah. Allen, we did. We saw the starts in both the non-invasive advance and oxygen begin to pick up late. I think I've talked pretty publicly before. We got a little flat-footed at the start of the year. Obviously, the requirements around reimbursement for those categories changed dramatically post-pandemic. We went through a little flat-footed, really getting ourselves up and geared up for that, and others in the space have as well. It took us a while to really adjust to that, and I think we're in a good spot now to begin to capture that growth. That's important growth. You talk about margin across that business. Those categories are very high-growth margin products. We like them a lot. We're good at it, and we want to see that growth.

I will tell you, we did not build, we built some of that improvement into our 2025 expectations, but the more we can accelerate that growth of those two categories, it will be just upside to us.

Allen Lutz (Senior Equity Research Analyst)

Thanks for that. Last question from me. Lower glove pricing has obviously been a focal point over the past few years. I guess, where are we in that cycle today, and what's embedded in the guide for glove pricing in 2025? Thanks.

Ed Pesicka (President CEO)

Very good. At a macro level, yeah, we have seen glove prices come down, and a significant portion of what we did with our operating model realignment to reduce our cost structure and then helping offset a portion of that, but it still did hit the top line and did have some pull-through effect. I think with some of what we're seeing in the market right now is we're starting to see prices go the other direction. A good portion of that is related to tariffs that are driving that. I would say we've somewhat leveled out on those glove pricing, and there may be an opportunity as things proceed forward to actually look at price depending on input costs to adjust that based on those factors.

Allen Lutz (Senior Equity Research Analyst)

Thanks, Ed. Appreciate it.

Operator (participant)

This concludes the question and answer session. I'll turn the call to Ed Pesicka for closing remarks.

Ed Pesicka (President CEO)

Yeah. First of all, I want to thank everyone for joining on the call today. I also want to thank our teammates for an incredible 2024, some great accomplishments as we've moved through the year. I'm excited as we look forward into 2025. 2025 is going to be an exciting year for our organization, and I look forward to sharing our progress with everyone on this call and the rest of the organizations later in the spring. Thank you, everyone.

Operator (participant)

This concludes today's conference call. Thank you for joining. You may now disconnect.