Owens & Minor, Inc.

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.

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?

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?