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spk01: Thank you for your patience, please continue to hold your conference call will begin momentarily. Thank you for your patience, please continue to hold your conference call will begin momentarily. THE END Good day, and thank you for standing by. Welcome to the Owens & Miner second quarter 2021 earnings conference call. At this time, all participants are in a 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's second quarter 2021 earnings call. Our comments on the call will be focused on financial results for the second quarter of 2021 and our outlooks for 2021 and 2022, 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, of 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 the time 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 filings, including the risk factor section of its annual report on Form 10-K and quarterly reports on Form 10-Q. Except as required 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 to 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 Pisica, 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.
spk04: Thank you, Chandrika. Good morning, everyone, and thank you for taking the time to join us on the call today. I would like to start with a high-level recap of the strategic priorities that the Owens & Miner leadership team and I outlined during our Investor Day meeting in late May. I spoke about our transformation based on our business blueprint that focused on one, our culture, a culture that is based on hard work, stellar execution, and an unrelenting focus on our customer. while being anchored by our mission and our ideal values. Next, our discipline, which is based upon the owns and minor business system that is laser-focused on continuous improvement. And third, our investments, our investments that are implemented in a disciplined manner, enabling us to achieve our strategic priorities. These three elements are ingrained in our corporate DNA, have set the foundation of our business blueprints, and have enabled us to ignite long-term profitable growth. As committed during the Investor Day meeting, I will provide periodic updates. Today, let me start with an update on some of our investments which we spent time at our Investor Day detailing. These investments remain on track and are designed to provide attractive returns for our stakeholders. Let me remind you of a few. we continue to expand our own manufacturing capability for nitrile gloves in our existing facility in Thailand. This will put us in an advantage position, allowing us to have greater control and improved cost structure. Our new capacity is expected to go live in early 2022. Two, we remain focused on leveraging our manufacturing strength and brand value through the expansion of our product portfolio. During the second quarter, we doubled our wound care product line and we remain on track to expand our incontinence care portfolio later this year. Furthermore, we continue to identify additional product category opportunities to expand our proprietary product offering in the future. Three, we are also diversifying into new verticals to sell specialty higher margin products into new end markets. For instance, we expanded into clean room glove market space under the Halyard Pure Zero brand, In addition, we recently launched our SafeSkin consumer brand of gloves. Next, we continue to invest in technology-based offerings that provide our customers with actionable data through our service solutions. And finally, we are focused on the balance between technology and touch in our distribution centers with continued investment in automation, AI, and human capital, all of which expand our leading ability to be flexible and scalable to provide best service for our changing customer demands. These initiatives are just a few examples of how we are investing to generate long-term profitable growth while providing significant benefits for our customers. In addition to having the Owens & Miner business blueprint in place and the investments that I just discussed, I'm equally proud of our focus on corporate social responsibility. We are committed to delivering on both our financial and our corporate social responsibility obligations. So far this year, we have launched the Owens & Miner Foundation, which is committed to improving our communities in which we operate and live. Two, we released our first sustainability report, detailing the advancement that Owens & Miner has made in ESG. And three, we undertook a first step in reducing our carbon footprint with our Electric Fleet Pilot Initiative. Our ESG efforts, just like our business blueprint, are part of who we are and that good corporate citizenship is fundamental to our mission and values. Let me now shift gears to our second quarter performance. I am extremely pleased to report another strong quarter that continues to build upon the solid performance from 2020. A year ago, we were in uncharted waters due to the pandemic. but our ability to be flexible and adjust to meet the critical needs of our customers and the nation helped to establish momentum that is carried into the second quarter. Additionally, we continue to find ways to keep driving efficiency and be more productive as markets begin to return to pre-pandemic form. Now let me update you on the segments, and I will start with our global solutions segments. Within this segment, the medical distribution business performed well and posted much improved results. We continue to bring in net positive wins as a result of our market-leading service combined with the trust we gained during the pandemic. In addition, we saw volumes associated with electric procedures return to pre-pandemic levels during the second quarter. Related to our patient direct business, we continue to grow through new patient capture in this rapidly growing patient direct market. And finally, our ongoing investments in our global solution segment are expected to provide continued growth and an attractive long-term outlook. Moving on to the global product segments, this segment produced significant top-line growth as sales of our surgical infection and prevention products, including PPE, remained strong. The strong sales are a result of our increased output of previously added capacity to fulfill continued high usage, share gains made during the pandemic, stockpile fulfillment, and increased elective procedures. In addition, we saw favorable timing for cost pass-through on gloves, adding to the top-line growth. In addition to the solid performance in our two reporting segments, our balance sheet remains strong, with net leverage at 1.8 times and total net debt of less than $1 billion. This gives us the latitude to continue to make well-thought-out investments to improve our operations and drive growth. Moving from the second quarter and looking to the rest of 2021 and beyond, we are excited about the long-term future. We expect the rest of the year to be driven by SNIP utilization, elective procedures, opportunity pipeline, and continued strength of our patient direct business. In addition to this, we will continue to have a tenacious focus on operational excellence and continuous improvements. Starting with SNIP, as we have said, we believe that the usage for SNIP products, including PPE, will be defined by the new normal, the new normal in the healthcare industry. We continue to believe that usage for many PPE categories will settle somewhere below the peak of the COVID-19 outbreak, but in excess of the pre-pandemic levels as a result of established healthcare protocols, stockpile requirements, and our share gains obtained during the pandemic. In addition, we expect the expansion of our PPE into new markets like clean room and consumer to provide incremental opportunity. However, as the year progresses, we expect moderation in both pricing and demand for PPE. But let's not forget another factor to consider, that is the elimination of PPE emergency use authorization, which will create opportunity for our Americas-based manufactured medical grade PPE. Let me give you a few examples. First, most recently the FDA revoked emergency use authorization for non-NIOSH approved disposable respirators, which will prohibit the use of these devices in the healthcare setting. Second, the CDC has recommended that healthcare facilities return to conventional practices and no longer use crisis capacity strategies like bringing in non-medical grade supplies. And third, the EUA for decontamination and bioburden reduction systems has been revoked. All of these actions by the federal agencies bring to light the significance of authorized medical-grade PPE in the healthcare setting. Our unique value chain of vertically integrated Americas-based manufacturing footprint and supply chain will remain a distinct advantage for us as we continue to work closely with the government and industry to help address the current and future needs for PPE requirements. Next, on elective procedures. By the end of the second quarter, we saw elective procedures return to pre-pandemic levels, and we expect this to continue through the second half of the year. This expectation is consistent with our customers' outlook and assumes COVID rates don't get markedly worse across the country. Moving on to our pipeline. Our medical distribution continues to provide best-in-class service and is backed by our complete suite of products and services. These together provide one of the industry-leading offerings to best serve our customers. We will continue to advance with a large pipeline of opportunity while capturing net new wins. Again, our medical distribution continues to provide market-leading operational performance and stability that supports our customers' need for continuity of supply, and supply chain resiliency. And lastly, our patient direct business. Our patient direct business enjoys a leading national presence as the partner of choice for referral sources. We are uniquely positioned to meet the needs of our customers in this fast-growing home health space. We expect this business to continue to grow across our major product categories with an annuity-like recurring revenue model. I'd like to conclude by underscoring the success we've achieved during the quarter. Our strong second quarter gives us the confidence to affirm the range of our 2021 guidance for adjusted EPS of $3.75 to $4.25 and adjusted EBITDA of $450 million to $500 million, as well as affirm our previously issued 2022 guidance. We continue to be excited about what's ahead. We have one of the strongest value chains in the healthcare solutions market while having the ability to be flexible in scale along with the financial flexibility to invest as appropriate. And finally, we have our great teammates that exemplify our ideal values every day and live our humble mission to empower our customers to advance healthcare as we continue to deliver on our commitments to our stakeholders. 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 financial results for the second quarter and the key drivers for our quarterly performance, and then I'll discuss our expectations and assumptions for the balance of the year. I'd like to start by saying that we're delighted to report a record second quarter with solid growth in revenue, EBITDA, and earnings per share. We're maintaining our expectation for adjusted EPS in 2021 to be in a range of $3.75 to $4.25 and adjusted EBITDA in the range of $450 million to $500 million. Also, we are affirming our previously announced guidance for 2022. I'll provide additional color on this later in my remarks. Let's begin with the results for the second quarter, starting with the top line, Revenue for the second quarter was $2.5 billion compared to $1.8 billion for the prior year. This represents 38% growth with strong performance in both of our segments. Top-line growth in the quarter was driven by ongoing recovery of elective procedures, glove cost pass-through, and higher levels of PPE. Gross margin in the second quarter was 16.1%, an improvement of 117 basis points over prior year due to revenue mix from higher margin sales in the global product segment and patient direct business, timing of the pass-through of glove costs, and improved operating efficiency. These were partially offset by higher commodity prices in global products and transportation costs across the business. Also, compared to Q1, gross margin was lower by nearly 300 basis points due to margin compression in gloves as anticipated and discussed last quarter. We also began to see commodity and transportation inflationary pressures in the beginning of the quarter and expect this to continue through Q3. Distribution, selling, and administrative expense of $294 million in the current quarter was $52 million higher compared to the second quarter of 2020. The increase represents higher variable costs to support top line growth, funding of ongoing investments across all business lines, and higher incentive compensation driven by our financial performance. This performance, coupled with efficiency gains from enterprise-wide continuous improvement, led to adjusted operating income for the quarter of $116 million, which was $77 million higher or three times the same period last year. Adjusted EBITDA for the second quarter was $128 million, which increased by $76 million or over two times year-over-year. Interest expense of $12 million in the second quarter was down 47% or $10 million compared to last year, driven by lower debt levels and affected interest rates. On a GAAP basis, income from continuing operations for the quarter was $66 million or 87 cents a share. Adjusted net income for the second quarter was $80 million, which yielded an adjusted EPS for the quarter of $1.06, which was over five times our performance from Q2 of last year. The year-over-year foreign currency impact in the quarter was unfavorable by two cents. In the second quarter, the average dilutive shares outstanding were $14.7 million higher year-over-year as a result of our equity offering in the fourth quarter of prior year and the impact of restricted shares for compensation. Now I'll review results by segment for the second quarter. Global Solutions revenue of $1.98 billion was higher by $429 million, or 28% year-over-year. the segment experienced continued growth driven by ongoing recovery in volumes associated with elective procedures of approximately $300 million, along with higher sales of PPE, as well as continued strong growth in our patient direct business. During the quarter, elective procedures continued to move towards pre-pandemic levels while we recognized that a number of COVID hotspots remained throughout the country. Global Solutions operating income was $18.5 million, which was $29 million higher than prior year as a result of higher volumes coupled with productivity and efficiency gains in our medical distribution business. In our global product segment, net revenue in the second quarter was $689 million compared to $370 million last year, an increase of 86%, which was led by higher SNIP sales, particularly PPE volume, as we benefited from our previous investments to expand capacity and and the previously discussed impact of passing through higher glove acquisition costs of approximately $200 million. Operating income for the global product segment was $95 million, an increase of 84% versus $52 million in the second quarter last year. This was driven by higher PPE sales, favorable timing of cost pass-through on gloves, productivity initiatives, and improved fixed cost leverage. These were partially offset by higher commodity prices and elevated transportation costs. Next, let's review cash flow, the balance sheet, and capital structure. In the second quarter, our cash flow was negatively impacted by our investment in working capital to support top-line growth, inventory build to ensure supply given numerous supplier issues, global transportation delays, and continued unfavorable payment terms with glove manufacturers. We expect working capital to improve throughout the second half of the year as global supply chain issues subside and as payment terms to glove manufacturers return to historical levels. As a result, we continue to expect 2021 cash flow to be back-up loaded. Total net debt at the end of the second quarter was $964 million, and total net leverage was 1.8 times trailing 12 months adjusted EBITDA. I'd like to highlight that despite our working capital consumption, we maintained our leverage profile below two times adjusted EBITDA. Still, the improvements we've made to enhance our capital structure provide us with the operational flexibility and put us in a strong financial position to implement our growth strategy. Our achievement in this regard was recently rewarded with another credit upgrade from S&P last month. Finally, turning to the outlook. Earlier today, we affirmed our guidance for 2021 and 2022. The confirmation of our guidance range for 2021 is a result of our strong Q2 performance and improved visibility into the second half of the year. Let me provide some context on the assumptions for our outlook. Our recently installed PPE-related capacity has been fully deployed, and our previously announced glove manufacturing capacity expansion is on track to begin contributing to our financial results in early Q1 of next year. We now expect the full-year top-line impact of glove cost pass-through to be in the range of $675 to $725 million. Any sudden unforeseen declines in the market price of gloves could result in downside to our revenue and adjusted EPS projection. In addition, we believe our patient direct business will continue to perform above market and demonstrate attractive patient capture and retention rates. As I mentioned earlier, elective procedure related volumes are at or very close to pre-pandemic levels in much of the country, and we expect the trend to continue in the second half of the year. As experienced in Q2, we are now including a headwind from elevated commodity pricing and transportation costs and expect this to continue through Q3. Guidance for adjusted EPS is based on 75.5 million shares outstanding. The increase in our dilutive share count is related to the treatment of certain performance share grants and incremental restricted stock grants driven by our strong financial results. Even with a 6% increase in shares and new inflationary headwinds, we are confirming our outlook for 2021, 2022, and targets for 2026. In terms of the calendarization of our guidance, starting with revenue, we expect Q3 revenue to decline slightly from Q2 as the pass-through of wealth costs begins to ease. The 2021 quarterly earnings pattern is contrary to our typical seasonality, with most of the year's profitability weighted towards the first half of the year. Specifically, we continue to expect Q3 earnings to be softer than Q2 due to the timing of glove cost pass-through. However, we expect Q4 to improve due to the seasonal impact of healthcare utilization across our businesses. Also, remember that cash flow is expected to improve in the back half of the year as working capital headwinds soften as previously discussed. 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 and have been posted to the investor relations section of our website. In closing, I'm delighted with another strong quarter and proud of the efforts of our teammates around the world. As we further embed our business blueprint into our day-to-day activities, we'll be well positioned to deliver on our long-term objectives. Thank you, and with that, I'll turn the call back over to the operator to begin the Q&A session.
spk01: Operator? Thank you, sir. As a reminder, to ask a question, you would need to press star 1 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 comes from the line of Michael Cherney from Bank of America. Please go ahead.
spk05: Good morning, and thanks for all the callers so far. First, just a quick housekeeping question. I want to make sure I heard that correctly regarding the 3Q trajectory, the sequential decline that you're expecting, not a year-over-year in terms of revenue, correct?
spk04: Can you repeat the question? Sorry, Michael.
spk05: Sorry, the comment you just made about the 3Q revenue trajectory, that's a sequential decline you're expecting, not year-over-year. I'm not sure I heard that correctly.
spk04: Yeah, Mike, this is Andy. That's correct. In terms of just trying to help you look at the back half of the year in terms of our guidance, just trying to help you understand, because You know, again, this year has been very atypical in terms of seasonality, but you're absolutely correct. On the top line, we expect that to be a slight decline Q2 to Q3 sequentially.
spk05: Okay. That makes sense. I appreciate that. And so you're taking a bigger picture approach. You know, when you think about moving pieces of your business against the backdrop of an uncertain Delta variant rollout, clearly there could be some potential pressures on electives if we do go back to some level of of increased hospitalizations, but I would assume, I would think that would be offset by another potential spike in PPE demand as people worry about infection. Are there any local pockets where you're seeing any of those trends where there is an increased Delta variant approach? And how do you think about the variability in your guidance against the backdrop of that?
spk04: Michael, this is that. I'll take that one, and then Andy can add some color afterwards if necessary. So we have seen pockets of it. So in Florida, we've seen some pockets of that where we have seen a drastic increase in demand for PPE from us, even from levels that were already elevated. In addition to that, we have seen some tightening on the elective procedures there. But here's the other thing we saw. So during the pandemic, we worked with our customers for some unique solutions. You know, and we have subscription-based models where customers have access to product as they need it. So since we're producing it ourselves, we're producing stuff like N95s in Texas as well as in Lexington, North Carolina. You know, they've called in on their subscription model and said, you know, we need a triple of what our use is, for example. And we've been able to fulfill that. So you're absolutely right. You know, if Delta variant does increase and actual hospitalizations increase, which is what we're seeing, we are seeing that increase in demand for that PPE. But again, what makes us unique, Michael, versus others is we're making the fabric in the United States. We're finishing that PPE all relatively speaking close where it can be delivered by a truck. You know, all of the fabric-based stuff. So we have been able to flex very quickly as this Delta variant has hit. and has certain locations in the United States have needed the product. And then Mike and Andy, just to take the second part of your question on the implications for the full year forecast, regarding elective procedures, So we did see elective procedures get back to near pre-pandemic levels in Q2 as we expected, and the balance of the year contemplates really staying at that level of near pandemic levels. We do not have an anticipation or we've not built into the forecast any downside due to the Delta variant in terms of elective procedures. But on the other hand, on the other side of PPE, we have not built in a significant spike in demand. should those occur, we would see those adjust accordingly in our forecast. But we've pretty much assumed elective procedures at pre-pandemic levels and no spike in PPP.
spk05: And then one more just quick housekeeping question. Can you remind us what your share count guidance was before? It looks like it went higher despite EPS not moving. So just curious what it was prior to today.
spk04: Yeah, Mike. So the last guidance we gave with 71 million shares, and the current guidance is 75.5 million shares. And, again, that's really the increase is really due to the result of the treatment of restricted shares as well as the issuance of some additional restricted share grants. Performance shares.
spk05: No, helpful to understand against the maintaining of ETS guidance. So thanks so much.
spk01: Thank you. I show our next question comes from the line of Daniel Grossleit from Citi. Please go ahead.
spk06: Hi, guys. Thanks for taking the question. I was hoping you could put a finer point on the quarterly cadence of the glove pass-through and the relative benefit in the first half of this year versus the second half. I think you mentioned $200 million of top-line benefit this quarter, and you're still seeing some positive timing benefit to the EBIT line. Can you help quantify the EBIT benefit this quarter? and your quarterly expectations for the remainder of the year, and if you still expect a net neutral impact from that pass-through for the full year.
spk04: Sure, Daniel. Yeah, this is Andy. Happy to take that question. So just to ground you, just make sure we've got a level set on what we know at this point. So we did change our full-year top-line revenue guidance. It used to be $700 million to $800 million. We've now fine-tuned that to about $675 million to $725 million today. And we've done that as a result of seeing some cost pressures starting to ease in the marketplace. And in the quarter, we recognized about $200 million of higher cost pass-through on the top line. And as a reminder, in Q1, that equivalent number was about $160 million. So year-to-date, we've seen about $360 million on the top line. So roughly halfway through the year, we're roughly at the midpoint of our full-year guidance. And in terms of the impact on the bottom line, so you're right, in Q1 we did see a favorable impact. You know, as I talked about how the price impact of raising prices is realized sooner than the cost impact, as costs have to work their way through inventory. And again, as we discussed on the Q1 call, we set the expectation that in Q2, those costs would catch up, would begin to catch up. And we did see that in Q2. And albeit, we still had some favorability in the quarter, but it was at a much lower rate, with a much lower level. And you could see the 300 basis point decline sequentially in our gross margins. And then going forward into our forecast, I would say Q3 would be the most significant impact of cost. So I would expect gross margins and adjusted operating income margins to decline further in Q3. You'll see that in the global product segment. And then as we get to Q4, I would expect a slight improvement. And really, by the end of the year, we expect to be pretty well worked through the issue of cost-price dynamics. That would be our expectation.
spk06: Thanks. Very helpful. And as you have new glove capacity come online in the first quarter of 22, can you help us think about what the margin profile of those gloves will be relative to your overall product's margin profile?
spk04: So again, we don't really give guidance and specific margins by product. But what I will say is that As we made that investment to expand gloves, we've done that within the four walls of our existing facility. And so, again, like the capacity that we've added during the course of 2020 to expand PPE production in our Americas-based facilities, the capacity we're bringing on with gloves should benefit from some fixed cost leverage, again, because we're not adding additional square footage to produce those gloves. You know, Dan, you know, this is that. I think two things, I'll add on to that, two things. One, Andy covered, you're right, absolutely we're going to get fixed cost leverage on that because we're able to put it in our existing facilities. But second, we'll have the capability to make a more technical glove there, whether that's for surgery, whether that's chemo rated and other aspects of a glove that inherently within those gloves also have, you know, a different margin profile versus just your standard glove.
spk06: Got it. Very helpful. Thanks for all the color, guys.
spk01: Thank you. I show our next question comes from the line of Eric Caldwell from Baird. Please go ahead.
spk02: Thanks very much. Sticking with the gloves question, $200 million in revenue this quarter, $160 million last. You said it was still positive on profit but less so than first quarter. I think what we're probably going to get the most questions on today is the operating margin in global products. 25% last quarter, 14% this quarter. Can you give us any sense what the underlying base might have been absent the gloves? And then I guess, you know, when I think about the margin being down 11 points quarter over quarter, how much of that was related to the cost pass-through or the cost increase, I mean, to say in commodity costs, transportation costs? versus mix shift in your product lines or changes in the glove pass-through impact. And then I have one more follow-up. Thanks.
spk04: Yeah, Eric, this is Andy. So I'll try to address that. So you're right. Sequentially, as expected, you know, with that increase of cost being recognized, you know, we did see about an 11 percentage point drop sequentially in the global product segment. And I still expect Q3 to see an even greater impact due to the higher costs in gloves as those work their way through and we try to normalize throughout the year. So I would expect margins to drop further in Q3 from where we are in Q4. And then as we go into Q4, I would expect that to rebound slightly and then start to stabilize. So while we're not giving exact guidance on quarterly margin rates, I would say that that will largely be working its way through the system and hopefully going into 2022. As I said, I'm not talking about glove pass-through timing issues.
spk02: So could you give us a sense on the impact of the commodity cost increases and transportation cost increases that you mentioned on the call?
spk04: Sure, yes. So again, when we talk commodity cost increases, we're specifically referring to the polypropylene And again, polypropylene is what's used in the manufacturing of some of our key garments and masks. And we started to see some of that impact, Eric, in the first quarter towards the end. But by the time we got to the end of the second quarter, we had seen prices of this commodity almost double. And we expect that to continue into the third quarter and start to see some easing as we go into the fourth quarter. But, you know, it's big enough to call out, Eric. We don't quantify that, but I think it was worth mentioning. But I think the important thing to note is that you know, overall with the inflationary items that we did experience in freight and commodities, as well as the share count change, that we are able to maintain our full-year guidance for adjusted EPS and 2022 guidance, given the strength in other areas of the business.
spk02: My other question is a bit off the quarter, but You had your IR day in late May, and then in early June, your closest market peer, Medline, received an investment by a consortium of really highly respected PE firms, valuing that company at $34 billion. That's eight times your enterprise value. I'm 100% certain Medline is eight times larger than you. I'm probably 99% certain they're not eight times more profitable. I know they don't rank eight times better in our survey work, so I'm just hopeful you could do a compare and contrast of your offering versus that close competitor. It's sort of a quiet company. People don't know much about them. I'm wondering if you could provide any thoughts on the impact of that deal to you, whether that might be fundamental, if you see any fundamental impact, or regarding your thoughts on maximizing shareholder value. I mean, it's such a stunning deal. comparison to how the market values OMI. I'd love to get your insights if possible. Sure. So I'll take that one.
spk04: So let me talk about, I think, what makes us unique and what makes us different versus them. And I think the pandemic has proven that out. So, Eric, the last month I've spent a tremendous amount of time back on the road because I've been able to go visit customers. I've been out in our distribution centers. And here's what's made us different, which I think is unique and I think is extremely valuable to our customers and then extremely valuable to the shareholders. So it's really our vertical integration from manufacturing all the way to delivery of the product and then even onto the home. And that's a little bit different. I think others in the market talk about themselves being manufacturing. They manufacture, but the reality is primarily most of their products are made overseas and then their labels are put on them. Versus you take our PPE, the bulk of our PPE, we're making it ourselves in our factories and with our products, with our raw material, with our quality control, with our regulatory affair, you know, with our teammates. So that way we have great control over it. It's reduced substantially recalls. It's created our ability to service the customers at a greater level. So I was at several customers over the last month, and here's what they were surprised at and they told me is that, Our service level for core products was at 99.8% on average last year during the pandemic. Again, during the pandemic, we were able to get the customers what they needed, when they needed. On-time delivery, 99.9%. Our accuracy, 99.8% to 99.9%. So that's really what's made us different. And in full transparency here, we weren't that way in 2017 and 2018 and 2016. You know, we changed the business in 2019 with this tremendous focus around continuous improvement with our blueprint to improve the way we operate. And that's been a result of all of that hard work and then, you know, capitalizing on our strengths during the pandemic. That has created goodwill. You see in this quarter the improvement of our global solutions business. From a profitability standpoint, a 29% growth or 28% growth year over year, that's both in medical distribution and in our patient-direct business. So all of that has really changed the trajectory of where we're going. And look, their valuation is what their valuation is. I think from our standpoint and our company, what we do is unique. What we do is different. We operate with great values and a clear mission of how we're going to do it. So those are some of the differentiators is really we're a manufacturer, we're a distributor, we have this great home health business versus really just primarily being more sourcing company. We do sourcing. We do that to mitigate risk and reduce some of that risk. But in the same sense, it played out our service levels were significantly stronger than most during the pandemic. So, you know, I'm not an investment banker. I'm not somebody who's making those decisions on what multiple to pay for a company. But I think our company is extremely valuable and You know, we talked about this in Investor Day. You put those pieces together, as well as the bright future we have, there's tremendous opportunities for us to continue to grow. So, you know, you can probably hear my voice. I get excited about what we do. I'm passionate about it. Our team's passionate about it. And those are the reasons why I think, you know, we are tremendously valuable, not just today, but for the long term.
spk02: Thanks, Ed.
spk01: Thank you. Yeah. I'm sure our next question comes from the line of Jalendra Singh from Credit Suisse. Please go ahead.
spk03: Yeah, thank you. Just trying to better understand your comments around second half outlook versus first half reported numbers. Are you implying that trends you saw on revenue and margins in global solutions business in first half continue in second half, but majority of decline you're expecting on revenue and margins or profitability decrease? in second half versus first half is in global products business. I want to make sure I understand the comment. Good morning, Jalendra. It's Andy.
spk04: I'll take that question. So in global solutions, you saw significant growth year over year, about 28% increase. And as you recall, last quarter when I talked to you, that second quarter of last year is when the elective procedures dropped significantly. And we talked about a $300 million estimated decline as a result of that. So you know, with almost $430 million increase year over year, you know, happy to say that we've made up for that shortfall and really continue to grow on top of that. So real strong performance on the top line. So that, you know, certainly we're not going to grow 30% to continue because our comps obviously get tougher in the second half of the year. But, you know, I would expect that to level off. But you're absolutely correct. In terms of global products in the second half of the year, profitability, yes, so our – profit is going to be more weighted towards the first half of the year, which is very atypical of the seasonality of this business, but it's been largely driven by the fact that the timing of the glove cost passed through with the favorability being recognized more in Q1 in particular, a little bit in Q2, and then the unwinding of that in Q3 and Q4. So you can expect the low point of the margins for the business, which is driven by global products, to occur in Q3.
spk03: Okay. And then going back to the Delta variant impact, I understand you're not having anything in the numbers right now, but are you seeing any implications on your customers or potential customers in terms of their willingness to come out with RFPs with respect to your global solutions business right now? No, we have not seen the Delta variant impact that at all. Okay, then one last one on the buy-in business. I mean, can you provide any color? Like, was that a significant contributor to the margin trend in the quarter? And what are your expectations there for the second half?
spk04: Yeah, I'd say our patient-direct business, you know, continues to be strong. You know, I made the comment earlier, I think, from Eric's question is, you know, we saw the global solution segment grow at 28%. You know, very strong segment. The bulk of that growth came from global solutions. But another significant portion of very, very, very strong growth also came from our patient-direct business. So you don't post up a 28% growth in the segment without both of those businesses performing extremely well. That business continues to perform well. They've expanded the relationships, got relationships with other suppliers as well as continue to win new business in that patient-direct business. So frankly, I believe they're growing at rates well above what the market rate is growing today in that space. So really excited about the future of that business, too.
spk03: Great. Thanks a lot.
spk01: Thank you. I show the next question. It comes from the line of Kevin Caliendo from UBS. Please go ahead.
spk07: Thanks. Can you talk a little bit, you mentioned it briefly in your prepared remarks about net customer wins and global solutions. Is that showing up in 2021? And what do you anticipate for 2022? At this point, I'm guessing most of the RFP activity is probably completed.
spk04: Yes. So to that, Kevin, I think, you know, a couple of things. It is starting to show up in 2021. You know, this was some business we actually won during the pandemic. you know, where customers were looking at their options and saying, hey, you guys have the ability to support us. Let's move the business. So, you know, there was several customers, you know, you could add up that we won late last year that started into this year. You know, the expectation is those continue and then actually more momentum into 2022. Because as I've talked in the past, you know, we've streamlined down our ability to onboard customers for less than 90 days. you know, probably depending on the size and complexity, we've seen that as much as a year, you know, down to, I think, where we come in and be able to do it in 90 days. So, you know, we're already starting to see that. We expect to see that as we continue through the year.
spk07: Okay. Thank you. Also, in terms of your capacity, you know, excluding the incremental glove capacity, which you talked about already, when we talk about the manufacturing, increases and getting into some higher specialty products and the like that you talked about in your opening remarks. Can you go a little deeper and help us understand sort of what that means, the potential for that? My guess is, you know, 2022, it's not going to be incredibly meaningful, but help us understand sort of the opportunity set that, Pam, how big, you know, in terms of revenue potential this could be. and how we should think about it when modeling.
spk04: From a modeling standpoint, let me just first go back to where it is. So we talked a little bit about it in the speech, and I talked about it in investor days. It's a mix of two things on this, Kevin. One, it's a mix of existing products we have today with some unique packaging to go into other markets and other industries. We talked about the consumer or the retail market. We just launched our Safe Skin Pop and Go gloves. you know, that is a different margin profile than what we provide into the acute care space. And it's actually, you know, from a positive standpoint, from a margin standpoint. You know, that opportunity is going to continue to grow. We also have the ability with that for in the retailer consumer market to also private label it for big boxes and brands, which we're in process of it today. And then in addition to that, it's other new products that we've launched, not just wound care incontinence, you know, but additional products within our own manufacturers like gloves, you know, where we have, as I mentioned earlier, whether it's a chemo-rated glove, a surgeon's glove, you know, other unique gloves that we have the ability to go out and launch. And we continue to do that. You know, we haven't sized it for the market yet. We haven't gone out publicly with that yet. You know, so from a modeling standpoint, I think the way to just think about it is, you know, those are incremental dollars at much higher pull-through than what we have today.
spk07: Great. Great. All right, thank you very much.
spk04: You know, I'll add one last thing as I think about a little further, too, is really think about 2026. You know, that's kind of, you know, when we gave the targets for 2026, that's a good view of where, you know, where our margin profile would be as these become, you know, involved or developed and included more broadly into our overall revenue targets.
spk01: Thank you. I'm sure there are further questions in the queue at this time. I'd like to turn the call back over to Mr. Ed Paseka for closing comments. Please go ahead. Thank you.
spk04: Let me just first discuss one thing and then I'll close it. I know we spent a lot of time today talking about glove cost pass-through. I think the way to really think about that is at the highest macro level is first half of the year we had favorability in that from both a revenue and a pull-through. The back half of the year, that will be primarily offset. Even in light of that positive in the first half, negative in the second half, and all balancing out kind of on a go-forward basis, we're still generating between 375 and 4.25 adjusted earnings per share. So I think thinking that in the context is, yes, sequentially there will be an impact on it, but overall, even with that netting out in essence over time, you know, this year we're still, you know, at the 375 to 425. And in addition also to the share count still at the 375 to 425, which is really where I would close on it is this is why I look at the robust performance. I look at the strength that we've shown in global solutions, you know, in sequential growth. I look at, you know, overall revenue and the operational efficiencies we've driven in our global products business and our patient direct business. as well as our global solutions medical distribution business. That's why I am so excited about where we are, what's ahead this year, and even beyond this year. You know, I had the opportunity to talk a little about it with a question from Eric. You know, we believe and we've proven that we have one of the strongest value chains in the healthcare solutions market. Not only do we have a strong value chain, right now we have the ability to flex and scale very quickly because we still have a quickly changing marketplace today. And then finally, what we haven't had and we have now is the financial flexibility. We're down at a 1.8 debt to EBITDA ratio. which enables us to continue to invest in our business and invest wisely and diligently to provide that long-term growth. You know, Invest Today, we talked about 2026. You know, I'm excited to get there. I don't want to live my life and pass it over very quickly, but I'm excited of where we are and where we're going. You know, so that's what really gives us, you know, the excitement about what we have into the future. So I appreciate the time from everybody today. You know, I look forward to talking to you, you know, over the next few months and for sure in the next quarter at the earnings call. So thank you, everyone. Thank you. This concludes today's conference call.
spk01: Thank you for participating. You may now disconnect. Good day.
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