Apr 24, 2013
Executives
Craig R. Smith - Chief Executive Officer, President, Director, Member of Executive Committee and Member of Strategic Planning Committee Trudi Allcott - Director of Investor & Media Relations James L.
Bierman - Chief Operating Officer and Executive Vice President Richard A. Meier - Chief Financial Officer and Executive Vice President
Analysts
Robert M. Willoughby - BofA Merrill Lynch, Research Division Eric W.
Coldwell - Robert W. Baird & Co.
Incorporated, Research Division Lisa C. Gill - JP Morgan Chase & Co, Research Division Robert P.
Jones - Goldman Sachs Group Inc., Research Division Steven Valiquette - UBS Investment Bank, Research Division David Larsen - Leerink Swann LLC, Research Division
Operator
Good morning, ladies and gentlemen, and welcome to the Owens & Minor First Quarter 2013 Earnings Conference Call. My name is Janine, and I will be your operator for today.
[Operator Instructions] As a reminder, this conference 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, President and Chief Executive Officer of Owens & Minor. Please proceed, sir.
Craig R. Smith
Thank you, Janine, and good morning, everyone. Welcome to the Owens & Minor First Quarter 2013 Conference Call.
This morning, we will review our results and then take your questions. But first, let me introduce my colleagues on the call today: Jim Bierman, our Chief Operating Officer; Greyson Hartog, our General Counsel; and Randy Meier, our Chief Financial Officer, who is participating in his first of Owens & Minor earnings call today.
I would like to personally welcome Randy to Owens & Minor. He brings a great deal of finance and operations experience from the manufacturing side of healthcare and international experience from companies that were engaged in global commerce.
I'm very pleased to have him as the newest member of our leadership team. Now, before we begin, I'm going to ask Trudi Allcott from Investor Relations to read the Safe Harbor Statement.
Trudi?
Trudi Allcott
Thank you, Craig. Comments today will be focused on financial results for the first quarter 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 on our press release and in the first quarter supplemental slide presentation, both of which are posted on our website.
Our call today will also be archived on our website. And 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 on these risk factors.
Finally, upcoming investor events are spelled out in our press release, and 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 to provide an update on the numbers.
James L. Bierman
Thank you, Craig, and good morning, everyone. I'd like to join Craig in welcoming Randy on board as our new CFO.
Since Randy is going to review our financial results this morning, I'll focus on the qualitative and strategic aspects of our operation. After taking over as Chief Operating Officer a year ago, I've been working with our sales and operations leadership to streamline and update our approach to a changing market.
I will highlight some of the progress in this effort and then comment on the status of our GPO contract renewals, as well as provide some operational context for Randy's review of our financial results. As the wave of hospital affiliations and consolidation has continued, we have made a concerted effort to work with the large hospitals and IDNs that will be setting the direction for the future of healthcare.
I visited with folks from several of our country's largest healthcare providers this past quarter, and believe more than ever that the changes we see in the market are validating our strategy. And looking at our quarterly results, we see the positive impact of these large customers, and we are seeing signs that we are beginning to achieve our targeted operating performance.
As these trends are ongoing, we will continue to streamline our Domestic and International networks, and our approach to the market to meet the evolving needs of our customers. For example, we accomplished certain plan distribution center consolidations in the first quarter.
The financial effect of which, is included in our exit and realignment charges. These first quarter actions were designed to consolidate our footprint, both in the Midwest and in Europe.
Despite the fluidity in the market, we continue to invest in our company for the long term. As we said at our November Investor Day, we are working to connect the world of medical product to the point of care, and we've made significant progress in the last few years.
We have achieved 2 international expansions: first, in China, with our sourcing joint venture; and then in Europe, with acquisition of Movianto, which has greatly expanded our third-party logistics platform. As we also highlighted in November, we are migrating from being predominantly a provider-centric company to a company that is more equally focused on healthcare providers and manufacturers.
But this transformation does not happen overnight, it will take several years. In 2013, we are entering the second year of a planned 3-year $50 million information technology strategy that is designed to improve our efficiency, our flexibility and our ability to handle new lines of business.
As our customers gets larger and expand along the continuum of care, we believe the investments we are making now will ensure we continue to add value as their supply chain partner. For example, we are currently working on implementing new and more comprehensive productivity standards in our warehouses that should improve our efficiency over time and enhance our ability to serve both our provider and manufacturer customers in new ways.
Turning now to an update on our progress with the GPOs. As we have said, we successfully negotiated and signed the novation and premier contract last year.
This year, we have contract renewals with MedAssets and HPG. At this point, we are progressing with the negotiations, and we will update you once those agreements are signed.
By the end of this year, the majority of our distribution business will have been resigned with new multi-year GPO contract. Now, I'd like to provide some context for Randy's financial review.
In the healthcare market, Owens & Minor, along with other healthcare companies, has been experiencing the impact of lower utilization trends for some time. We saw the continuation of these trends in our book of business for the first quarter, which were also validated by several recent reports from other healthcare companies.
As for our Domestic operating earnings and margin, as Randy will further discuss, we did report an increase in operating earnings as a percentage of revenues for the quarter. This improvement occurred even as we saw an increase in our SG&A expenses as a percentage of revenue.
This has not come as a surprise, as comparable period Domestic revenues declined slightly, and given that a portion of our expenses are fixed, one would anticipate the expense as a percentage of revenue to increase. We are well aware that careful expense management is essential for Owens & Minor.
And we have a long track record of successfully controlling our costs. I would also point out that part of the reason we have continued to maintain some of our expenses is because of the ongoing investments in operational improvement I mentioned that will benefit us in the long run.
Looking ahead to the rest of the year, we will be focused on continuing to deliver our industry-leading distribution and logistics services to our provider and manufacturer customers. Our teammates have done a great job in a challenging market, and we are confident that they will continue to excel in serving our customers and our company.
Thank you. Now, I will turn it over to Randy.
Richard A. Meier
Thank you, Jim, and good morning, everyone. First, I'd like to thank Craig and Jim and all the teammates for making my transition to Owens & Minor a smooth one.
The team has been very welcoming and I'm excited by the opportunity to participate in the growth of Owens & Minor, both domestically and internationally. That said, let's turn to the first quarter results.
Consolidated revenues for the first quarter were $2.28 billion, up 2.6% compared to the prior-year quarter. The increase in the quarterly revenues resulted primarily from the positive impact of Movianto, which contributed $121 million to the first quarter revenue.
First quarter Domestic revenue declined 2.8%, but when compared to the per-day basis, Domestic revenues declined only 1.3% versus the first quarter of last year. When compared to the first quarter of last year, the Domestic revenues declined partially as a result of our rationalization of smaller less-profitable healthcare provider customers and suppliers.
Quarterly Domestic revenues were also negatively affected by trends that we have been seeing for some time, including lower hospital utilization rates and reduced government purchasing. Consolidated gross margins were $279.1 million for the quarter or 2.26% of revenue -- excuse me, 12.26% of revenues compared to $214.3 million or 9.66% of revenue in the prior-year quarter.
And looking at the first quarter gross margins, when compared to last year's first quarter, the improvement came primarily from our fee-for-service businesses, primarily driven by Movianto. You may recall that Movianto's business has a variety of revenue models that include both buy-sell and fee-for-service arrangements that can vary significantly in terms of gross margins.
For the quarter, distribution gross margins benefited from supplier price changes and associated benefits. For modeling purposes, we continue to believe that consolidated gross margins for the full year 2013 will fall within the range of 11.75% and 12.25%, that we've provided in our November Investor Day.
Moving to operating expenses, consolidated SG&A expenses were $217.7 million or 9.57% of revenues for the quarter, up from $155.6 million last year. The $62 million increase in SG&A for the quarter resulted primarily from the addition of our international operations, which includes labor, facilities and delivery costs, as well as ongoing cost for information technology and other transition services.
While many of these costs vary as business activity changes, a portion of the labor and facility costs act more like fixed costs. As a reminder, the incremental cost of transitioning Movianto's information technology and other functions from our former owner are reported as acquisition-related charges outside of SG&A expense.
Domestic segment SG&A as a percentage of revenue was 7.31% of revenue compared to 7.01% for the same period last year. As Jim indicated in his remarks, much of this increase in the SG&A as a percentage of revenue can be attributed to the small decline in revenues compared to last year's first quarter.
However, we did experience increases in workers' compensation and expect in consulting expenses, which we do not expect to have a meaningful impact on the full year. Adjusted consolidated operating earnings for the quarter were $50 million or 2.19% of revenues, a decline of $2 million compared to the prior-year quarter, primarily due to the operating loss of $3 million in the International segment.
For the first quarter, Domestic segment operating earnings were $53 million or 2.46% of Domestic revenues, up $1 million from the prior-year quarter. As for the International segment, during the quarter, we completed key management changes in Europe.
With our new team in place, we are focused on achieving reductions in our cost structure, while we steadily work toward optimize -- or to optimize our capacity in the network. In addition, we took some initial steps in the first quarter to reduce costs in Europe, including the closing of one small facility.
As we move through the year, we expect to see the benefit of these actions. For the balance of 2013, our strategy with Movianto is to achieve an improved cost structure without affecting our ability to grow in 2014 and beyond.
For the quarter, interest expense was $3.2 million, while our tax rate increased to 41.6% from last year's 39.4%, largely reflecting the impact of foreign taxes. Operating cash flow for the quarter was $155 million compared to $102 million for the same period last year.
Much of the quarterly increase resulted from a $98 million increase in cash flow related to accounts payable. Timing played a role in this quarterly increase and is something that we see from time to time.
For the year, we would expect to see moderating trends in our accounts payable. The company continues to report strong Domestic asset management metrics, such as DSOs of 19.6 days and inventory turns of 10.6x.
So for the first quarter 2013, adjusted consolidated net income excluding pre-tax charges of $2 million for the acquisition-related and exit and realignment activities, was $27.6 million or $0.44 per diluted share, compared with $0.46 for the prior-year quarter. Included in these results is the previously mentioned pre-tax quarterly operating loss for the International segment of approximately $3 million or $0.04 per diluted share.
Considering our fourth quarter results and looking towards the rest of the year, our guidance for 2013 remains unchanged. As a reminder, we are targeting revenue growth for 2013, up 2% to 4%, and adjusted net income per diluted share of $1.90 to $2 per share for the year, which includes operating results from Movianto, but excludes exit and realignment costs as well as acquisition-related costs.
Thank you. And with that, I'd like to turn the call back over to Craig.
Craig R. Smith
Thank you, Randy. And now that Randy has given you really a thorough update on our first quarter financial and operational results, I'd like to just comment before we go into Q&A.
And the first thing I want to do is I want to thank all of our Boston teammates who responded during a very terrible tragedy during the Boston Marathon. Our hearts and prayers go to the victims and those who have suffered.
And I want to just personally thank all of our Boston teammates who worked throughout the night and during the day to make sure that our hospitals and patients were taken care of in the Boston market. Now, we are celebrating our 131st anniversary this year, and that means we've learned a few things about operating in healthcare.
We are staying very focused on the long-term strategy of the company. We have, and we will continue to invest for strength and flexibility.
We are making sure we are serving the needs of our customers. And as you heard Jim say, he's been out visiting with customers, and I have.
So we've got a lot of input from our customers throughout the country and we try to respond and maintain our flexibility as they are clearly changing in a very quick environment, changing healthcare environment. We are also staying very true to our values, and no matter what's happening in the market or the economy, we're staying very true to our culture.
I was talking with someone recently that said, that Owens & Minor is a good company in a tough neighborhood, and I think that's pretty appropriate for our company. We always try to do the right thing.
We're always working hard. It's -- the last 2 or 3 years has been a little challenging, but I think we're making good progress.
We are really successfully working through some of these challenges. And I'm very pleased that our teams in the U.S., Europe and Asia are demonstrating really a great sense of urgency, and they are making things happen every single day.
Now, with the investments we're making in our Domestic business to improve flexibility, lower cost and serving the right customers, we're also making the right investments in Europe. And I believe we are in a very strong position for the future.
Now, with that said, we'd be happy to the open it up and to take your questions. So Janine, I'll turn it back over to you.
Operator
[Operator Instructions] The first question comes from Robert Willoughby of Bank of America.
Robert M. Willoughby - BofA Merrill Lynch, Research Division
Craig or Jim, is it possible to get some kind of quarterly run rate for Movianto? It's been a little bit more volatile out of the box than I would have thought, so any guidance on that one would help.
And then just secondarily, it looks like the CapEx, as well as some of the additions to software, et cetera, running about twice what they were last year, where is that investment going?
Craig R. Smith
Bob, this is Craig. I'm going to answer the first question on Movianto and of course, we've had that business for 6 months.
And I think if you look at the run rate at the end of the fourth quarter and the first quarter, I think we were in a ballpark that we're probably still operating in. It's going to be a little more choppy, maybe, than the core distribution business, maybe a little bit more seasonality.
But I believe that in Investor Day and at the end of the first quarter, we had worked it through a number that I think we're still fairly comfortable with. I don't have it right in front of me, but I think there was a high number of over 5 and a low number of 4, and maybe somewhere in the middle there would be probably where we would want to look at.
Robert M. Willoughby - BofA Merrill Lynch, Research Division
Okay.
Craig R. Smith
Robert, on the CapEx side, we had a little bit north of $11 million domestically on the CapEx. A lot of that went towards the IT strategy and the long-term capital investment plan that you've heard of, fair amount.
And then we had a little bit more than $3 million being spent over on Movianto and the International business.
Robert M. Willoughby - BofA Merrill Lynch, Research Division
Okay. And the additions to computer software and intangibles that doubled year-over-year, that's on what?
Craig R. Smith
That sounds about right.
Robert M. Willoughby - BofA Merrill Lynch, Research Division
Well then, what's it in support of though...
Craig R. Smith
Bob there's a -- first of all, Bob, there's a 3-year IT initiative, $50 million initiative, and we're in the second year of the third year or so. I think you're going to see the CapEx up a little bit higher on the IT piece, which we've talked about in terms of upgrading our warehouse systems.
We're actually upgrading [indiscernible] wins and services for customers, and then we're actually upgrading some of our internal and external tracking mechanisms for our customers and for us internally. So this, if you remember, we're in -- we're right about in the middle of our $50 million IT upgrade.
And that's where we're looking at best-of-class systems, and we did the Microsoft mainframe, a lift in shift, so we're right in the middle of that piece. So we probably got about another 18 months on that.
Operator
Our next question is from Eric Coldwell of Robert W. Baird.
Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division
First up, on utilization trends, understand what you've been communicating there. But could you see -- could you give us a better sense on utilization overall.
Are you seeing results decline sequentially? Is it a negative number now?
Or is some of the influence on your overall revenue growth simply the selectivity, such that you're seeing your core account base, your same-store account base, actually growing a couple of percent, perhaps?
Craig R. Smith
Yes, Eric, great question. And the answer, we have various data points, some are in conflict.
Let me start with, as we look at the first quarter, we continue to experience a situation where there's little to no product price inflation. And in fact, there could even be a deflation going on.
So there is not the normal lift that would exist in a cost-plus kind of environment with product price inflation. If you get to then, the root issue that you raised, which is what are the actual procedure activities and what are we seeing within our customers, we continue to see a trend that we called out, wow, now, it's almost 1.5 years, 2 years ago, where our larger customers are experiencing higher utilization or growth than the average that we see.
Now some of that may be due to various acquisitions that they may be doing that are relatively small and have an influence, but we're not able to identify them as unique reasons for an increase. But there is no question, our larger customers are increasing at a faster rate than our smaller customers.
And just as we called out before, it continued on this quarter, the smaller customers are actually experiencing negative growth. Overall, utilization was flat.
I think the way we would look at it on sequential basis, is that it was down from the fourth quarter. But again, that is -- much of that is -- the reasons for it are anecdotal as we talked to our larger customers, and we zero in on the quantitative data related to those larger customers.
Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division
Hey, Jim, let me just true-up a comment you made with something in the press release. So I think you just said little to no product inflation, maybe some deflation, but the press release also says that operating earnings in the Domestic segment benefited from supplier price changes.
What price changes are you referencing, given those recent comments on the call here?
James L. Bierman
Yes. So as we look, and I'm going to convert over to a bit of a financial accounting-related answer, and I would defer to Randy and a heartbeat on this.
But I think what we're referring to there is a phenomenon that those of you that have been with us for a while have seen in other quarters where the mix of product pricing within our inventory valuation shift, and there is either a benefit or a negative impact to the margin. And I think that's what was being referred to in the press release.
But again, any further details, I'd defer to Randy on.
Richard A. Meier
I agree with what Jim said. I think as the new person, sort of getting an education on inventory and how it's managed here, certainly, we see -- with the diversity and their product line, we saw those price increases and decreases, but how it flows through the income statement has more to do with our product mix at the end of the year based on inventory on-hand and how those price adjustments are then reflected, both in the cash flow statement and then through the income statement.
So overall, I think we -- that we try to make an accurate statement that supplier price was both positive and negative in terms of across the board. But as the net result to us was somewhat positive in the quarter, and we would expect that to have a follow-on impact a little bit in the second quarter.
Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division
Okay. And if I could just squeeze one more in.
Jim, you said it's obviously not a surprise to see SG&A increase as a percentage of revenue in the period where Domestic revenues is off a little bit, some fixed cost in nature. At the same time, your guidance for the year is maintained and your original SG&A guidance was 8.9% to 9.3% of revenue, this quarter came out at 9.6%.
So are we trending, as we look for the rest of the year, we're trending to the higher end of that original guidance range? Or are you perhaps suggesting that the first quarter was somewhat of an anomaly?
And we see SG&A as a percentage of revenue to come back into that range to true-up the full year between 8.9% and 9.3%?
James L. Bierman
Sure, Eric. I think a couple of things.
I think that, first of all, the SG&A results were within a reasonable range that we were targeting for the quarter. You will recall, and I think it's largely because of the nature of our workforce, that there is some seasonality in our expense run rate.
And we do see some higher expenses in the first quarter related to payroll taxes and various other incentive-related things that occur in the first quarter versus later quarters. So I think, all in all, we're within a comfortable position of the amounts we put forth as targets at Investor Day.
And as you also well know, we're probably not going to fall into the trap of beginning to triangulate or narrow those ranges at least with only one quarter behind us. So we're satisfied where we are.
We do understand. And I think the investment community who's been with us, who understands us, too, our major cost is people, and that cost structure is semi-fixed or technically, it's step variable.
And so a relatively small variance in revenue, it's tough to titrate the expenses as narrowly as one might think.
Richard A. Meier
One other comment, the increase year-over-year in SG&A was about $62 million so the -- and the vast majority of that was Movianto. So I think as we move forward, the variance in the North America business in terms of that was very small.
So again, I think -- again, being relatively new here, the expense control and our ability to manage that, I think, is still at pretty high level. So that's what I think our confidence on our ability to manage to the inside the range still remains very high.
Operator
The next question is from Lisa Gill of JPMorgan.
Lisa C. Gill - JP Morgan Chase & Co, Research Division
I just had 2 questions. First, Craig, just a bigger picture question.
You started off the conversation today talking about working with the largest IDNs. Can you talk about how those relationships are changing?
And as there are buying physicians and taking more of the services within the IDN umbrella, how does that impact Owens & Minor?
James L. Bierman
Yes. Lisa, this is Jim Bierman.
I'll answer it first, and then Craig can supplement it. But because I think I was the one that actually said that we have had meetings with the larger IDNs.
Yes, I think it's really quite interesting and it's exciting for us here. Because the nature of the conversation with the provider thought leaders that are out there, those that are going to really move the needle, is totally changing.
And that discussion is becoming way more strategic as to how they can dramatically change the landscape as opposed to highly tactical, or as Craig likes to say, very price driven. And I think we're excited about this.
Now, where that goes, whether or not the momentum is sustained and fundamental changes can be made, remains to be seen. But the -- clearly, the nature of the conversation is shifting, and we think we are uniquely positioned to take advantage of that shift.
Craig?
Craig R. Smith
I just would say Lisa, actually I'm very pleased with what's going on in the marketplace with our customer base. A product like PANDAC, which has been around for 40 years now.
It's still got a lot of legs and a lot of momentum, and it's actually became a piece of a bigger service that we're offering. So the discussions really have changed too.
And I think you've heard me say this before, if you want to do a price deal, you can maybe -- on a large customer, a customer might save a $1 million. We're talking $5 million, $10 million, $15 million, $20 million where these systems just have very, very large numbers to try to get to.
But I think the bigger part is, as they bring these systems together, as they go out and acquire, they need help with their physician practices. They need to tie them in to the integrated delivery network technologically and supply chain wise.
And they're also adding hospitals that historically, maybe still are behind the curve on the IT curve and they've got to accommodate them and bring them into a bigger system. And I think all the things that we have invested in over the last 5 to 10 years are actually -- are playing very well on our hand right now to really help these bigger systems get at a bigger number.
And so I would say, overall, I'm feeling very pleased with where these larger systems are going.
Lisa C. Gill - JP Morgan Chase & Co, Research Division
And what do you think that means though, Craig? I mean, from our side, right, we think about things in numbers.
So do you expect the you're going to continue -- you're going to see big growth in the big guys? The smaller guys continue to see the way.
How should we think about that in the next couple of years?
Craig R. Smith
No. Lisa, I think we're already seeing that.
And I think we've maybe, for lack of a better word, been a little bit coy about it. But we are actually seeing better utilization in the larger systems, we're seeing better penetration.
So from a sales growth standpoint, we're seeing sales growth in those IDNs. We're seeing a better acceptability of our programs and services.
And so that should help us, to some degree, on margin. We also have a lot of customers that want to aggregate more of their purchases with this in these bigger systems.
So I think from a number standpoint, that's where we think our growth is going to come from. And I think we believe that, that's where our programs and services will grow over the next 3 to 5 years.
Lisa C. Gill - JP Morgan Chase & Co, Research Division
Great. And then I just have a numbers verification question around the gross margin in the quarter.
Randy, can you maybe help us understand that, I know you said it from an accounting perspective, but the supplier price increases and the way that it impacted things, right now, your gross margins are at the upper end of that guidance range that you've given. Is there a way for you to give us some idea of how much impact came from these base price increases?
And how we should think about gross margins for the rest of the year? Because we would have to assume if you keep the guidance the same, that gross margins are coming down from the first quarter.
Richard A. Meier
I think probably the best way to describe this is to give you some trends about where we see our gross margin going. I think in the first quarter, we did have a positive impact from some of the supplier price changes, and we expect that will be somewhat diminished as we progress through the year.
So I think as we go to the second quarter, there'll be some debt small benefit as a residual impact. And then as we get into the second of the year, we'll see less of that going forward.
We continue to feel comfortable at this point in the year with the gross margin range. And certainly, I would expect that we would fall -- the subsequent quarters fall inside that range.
So I would expect to see some slight decrease going forward, but I wouldn't say it would have a significant impact on overall profitability. Overall, I think we're very positive year-over-year when you look back a couple of years ago at the overall trend in our gross profit margin.
And so I think with -- that's really what we're focused on here, and to continue to expand gross margins on an annual basis year-over-year.
Operator
The next question is from Robert Jones of Goldman Sachs.
Robert P. Jones - Goldman Sachs Group Inc., Research Division
Craig, I just want to go back to a comment you made around the top line and just trying to figure out how to forecast the 2 segments for the balance of the year. It seems like we're honing in a little bit more on run rate for Movianto, and say we do get towards the upper end of that range, it would imply that Domestic business would see a pretty decent sequential acceleration from where we were in 1Q through the balance of the year.
Is that the expectation you guys have, I guess, based on the 2% to 4% guidance? And if so, I guess, what are the main drivers or what gives you confidence that you'll see an acceleration in the Domestic business?
James L. Bierman
Yes, Robert. I'm not sure that your math works with where we're headed on Movianto.
I'm not sure we're seeing, we would mathematically come up with a significant acceleration of Domestic revenue. I'm struggling a little bit with that.
I'm working on it, but I don't have the [indiscernible].
Robert P. Jones - Goldman Sachs Group Inc., Research Division
So I'm just -- if you've used $500 million in the International business, I think it would imply that the negative 2.8% decline you saw this year would obviously have to improve?
Craig R. Smith
Well, Bob, let me jump -- I'll kick in. Let me jump in and see what we can do here.
I think we're within the guidance that what we gave for the year, and the $500 million actually is probably little bit high in what we've been talking about. And again, the only thing I would say, and I'm not trying to take you off the Domestic business, but I think there is probably some feeling that Movianto will contribute a little bit more this year than perhaps the Domestic.
But there is some seasonality to it, but we're clearly right in with the guidance range of what we gave for 2013. But I'm going to turn it over to Randy, maybe he can give a little more color on that.
Richard A. Meier
Yes. I guess, one comment I'd make is, if you look at where we were with a -- in the first quarter with Movianto, I think we're comfortable with that number and the continued progress we'll make there, which will contribute to sort of sustaining an overall top line growth rate.
But one of the things I'd point out is even though we did see slightly more than a 2% decline in the Domestic business, if you look it on a daily basis, it only declined 1.3%. And I think that's the important metric that you should look at, that the Domestic business is not declining as much as the headline number might suggest.
We did have one fewer day this year than last year. And as you know, in this business, that does matter.
So I'd sort of look at more the 1.3% as sort of a Domestic number rather than the -- I think it was 2.6%.
Robert P. Jones - Goldman Sachs Group Inc., Research Division
Got it, that's helpful. And then I guess, just a follow-up around Movianto, any update or comments or additional thoughts around where -- when you think that business could turn profitable?
Craig R. Smith
Yes. I think Bob, we're going to guide you back to the guidance that we feel were clearly in the guidance for the year.
So we're making good progress at Movianto, as I have said publicly. It's more of an expense opportunity for us as we build the pipeline for sales.
Originally, we had said it was a bit of a capacity opportunity, I think. We've got an expense opportunity too, but I think Randy put it very plainly in his remarks.
We're getting the business ready so that we can see some great progress in 2014. So we're taking our time, we're getting the business right to where we want it.
We're building the pipeline. I think we're doing all the right things.
We have a new leadership team in place. We now have a new COO under the CEO, who's got great operating experience.
And so, all the things that we're doing are building blocks to really position us for 2014.
Operator
Your next question is from Steven Valiquette of UBS.
Steven Valiquette - UBS Investment Bank, Research Division
A couple of questions for me. Just -- I'm guessing it's a way for the 10-Q for the gross margin split between Domestic and in International, or is there any chance you could give any color on that?
Richard A. Meier
I think we haven't in the past, and I think that's probably a good practice. I think from where we are, I think we want to keep with the long-term strategic view of moving more towards fee-for-service type businesses while we continue to aggressively manage the distribution business forward and focus on leveraging our provider customers.
I think we're going to try to focus on a consolidated gross profit margin, how that translate into operating margin. So I think we'll guide you that we were soft and nice progress, and we were very happy with our gross margin domestically.
But, overall, we're looking at a broader product mix and at consolidated gross profit margin.
Steven Valiquette - UBS Investment Bank, Research Division
Okay. And then did the Movianto acquisition help you win any Domestic 3PL business in the U.S.
in the quarter?
Craig R. Smith
I would say we're making good progress on several companies. I wouldn't have that right in front of me.
I think we gave you a little bit of a score card at the end of the fourth quarter just to give you some feel about some positive movement. I would say, we still are having positive movement in the first quarter and we are having discussions with companies that we probably would not have had, had we not done the Movianto acquisition.
So, overall, I'm pretty pleased with the discussions that we're having on a global and a Domestic basis.
Steven Valiquette - UBS Investment Bank, Research Division
Okay. And then, I guess, just going forward, if you lay out -- let's say, if you do win a big global 3PL contract, would you show the P&L implications of that on a split basis between Domestic and International segments?
Or would it just go onto one bucket? Just trying to think going forward how you would account for that.
And also, you're kind of tied into that. Going to forward, you want to be able to track the margins on the Domestic business on hospital distribution versus 3PL benefits, et cetera.
But just curious how you're thinking about if you win global 3PL contracts, how you're going to account for those?
Richard A. Meier
But first, let me say that would be a terrific problem had. As we look forward to making that, the accounting decision, we will definitely keep you posted on it.
But based on our segment reporting right now, I'd say we'd probably split it between Domestic and International. But I look forward to having that opportunity though.
Steven Valiquette - UBS Investment Bank, Research Division
Okay, that's helpful. And one last real quick one here.
On the discussion before on inventory, I may have missed this, but did you give the change in the LIFO provision in the quarter?
Richard A. Meier
No, we did not. As we start looking, and again, I think this goes back to the strategic change in the organization, as we move forward and continue to see increases in our fee-for-service business, that's going to have less of an impact overall.
So we decided that this was not really a valid data point, given that the overall changes in inventory or the impact on cash flow is really impacted by a variety of areas. So we decided that we would not be providing that on a quarterly basis anymore.
Annually, we will be short of showing that sort of inventor adjustment with the LIFO, which are FIFO sort of adjustment, and we'll show -- and we can talk about it at that point. But, overall, I just want to -- I think the impact of a variety of things affecting our inventory levels was really positive to the overall performance of the company in the quarter.
So we'll give more trends information on a going-forward basis.
Steven Valiquette - UBS Investment Bank, Research Division
Okay. I guess that's a little confusing, as I guess on the one hand, you're saying that brand inflation helped you, but then that would imply maybe you had a bigger LIFO charge in the quarter.
I'm just trying to compare that to the $5 million charge you had in the first quarter last year to figure out whether LIFO helped or hurt the earnings in the quarter. But I guess we'll have to do some guesswork around that, I guess.
Richard A. Meier
Well, just, again, just -- I think, overall, the changes in the inventory who had a positive impact on the overall financial statements as a company in the quarter. And I think going forward, we'll give you trends information, how that is working.
But again, we just think that the single data point creates more confusion than it is to help.
Operator
[Operator Instructions] The next question is from David Larsen of Swann.
David Larsen - Leerink Swann LLC, Research Division
Hey, can you please talk about the current excess capacity that there is for Movianto. It sounds like you reduced some cost, shut down a facility over there.
Is there any way to sort of quantify sort of what that capacity is now?
Craig R. Smith
Well, to be quite honest with you, it's probably relatively close to what I said last quarter. Remember, these deals, as we find these deals, do not happen overnight.
The more complicated deals will take somewhere between 6 to 8 months to ramp up to add the capacity. And what I would guide you back to is we're going to fill those buildings up.
That has never been a problem for Owens & Minor, and really has never been a problem for Movianto. It's having the right customers and the right product mix within those buildings.
I think our challenge really has been a little bit more around expense than capacity. I do know, anecdotally, we made good progress in 2 of the 11 countries in the first quarter in terms of signing new business.
But again, that does take a period of time to bring that over. So I think that, that actually -- we will be fairly successful, I think, over the next year to 18 months to do that.
Our challenge is, is to make sure we've got the right workforce, back to your point, the right buildings and that we've got the right management in place. So we do have the right management in place.
We are working on the cost structure of maybe not getting too much in the depth, getting things a little bit more organized over there. And I think that's our biggest opportunity for this year.
And then you'll see later in the second half of the year, the capacity starts to fill up.
David Larsen - Leerink Swann LLC, Research Division
That's very helpful. And then just as far as the Movianto business itself goes, can you sort of size how much of that revenue is fee-for-service?
I'm trying to get a sense for like the benefit to the gross margin. And then I'm assuming the vast majority of it, 80%-plus is pharma not med/surg supplies.
I mean, the other 20% would be med/surg supplies, is that correct or not?
Richard A. Meier
I think we'll give you, provide some data around what occurred in the first quarter. But I do want to sort of preface this by saying there is a certain amount of seasonality, and the fee-for-service and sort of by itself does change based on the underlying product mix in our customer base.
In the quarter, it was about 50-50 fee-for-service, and then particular buy-sell kind of arrangements. And I didn't quite get the second half of your question.
David Larsen - Leerink Swann LLC, Research Division
Movianto, all pharma?
Richard A. Meier
It is -- about half of it is -- more than half of it is the pharma business right now. So relative to the Domestic business, it is a little bit different.
But again, longer term, we're going to be continue to focus on leveraging some of our larger global customers on the supply side and see if we can change that mix.
David Larsen - Leerink Swann LLC, Research Division
Okay, that's helpful. And then just one more real quick one.
The $2 million in the exit costs, can you just sort of describe what those were? And do you think there will be more going through the rest of the year, or is that it?
And then, Craig, I'm sorry to keep harping on this, but you put a number out there, I think it was 4 to 5 for Movianto. Was that $4 million to $5 million in operating losses in terms of operating income for the International?
Craig R. Smith
No, no, no. Somebody was trying to get a sales number for the year and throughout a $500 million number, and I was bringing that down from the $500 million.
No, I did not give a loss number. That was more on the top line contribution for the year.
James L. Bierman
So David, this is Jim Bierman. In response to your question on the asset and realignment charges, as you would recall, when we met and talked about the 2013 targeted performance at our Investor Day, we talked in terms of their being about a $5 million exit and realignment charge that we would expect to record over the course of time in 2013.
The charges that were taken in the first quarter were totally within the context of that original plan. And we are on target with that plan, primarily relates to redundant capabilities that we had in certain markets.
Operator
There are no further questions at this time. I will now turn the call back over to Mr.
Smith for his closing remarks.
Craig R. Smith
Thank you, Janine, and thank you for everyone listening in today. And we will be active out in the marketplace talking to folks.
And we look forward to talking to you at the end second quarter and sharing our progress with you for the year. Thank you.
Operator
Thank you for your participation in today's conference, this concludes the call. And you may now disconnect.
Good day, everyone.