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spk08: Good day and thank you for standing by. Welcome to the Owens & Miner first quarter 2021 earnings conference call. At this time, all participants are on the listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, to Shandrika Nigam, Director, Investor Relations. Ms. Nigam, you may begin.
spk00: Thank you, Operator. Hello, everyone, and welcome to Owens & Miner First Quarter 2021 Earnings Call. Our comments on the call will be focused on financial results for the first quarter of 2021, our ongoing response to the COVID-19 pandemic, and our outlook for 2021, all of which are included in today's press release. I'd also like to call your attention to supplemental slides related to our 2021 outlook posted on our website in the Investor Relations section. Please note that certain statements made on this call are forward-looking statements which are subject to risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today, other than statements of historical facts, are forward-looking statements and include statements regarding our anticipated financial and operational performance. Forward-looking statements made on this call represent management's current expectations and are based on information available at signs such statements are made. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from any results predicted, assumed, or implied by the forward-looking statements. The company has explained some of these risks and uncertainties in its SEC filing, including the risk factor section of this annual report on Form 10-K and quarterly reports on Form 10-Q. Except as guided by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements. Additionally, in our discussion today, we will reference certain non-GAAP financial measures and information about these measures and reconciliations The most comparable GAAP financial measures are included in our press release and our annual report on Form 10-K. Today, I'm joined by Ed Pasica, our President and Chief Executive Officer, and Andy Long, our Executive Vice President and Chief Financial Officer. I would now like to turn the call over to Ed, who will start things off. Ed?
spk05: Thank you, Shandarika. Good morning, everyone. I appreciate you taking the time to join us on the call today. As I reflect back on the call from a year ago, we were still unsure of what COVID-19 pandemic had in store for us. But here we are today, continuing to battle the impact of COVID-19. At Owens & Miner, we are incredibly proud of the small role that we have played and that we will continue to play in this battle. It is our hope that it will soon be behind us so that we can serve our customers beyond their pandemic needs. However, in the meantime, I would like to again thank all the Owens & Miner teammates, along with all the frontline workers, for their dedication, sacrifice, and commitment to winning this battle. From a business perspective, the Owens & Miner team certainly stepped up in 2020. I am also very pleased with our continuation of the momentum and the utilization of our solid foundation built in 2020, which has enabled us to deliver a strong start to 2021. This strong start includes a record first quarter along with our raised guidance for the full year. And while it may be some time until we return to a more normal earnings pattern, it should be clear that we deliver on what we say we are going to do. In fact, delivering on our commitments is ingrained in our values and core to everything we do, whether working with customers, suppliers, teammates, or shareholders. And we have the Owens & Miner business blueprint as the foundation to continue to perform at the highest level and sustain success. The blueprint consists of our culture, our business discipline, and our investments, all of which are designed to provide long-term profitable growth. The investments in the business, our constant drive for operational excellence, and our customer-centric culture continues to pay off. And as I've said in the past, we will focus on the long term. You should expect a regular cadence of the following. Infrastructure investments across all business lines to stay ahead of the customer requirements and the non-stop pursuit of operational excellence with the expectation that we get better every day. Although it's still early in the year, we are well underway with reinvesting in the business. Here are just a few examples. One, We are developing a broader product portfolio and leveraging our manufacturing strength and brand equity. Two, we are expanding into new verticals to sell more products into different end markets. Three, we are selling across our businesses as one Owens & Miner. Four, we have begun to expand our own manufacturing capability for nitrile gloves in our existing factory. allowing us to have greater control and improved cost structure, and as a result, relying less on external manufacturing partners. Fifth, we continue to invest in technology like Q-Sight and MyoLens to ensure our offerings are amongst the best. Our technologies provide our customers with important data that is usable, timely, and reliable, while assisting our customers in managing their supply chains. And finally, we are also investing to provide customers with the best blend of both technology and touch across our distribution network. We do this so that we are able to meet our customers' particular needs with the ability to be flexible while scaling quickly, rather than force them into a cookie cutter and unscalable solution. We will be sharing more examples throughout the year But again, we are committed to reinvesting in the business for long-term profitable growth. Now let me dive a bit into the first quarter. During the fourth quarter earnings call, we told you that the momentum of 2020 would carry into 2021. And the year would begin much like 2020 ended. And that is certainly playing out. It is great to see the strong start with the first quarter better than the prior year fourth quarter, which is rare. However, The strong first quarter is a result of all of our businesses continuing to operate at a very high level of efficiency. Starting with global product segments, we continue to optimize our production to meet the ongoing elevated demand for PPE. This performance translated into very strong operating income, and our global product business continues to hit on all cylinders. And within our global solution segments, the medical distribution again showed operational excellence as we continue to provide best-in-class service and demonstrated the resilience that had been missing in recent years. With the outlook for elective procedures improving and our stable customer base, this business is expected to continue to improve. And once again, our Byram patient-direct business continued to grow nicely, as a result of strong operational execution combined with growth investments into e-commerce and portfolio expansion. We continue to be excited due to this business being very well positioned and an extremely attractive part of healthcare. In addition to the operations, it's important to note that we ended the quarter with a balance sheet that we are proud of and one that provides us flexibility to invest and grow. In the first quarter, we paid off another $44 million in debt, reducing our debt to below $1 billion, the lowest level since 2018. Our leverage is comfortably below 3x, and our credit profile has significantly improved, which led to the recapitalization during the first quarter that gives us a financial platform for growth. Now turning to the rest of the year, focusing on several key factors, including elective procedures, PPE demand, opportunity pipeline, and expectations of our Byron patient direct business. Related to elective procedures, we had good line of sight a few months out and continue to believe elective procedures will gain traction towards pre-pandemic levels. This expectation is consistent with our customer's outlook, but the timing and the extent of the return to normalcy remains less clear. However, as a data point, elective procedure activity continued to increase throughout the first quarter with an acceleration in March, and we see this momentum continuing into Q2. Next, we continue to believe PPE demand will work its way back towards a new normal and pricing will moderate as the year goes on, although today demand remains strong. We still believe ultimately the long-term demand for PPE products will be below the peak levels, but well above the pre-pandemic levels. Also, we remain very engaged with government and industry to address the future of PPE manufacturing and supply. Our largely North American owned and operated manufacturing resources and capability will continue to be a distinct advantage for us. As we think about our medical distribution business, we like how we are positioned. Our pipeline of opportunity has never been larger. and I regularly witness how well our value and breadth of offering resonates with current and prospective customers. And finally, I couldn't be happier with the recent performance and outlook for our patient direct business. Within this faster growing part of healthcare, our outlook for new patient capture, recurring revenue, and stellar management of the reimbursement cycle will lead to another good year. The strong start to the year as a result of our strategy and operational execution resulted in a record first quarter. The continuation of our strategy and execution has allowed us to provide new guidance range for adjusted earnings per share of $3.75 to $4.25 and an annual adjusted EBITDA range of $450 million to a half a billion dollars. As I've talked about before, everything we do is based on the Owens & Miner business blueprint focused on our culture, operational excellence based on the Owens & Miner business system, and strategic investment. This enables us to best serve and provide value for many years to come to all of our stakeholders, including customers, teammates, suppliers, and shareholders. We will be shedding more light on all of this at our investor day later this month. and I believe you will see why we are so excited about our future. Thank you, and now I'll turn the call over to Andy for discussion of our financial results. Andy? Thank you, Ed, and good morning, everyone. Today I'll review our first quarter financial results and the key drivers for our quarterly performance, and then I'll discuss our expectations and assumptions for the rest of 2021. We're pleased to report a strong first quarter with good growth in revenue and earnings per share. Earlier today, we announced our revised full-year adjusted net income guidance, which has been increased to $3.75 to $4.25 per share, and our full-year adjusted EBITDA projection of $450 to $500 million based on our current outlook for the remainder of the year. I'll elaborate on all of these in my remarks today. Beginning with the top line, revenue for the first quarter was $2.3 billion, compared to $2.1 billion for the prior year. This represents 10% growth that primarily occurred in our global product segment as the momentum that we achieved as we exited Q4 carried into Q1. As we guided last quarter, we've experienced and will continue to see higher nitrile glove acquisition costs relative to last year. And as previously discussed, higher glove costs are being largely passed through, resulting in higher revenues. In Q1, there was a revenue lift of approximately $160 million due to this dynamic. Also, I want to remind you that the bottom line impact is expected to be minimal over time, but in any particular quarter, this could have a positive or negative impact on earnings due to the timing of when price and cost changes hit the P&L. We have raised the expected revenue impact of the pass-through of these cost increases to $700 to $800 million for the year. Turning to gross margin, the first quarter was 19%, an improvement of 638 basis points over prior year due to strong revenue growth with favorable mix comprised of higher margin sales from the global product segment, favorable timing of the pass-through of glove costs, as well as improved operating efficiency. Distribution, selling, and administrative expense of $293 million in the current quarter was $39 million higher compared to the first quarter of 2020 to support top-line growth and to fund ongoing investments across all business lines, net of productivity gains. Interest expense of $14 million in the first quarter was down over 41%, or $10 million lower than the same period in the prior year. This improvement was due to continued debt reduction as a result of our disciplined approach to capital deployments. coupled with lower effective interest rates resulting from the improvements in our capital structure. I'll elaborate on this later in my remarks. The combination of our strong execution across the business and strength in global products coupled with productivity gains resulted in adjusted operating income for the quarter of $163 million, a five-fold improvement of $135 million compared to prior year. Adjusted EBITDA for the first quarter was $176 million, which was $135 million, or more than three times higher year over year. On a GAAP basis, income from continuing operations for the quarter was $70 million, or 98 cents a share. Adjusted net income in the first quarter was $111 million, which yielded an adjusted EPS for the quarter of $1.57, and represents an almost 40-fold increase compared to Q1 of last year. The year-over-year foreign currency impact in the quarter was favorable by $0.06. Additionally, it's important to remember that there were 10.4 million more shares in the first quarter 2021 EPS calculation than in the prior year as a result of the equity offering from the fourth quarter. Now we'll review results by segment for the first quarter. Global Solutions revenue was essentially flat year over year at $1.85 billion. The segment saw continued top line growth in our patient direct business, along with higher sales of PPE through medical distribution. Revenue was negatively impacted year over year as a result of having one fewer selling day in the quarter. Additionally, volume associated with elective procedures began to improve as we exited the quarter. However, it was still slightly behind where we were in Q1 of last year. Global Solutions operating income was $8.9 million, an increase of 15.6% compared to $7.7 million in the first quarter of last year as a result of productivity and efficiency gains on the back of our largely stable cost base in our medical distribution business. Turning to our global product segment, net revenue in the first quarter was $659 million compared to $391 million last year, an increase of 68.4% which was driven by significant growth in PPE, including the previously discussed impact of higher glove prices, slightly offset by the impact of lower elective procedures. Operating income for the global product segment was $164 million, nearly an eight-fold increase versus $19 million in the prior year's first quarter. The increase is attributable to higher revenue resulting from PPE capacity expansion, favorable timing of cost pass-through on gloves, productivity initiatives, favorable product mix, improved fixed cost leverage, and operating expense discipline. Foreign currency impact was favorable on a year-over-year basis by $5 million. Now let's turn our focus to cash flow, the balance sheet, and capital structure. In the quarter, we generated $25 million of operating cash flow, which was $68 million lower than the same period last year, primarily due to higher levels of working capital to support growth in the business. During the quarter, we achieved another milestone in our financial strategy by successfully issuing $500 million of senior unsecured notes due in 2029 while entering into a new five-year $300 million revolving credit facility and amending our three-year $450 million accounts receivable securitization facility. These actions provide additional liquidity and lower cost financing that enhances our operational and strategic flexibility as well as extending our debt maturity profile with no maturities until 2024. Our continued focus on enhancing our capital structure has resulted in significantly improved credit ratings. We were upgraded by all three credit agencies during the first quarter and expect further upgrades during the year. Accordingly, total debt at the end of the first quarter was $982 million, a reduction of $44 million versus year-end. I'd like to note that despite the working capital requirements associated with top line growth, we were able to lower the debt load and maintain our leverage profile well below three times EBITDA. We are very well positioned financially to execute our growth strategy by continuing to invest across our businesses. Turning to guidance for the year. Earlier this morning, we revised our guidance for 2021 upwards as our visibility into the third quarter improved. Our revised adjusted EPS guidance is now in the range of $3.75 to $4.25 per share. And adjusted EBITDA guidance is in the range of $450 to $500 million. Let me walk you through the assumptions that went into developing our guidance. We now expect revenue to be in the range of $9.6 to $10 billion, which will be driven by several factors. We now have improved visibility of the PPE market into the third quarter. While the timing is uncertain, we continue to expect post-pandemic PPE volume to normalize at levels lower than what we experienced during the peak, yet higher than pre-pandemic levels due to post-COVID changes in regulations, practices, and protocols in the healthcare industry. Our recently installed PPE capacity is expected to achieve full utilization during the first half of the year, and our recently announced glove manufacturing capacity expansion should begin contributing to our financial results in early Q1 of next year. Continued strength in Byram, our patient direct business, as a result of strong growth and the benefits of our investments to improve our B2B and B2C offerings. We continue to expect elective procedures to return to pre-pandemic levels during the second half of the year, and should pent-up demand for electives exceed pre-pandemic levels, there could be upside to our forecast. We expect further cost increases on the portion of our gloves that we source externally and have increased our expected pass-through of these costs in the range of $700 to $800 million for the full year. Gross margin rate is now expected to be in the range of 15.4% to 15.7% in 2021. Fluidity in the timing of glove cost pass-through is expected to be a headwind on EPS in the second half. Sudden unexpected declines in the market price of gloves could result in downside to our adjusted EPS projection. Interest expense is expected to be between $45 to $50 million for the year, reflecting lower debt levels and the benefit from our recent debt refinancing. EPS guidance is based on 71 million shares outstanding. Starting this quarter, we will be providing guidance on adjusted EBITDA, and for the year, we expect it to be in the range of $450 to $500 million. Finally, I'd like to remind you about the calendarization of earnings in 2021. As previously guided, we don't expect to see the typical seasonal pattern of earnings. Specifically, we expect adjusted EPS to be weighted towards the first half of the year. Please note that these key modeling assumptions for full year 2021 have been summarized on supplemental slides filed with the SEC on Form 8K earlier today that have been posted to the investor relations section of our website. Over the last several quarters, we have demonstrated our ability to consistently deliver improved financial results and enhancing our financial profile despite the challenging business environment. We continue to make progress on our strategic goals, and we are well positioned for growth in the future. Thank you, and with that, I'll turn the call back over to the operator to begin the Q&A session. Operator?
spk08: Thank you, sir. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. I show our first question. It comes from the line of Michael Charney from Bank of America. Please go ahead.
spk07: Good morning and congratulations on another very solid quarter. So I want to just dive in on this commentary you have on PPE. And as you think about the future, so many of the questions I think that you and so many others are trying to answer is what does owns minor look like in a post COVID world, whatever that means. And so as you think about the conversations you're having with your both customers and prospects now, what are they telling you in terms of how they foresee PPE being used and whether it's gloves, masks, gowns, whatever it might be, but all of the products that you sell in this future state that gets you comfortable with that well above pre-COVID level.
spk05: Hey, Mike, this is Ed. So thanks for the question. Thanks for joining us today. So I think we do spend a significant amount of time listening to our customers. And a couple of things we're hearing is what they've proven during this pandemic is that the high utilization of PPE, has drastically, you know, reduced infection spread, which is critical no matter what you're doing in a hospital. And, you know, the other thing they're telling us is that, you know, they believe that the healthcare protocols they put in place to solve that problem, you know, have been in place now for a year, and they expect those protocols and just the daily usage of PPE, you know, again, to remain significantly above where it was pre-pandemic. The amount of changes of PPE You know, it continues to be at that high level. In addition to that, we've had some customers say that, you know, while the shortage lasted, they were using certain aspects of PPE that now they're getting away from reusing it to now going back to more disposable because they have the ability to get more of that. You know, so that's why we believe it's going to be drastically higher than where it was pre-pandemic. You know, it will be slightly lower than it was at the peak, And we believe that because we think stockpiling is part of the reason why we think it would be slightly below that peak, but we still see customers continuing to build stockpiles or we're building stockpiles for them or we're creating idle capacity in our production lines so that way, should there be another pandemic, we have the ability to provide the product for them. The other aspect of this, if you start to think about it, is beyond the healthcare field. Currently, we're not selling to non-healthcare industries, whether that's retail, international, and consumers. There's opportunities for us once we get our customers completely satisfied with their PPE over the long term to continue to move into more or new adjacents or verticals with that product too. You know, I think, Michael, it's really the combination of the two things. It's back to, hey, health care protocols have changed. They've changed drastically. It's validated the fact that if you constantly reuse, you know, constantly use PPE and use it appropriately for the clinicians as well as anybody entering the hospitals, you can drastically reduce the spread of infection. Those protocols are in place. We expect those to continue. That's why we expect it to be much higher than it used to be. I think, you know, you continue to have the need for medical-grade PPE. You have stuff that was being reused, no longer being reused. You have stuff that was part of emergency use authorization, that that's being removed, that now they want more medical grade, and opportunities beyond healthcare for us to expand in other markets. That's what we're seeing, and that's why we expect this to continue, that demand to be well above pre-pandemic levels into the future.
spk07: And just along those lines, as you think about your global products business in particular, especially given the strong financial position the company is in at this point in time, how do you think about building out that portfolio? And essentially, given the window you've had into your client's infrastructure, especially during COVID, how do you think about where the portfolio sits right now versus other opportunities that you could have to drive incremental value over time?
spk05: Yeah. Michael, you bet. That's exactly right. And we're going to talk a lot about that May 26th at our Virtual Investor Day. Really, that's one of the key drivers for us to ignite growth going forward. It's that focus on that portfolio expansion. We've got multiple great brands in the market. We've got Halyard. We've got MediSoys. We've got other brands. And it's going to be the ability to broaden that product portfolio and with our brands that's going to drive and ignite significant growth moving forward. But, you know, to leave the teaser out there, you know, please plan on joining us May 26th at our Virtual Investor Day where Chris Lowry, who runs that business, is going to go into this in much greater detail.
spk07: Yep, I will certainly be there. Thanks for the questions.
spk08: Thank you. I'm sure our next question comes from the line of Daniel Grosslight from Citi. Please go ahead.
spk04: Hi, guys. Thanks for taking the question, and congrats on the continued momentum here. You know, product margins continue to come in much better than we in the street are anticipating. It's up around 750 basis points sequentially. You mentioned some of the drivers of that outperformance this quarter, but was curious if you could put a finer point on the particulars there. how much of that margin outperformance was due to this glove price-cost mismatch this quarter? And as we think about the rest of the year, should we think about run rate closer to where you ended last year in products margin?
spk05: Sure. Go ahead. I'll let Andy start, and then I'll add some color at the end. Good morning, Daniel. So, yes, in terms of a very, very strong quarter in terms of gross margin and overall bottom line performance sequentially, gross margins up over 200 basis points from where we were in Q4. And I think a lot of that is, as we talked about, the continuation of the momentum that we saw coming out of Q4 going into Q1 of this year as we approach more of the full utilization of the prior investments that we have put into place with our PPE capacity expansion. So we're continuing to get the benefits of the volume and the fixed cost leverage and the efficiencies that have come through in the quarter in the products business. And another dynamic in the quarter, as you pointed out, is this is really the first quarter where we've started to see the impact of the change in glove costs that are being passed through to us from the manufacturers where we actually do purchase gloves from the piece that we don't manufacture internally. And so the dynamic there is that, you know, the price changes in the market can be, market price changes can take effect much quicker than the cost changes. Remember, the cost changes take time because of, you know, delivery times overseas, and then they have to work their way through inventory. So there's a delayed effect. So those are really the two key contributing factors to the sequential gross margin improvement. And then, you know, looking long term, you know, first of all, I would point you to our full year guidance on gross margin for the year. you know, in that mid-15% range. And that really reflects the fact that the timing benefits of the glove cost pass-through will even out in the second half of the year. So I think that would be kind of more that long-term view looking towards the guidance that's provided. You know, I'm not asking Daniel. First, thanks for joining us on the call today also. And, you know, I'll add, you know, those two comments are spot on. It's either you have the timing on the gloves and that will balance out as the year progresses. Obviously, we have our margin projections for the full year that we disclosed. But the other side of it really is continuing to get fixed cost leverage and drive operating efficiencies. I talked about it. To make it as simple as this is we have to find ways to get better every single day, whether that we really leverage our own to minor business system and that continuous improvement. Frankly, when you think about the amount of additional product we have coming off our lines, the amount of volume we push through our factories, you know, we are continuing to learn how to be more productive and more efficient in the manufacturing of that PPE. And I think that also shines through in the first quarter, you know, as we're at, you know, continuing to produce as much product as we possibly can.
spk04: Got it. Okay. And then on your capital deployment priorities, you mentioned that you're investing in the business and working capital and inventory. I'm curious on your philosophy of continued debt pay down versus share repurchase versus a dividend increase for this year and next. How are you thinking about those capital deployment priorities outside of the investment in the business?
spk05: Yeah, I want to at least cover the investment in the business, and then we'll talk a little bit about the capital deployment outside of the investment. I think, Dan, what's important to understand is what we are not going to do is get caught flat-footed as the market continues to adjust. So we were clear. We invested in operational investments as well as inventory because we anticipated elective procedures to start to ramp back up. And that's exactly what they did in March. They really accelerated in March, and we made sure that we had the right inventory and the right operational investments expertise there to be able to deliver on that. So, you know, we put that as a key priority because that continues to build customer trust and continues to provide long-term partnership, long-term profitable growth, you know, for the business. You know, on the capital deployment side of it, you know, I think the way we'll think about it is, you know, as Landy's talked about this a lot, you know, we're going to have a disciplined capital investment approach. You know, we're going to focus on opportunities to invest for long-term profitable growth within the business. And I think related to dividend, the way we think about it right now, there are a tremendous amount of opportunities we have to invest that we believe can provide that long-term profitable growth at high levels. And that's going to be our primary focus. With that, let me turn it over to Andy to add maybe a couple more comments on how we progress to see our debt and debt leverage going forward. Absolutely. Thank you, Ed. You know, in terms of, as Ed said, you know, our capital deployment strategy and process being very disciplined, and I agree with Ed. I think, you know, the priorities in the business are reinvesting in the business, and that manifests itself in both in operating, if you'll see that, hitting the P&L through operating expense investments, as well as you'll notice in the quarter, we did increase our guidance on capital expenditures for the year. So we do plan to expand our investments on both fronts. And Looking long term, I think the cash flow that's being generated with the business will have ample funds to fund those investments in the business and still have cash flow left over to continue to make the improvements that we've seen in our balance sheet. We're still targeting to be in that two to three times leverage range, and quite frankly, being at the lower end of that range is very realistic in the short and long term. Got it.
spk04: Thanks, guys.
spk08: Thank you. Asha, our next question comes from the line of Jillandra Singh from Credit Suisse. Please go ahead.
spk01: Thank you, and good morning. Congrats on a good quarter. I actually want to better understand the global solutions revenue trends in the quarter coming in at flat year over year but down 5% sequentially. Can you provide some of the factors that drove sequential decline in revenues in that business? And excluding the impact of glove costs passed through, do you expect that business to sequentially grow for the rest of 2021?
spk05: Thanks for joining us on the call. So I think first and foremost, so that business is really made up of two items. It's our medical distribution and our patient direct business, our Byron business. And both of those businesses were negatively affected by one less billing day in Q1 this year versus Q1 last year. So that was one of the impacts on it. You think about it, it's a consumer-based business. If you have less days in the court, less billing days, you have less revenue. You know, I think there is a clear expectation, and we're seeing that already, for that business to continue, that business should be able to continue to grow. You know, we look at that business in a lot of ways. You know, that business, when I say that business, the medical distribution, we're sitting there with net new wins. So PPE aside, we've got net new wins that we're beginning to implement. We started implementing many of those at the end of Q1. In addition to that, we've seen elective procedures starting to ramp in March, and we expect that to continue through the year. And like I just spoke earlier, we are well positioned on that to make sure we have the ability to capitalize on that as the elective procedures start to ramp, we're there ready to serve. I haven't talked about this, but our pipeline of opportunity in our medical distribution is greater than it's been in my two years that I've been here. There are more opportunities for us to continue to capture and then capture new wins. The reality is though any of those you do, it takes probably six to nine months until you start to implement those. So those would be late in the year as possible. In addition to that in Global Solutions, we continue to work with our customers to renew contracts in advance of the expiration. So that way you don't have that risk when it's out there. If you look at our patient direct business, that's part of it. We continue to grow our existing relationships with our customers and broaden what we do for them We're entering into new relationships to expand our market opportunities in various existing chronic conditions that we currently support. In addition to that, we've invested in our patient direct business in pursuit of organic growth in under-penetrated areas. So those are all the reasons why we expect this segment to continue to be strong and strengthened as the year progresses. And I think the first quarter is really a result of, you look at it year over year, Again, one less billing day year over year that had a slight impact on it.
spk01: Yeah, actually, can I follow up on your comments around patient-direct business? Can you be more specific, like what are the key drivers, kind of driving out performance there, and how much of that is sustainable, and maybe talk about some initiatives you have focused to further drive growth in that business?
spk05: Yeah, so I'll just cover a couple, which I just briefly touched on before. So, You know, we looked at our commercial organization and did an analysis across the U.S., and we recognized there were some pockets where we were underpenetrated, and we actually invested in new commercial resources in those areas to capture share in different parts of the U.S. where we already have relationships with the payers. So that's one example of a simple investment. You know, another is we brought on a new line in an existing chronic category that we were in. It was just an expansion of additional products within that line where we're seeing significant growth. And then lastly, our presence in diabetes. We have a strong presence in diabetes, and that is one of the fastest growing areas of healthcare that's also driving the ability to grow. And then you look at it more from a macro level, Shalindra, and you think about home health. The one thing the pandemic has proven is home health is here to stay. And it's going to, we believe it's going to be able to continue to grow at a very fast pace. And we believe that, you know, because we can impact 85% of insured Americans with our contracts and relationships as that grows, we have the ability to grow.
spk01: Okay. And the last one quick here, uh, with the sequential decline in EPS, uh, from first half to second half this year, which you are indicating and the guidance seems to imply, are you still comfortable with the double desert EPS growth in 2022? Because a double-digit growth next year would imply much higher growth compared to second-half run rate, maybe just quite quickly there.
spk05: Yeah, we haven't disclosed 2022 guidance yet, and that will happen later in the year.
spk01: Okay, thank you.
spk08: Thank you. I show our next question. It comes from the line of Robert Jones from Goldman Sachs. Please go ahead.
spk03: Good morning. Thanks for taking the question. And I guess just to go back to some of the rationale behind the guidance raise, it sounded like improved line of sight was a part of that. You know, obviously seeing ahead in this, you know, this pandemic window around PPE is obviously challenging, but interested in those comments. Could you maybe share a little bit more detail regarding how you're expecting things to trend relative to the results you posted this quarter? And, you know, couldn't help but notice you mentioned a few times, you know, PPE volumes, you know, obviously normalizing at some point. point beyond peak levels. Are we at peak levels today as you think about the line of sight over the balance of 2021?
spk05: I would say right now, if I think about where we are as a company, we are probably at that peak level. Our machines are running outside of gloss. Let me separate gloss from this conversation. All the investment we made, we're still running at capacity We still have strong demand. And I think this is the other aspect of why we think it continues with us. We're one of the few companies that actually manufacture our own product. We're one of the few companies that manufacture it on scale. We're one of the few companies that manufacture the entire suite of broad-based portfolio line of PPE. So all of those become important because you can come to one location and get fit tested for, you know, N95s and we can provide all the products that's needed versus having to work with 30 or 40 different, you know, smaller manufacturers. I think, you know, that's something why, you know, we see ourselves at Teek and that extending for an extended period of time, you know, plus, you know, some of the longer term relationships we've worked with all the support, we've worked with our customers because of all the support we've provided them during the pandemic. You know, so that's critical. The one area I would say no on is, is, our glove manufacturing. So we talked last quarter that we are doing a significant investment in our factory in Thailand to expand our gloves. In addition to part of that investment we're doing is we're continuing to enhance our employee workspace too. So we're really setting that up for growth of our own manufacturing of gloves. That's the one area where there still is constraints and it gives us the ability to help fill some of those demands. So I would say that gloves is still not at its peak. And that's how we see that PPE space going forward.
spk03: No, that's helpful. And I guess maybe just one big picture question, and I have a feeling we'll probably wait for the analyst day for more on this. But, you know, clearly improving the balance sheet has been a big focus, you know, as you and Andy discussed in the prepared remarks. As you think about that, you know, normalized PPE level, you know, below peak but above historical trend and then, you know, thinking about where you are on, you know, on the distribution side and obviously that, you know, will recover, you would imagine, as, you know, the industry and utilization recovers. Do you think about adding like a third leg to the stool or when you think about capital deployment and investment, is it really more within the two businesses that you currently obviously operate today?
spk05: Yeah, we are going to cover that in a little more detail on May 26th of where we're going to be investing. But I think let's hold it until then if we can because I could start to get into it here, but it would take a long period of time. But I prefer holding it to May 26th when we talk about capital deployment, our M&A strategy, as well as our investments into what businesses we're going to invest in. That's fair. Looking forward to it. Thanks, Ed.
spk00: Yep.
spk08: Thank you. I show our next question. It comes from the line of Eric Coldwell from Barrett. Please go ahead.
spk02: Thanks. Good morning. I was hoping you could just hit quickly on cash flow, the influences in the quarter, and then how you see cash flow phasing through the year. And I have a couple of follow-ups. Thanks.
spk05: I'll let Andy take that one. Good morning, Eric. As we look at cash flow, Cash flow in the quarter generated about $25 million, and that was lower than where we were last year at this time. And there's really a number of factors driving that lower cash flow figure. And I'd say probably first and foremost is working capital investment. So with growth in the business, we're continuing to invest in working capital. I think the good news is that accounts receivable is performing as we expected. Days are in line with where we want it to be. Our aging profile is good. Inventory is up. That's consuming cash. But again, that's a very proactive, meaningful investment in inventories that is talked about, right? We want to maintain service levels. We want to put in inventory in advance of new customer wins. We want to make sure inventory is available should elective procedures tick up. And when they did tick up, we were ready for it. So that's all very purposeful and intended investment. I'd say probably the drain on working capital is historically when inventory is up, you get a nice offset in your accounts payable. And that's not happening for us. And a key driver of that is really it comes back to gloves. You've seen the impact that gloves manufacturers, third-party manufacturers in Asia, the influence that they've had on pricing. We've talked about that a lot. Well, they also have influence on payment terms. So what we're seeing is that we're accelerating payments in some cases to glove manufacturers. The cycle time then to get the product into the United States has been delayed as the backups in the West Coast with the ports getting product in. So that's caused the delay. And the combination of the two, Eric, has really led to the fact that we're seeing longer cash collection cycle times. And that's that's caused a little bit of a drain on working capital. Now, again, over time, we expect that to work out and even out and improve as we move through the year, but that's certainly played a big factor in the first quarter. Just another comment on cash flow that's unrelated to gloves, just to note that while we did increase our guidance on capital investment, capital expenditures, that also will be very tail-end loaded. Our guidance is in the $80 to $90 million for the year. I think we spent less than $6 or $7 million in the first quarter, so expect that to have a drain in the second half of the year.
spk02: That's a great answer. Thanks for that. The other one I had remaining was just... Maybe putting a little more pressure on to see if you would actually quantify the impact of the profit timing on the nitrile gloves in the quarter. We all realize that that is expected to be net neutral to profit over time, but it would be helpful to understand the actual influence in Q1. I don't know if you want to do dollar terms or percent of the operating margin increase in global products or however, but a little finer point on the actual influence of that would be, I think, very helpful to everyone.
spk05: Sure, Eric. So I guess the two data points that I would point you to in the quarter would be, you know, the top line impact of the $160 million, you know, and again, the guidance that we've tried to provide on the full year of the $700 to $800 million impact. So that's one data point. And in terms of margins, you know, while we haven't really disclosed, you know, any of the many drivers of our gross margin improvement, the one point that I would probably turn to is just looking at the sequential profits change in the global product segment from Q4 to Q1, the 75% pull-through that we saw sequentially. So that might be another data point to help quantify the impact. But you're absolutely correct that we expect that tailwind to become a headwind in the second half of the year as cost catches up with the price increases and And over the long period, long term, we expect as those prices and costs normalize that that impact in total over that period will be very minimal. And even with that, though, even with that balancing through the year, front half versus back half of the year, we're still extremely comfortable and confident in our new range that we put out there.
spk02: Yeah, no, that's great. So not unreasonable to assume that. global products margin would have been somewhat similar to second half 20 absent this impact? I think for modeling purposes, I think that's reasonable. Yeah. Thanks very much, guys. I appreciate it.
spk08: Thank you. I assure our next question comes from the line of Kevin Caliendo from UBS. Please go ahead.
spk06: Thanks. Thanks for taking my question. I wanted to talk a little bit about the solutions margin. I know there's some seasonality to it, and you talk about some of the improvements. Was there anything one time in nature that affected margin this year other than sort of the volumes? And how should we think about the progression? I know it increased year over year. Should we expect sort of a year over year improvement similar to what we saw in terms of absolute? basis points on a quarter-by-quarter basis. You said it would improve over the course of the year. I'm just trying to understand how to think about modeling the operating margin for that business going forward.
spk05: Good morning, Kevin. It's Andy, and again, thank you for joining us today. So we're looking at global solutions margins in the first quarter and specifically looking at it sequentially from Q4. So you did see the volume drop off sequentially Q4 to Q1 on the top line. Again, key drivers is historical seasonality and also just slight easing of pandemic volumes. And then you see the corresponding margin change as a result of volumes. That's one of the key drivers. Also, there's an element of seasonality in the global solutions business, and in particular, it's driven by our patient direct buyer and business. And the reason for that is as you get into the first quarter of the year, you see a change in your payer mix, right? So you see it more weighted towards the individual or the consumer as opposed to the payer, and that's because the individual has not yet met their deductibles. And with that mix shift more towards the payer, we appropriately reserve for that payment or collection risk that's associated with that. And again, that eases as you move through the year as the payer mix normalizes and shifts back towards the payer. And then we continue to invest in the business and drive productivity. So I think those are really the four dynamics that drive that business sequentially. And then longer term, as we look at that business, again, The patient direct business continues to perform very strong, and that continues to drive solid margins. And in the medical distribution business, as we've said, it's really a fixed cost leverage game, right? So the additional volumes that we can put through that business should generate additional fixed cost leverage in that business. And I'll add just a little bit of comment on some of those investments. I mean, I talked about it earlier. Not only do we invest in inventory and working capital, We also invested in some operating expense for one, electric procedures ramp up, and two, for new wins. So we wanted to make sure when we do have a new win, we'll actually put the expense in advance of the implementation so that way the implementations are flawless. And we've had several of those that happened in the first quarter where we did put the expense in in advance to make sure we were prepped and the execution of those implementations went flawless. Three customers reached back out to us, complimenting us how, you know, the only thing they saw was the next day an Owens & Miner truck showed up. We probably just had somebody else's. But they got all the product they needed. Stuff showed up on time. It was accurately picked, and it was everything they needed. So, you know, we'll make those investments in advance, and we did some of that in Q1.
spk06: That's great. And just a quick follow-up. You talked about the impact of the gloves and the pull-through this quarter. and how that's going to normalize over the course of the year. But if we think about the net, net, net, the impact that we saw in 1Q versus the normalization expected over the rest of the year, so we think about that sort of normalizing going forward for your gloves business. Is the margin similar to the rest of PP&E? Is it higher? Is it lower? How should we think about that longer term?
spk05: Yeah, we really have not talked about within PPE, you know, or within global products, even specifically any commentary on margin profiles of specific categories or product lines within global products.
spk06: Well, okay. If I'm to say the pull through is 75% this quarter, the rest of the year, is it, you know, break even? Is it still positive, your expectation? Like, you know, any sort of help to try to think about that part of the business. We can kind of back into it, but I think we've all kind of done the PP&E pull-through on margin in the past and tried to figure out sort of what it's been. I'm just wondering if gloves, if you think that gloves would be typical to the rest of PP&E, without giving us numbers, but would it be higher margin, do you think, or lower margin than what you're seeing with the rest of your PP&E business?
spk05: I would say really the only thing I could point to to help you out here would be that the pull through sequentially Q4 to Q1 in global products was higher than normal, and I'd say that's largely attributable to the dynamic we just described. And then I would look to the full year gross margin guidance, knowing that probably the big fluctuation is going to happen in our global product segment as opposed to the global solution. And I think over time, it's been all balanced out, too. Over long periods of time, that dynamic should even out. And even in light of that, that's, you know, we're still extremely comfortable and confident in our new range that we put out there, even in light of that balancing of it out in the back half.
spk06: No, that's helpful. I appreciate it. Thanks so much, guys.
spk08: Thank you. And I show our last question. It comes from the line of Michael Mintak from J.P. Morgan. Please go ahead.
spk09: Yeah, good morning, and thanks for taking the questions. So just putting aside the unique dynamics with respect to exam gloves, can you talk about what you're seeing with respect to current pricing trends in the spot market for other PPE categories? Do you still see prices elevated relative to historical levels? And I guess, you know, once supply demand does begin to normalize, you know, what are your assumptions around, you know, where we could ultimately see spot pricing go relative to pre-pandemic levels? Just trying to better understand the dynamics at play there.
spk05: Yeah, so we see spot pricing continuing to be fluid, and we talked about this in the fourth quarter, about in the fourth quarter. You know, we do see spot pricing coming down from the peak of pandemic, you know, but we still are, you know, our pricing, because we have contractual relationships with our customers, are below spot pricing, spot by pricing, you know, which is what we've tried to live through the process is whatever contract pricing we have, we're going to honor that. versus going out and adjusting based on spot price. So we are seeing them come down. We did see gloves go up drastically. We're starting to see that balance out. And again, gloves is probably the exception right now, the outlier on that. But we would anticipate it to continue to adjust as we go forward. But again, I think what's critical is we think the usage in the demand for PPE will remain much higher than it was before. This business was profitable pre-pandemic, you know, at pre-pandemic pricing, and it will continue to be profitable, you know, post-pandemic and post-pandemic pricing, which we expect, obviously, demand to be much higher than it was before, which enables us to get significant throughput and leverage in our manufacturing facilities.
spk09: Got it. That's helpful. And then maybe just a quick question around GPO contract renewals. Can you talk about, you know, how you see those sort of playing out and how that impacts your results, I guess, maybe relative to what you've seen in the past around those renewals?
spk05: Yeah, so we recently renewed Vizient. That's a two-year renewal. We're continuing to work with, you know, our two other key GPOs, Health Trust and Premier. And, look, we've got, you know, great relationships with them. I mean, I think during the pandemic, You know, we've really strengthened that relationship. We did everything we could to help, you know, all of their members. You know, we expect to continue to work with them and move forward.
spk09: Got it. Thanks for the comments.
spk08: Thank you. That concludes our Q&A session. At this time, I'd like to turn the call back over to Mr. Ed Pasica, President and CEO, for closing remarks.
spk05: Well, let me first start by thanking everyone for joining us on the call today. Let me also add a comment that I would like to thank all the owners of mine or teammates who really had the privilege to work with side by side over the last two years and the amount of effort and work that our teammates have done to go out and support the cause to fight this COVID-19 side by side. And I would be remiss not to thank the frontline workers who have basically done everything they possibly could over the last 14 to 15 months in this battle. You know, I'll close by adding this is, you know, pleased with the way Q1 started and the year started, but we still have a lot of year left in front of us and a lot of hard work ahead of us, which, you know, we expect to continue to be successful as we move forward. And then lastly, close with, you know, hopefully we'll hope to see everyone May 26th, virtually see everyone May 26th, when we're going to do a deeper dive into Owens & Miner and how do we ignite growth into the future. So thank you. this concludes today's conference call thank you for participating you may now disconnect
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