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spk06: Thank you for standing by. Please continue to hold. Your conference call will begin momentarily. Thank you. Thank you.
spk02: Good day and thank you for standing by.
spk06: Welcome to Owings & Minor Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are on 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 one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker today, to Mr. Alex Jost of Investor Relations. You may begin.
spk03: Thank you, Operator. Hello, everyone, and welcome to the Owens & Miner fourth quarter and full year 2021 earnings call. Our comments on the call will be focused on the financial results for the fourth quarter of 2021 and the full year 2021, as well as our outlook for 2022, all of which are included in today's press release. The press release, along with the supplemental slides, are posted on the investor relations section of our website. Please note, during this call, we will make forward-looking statements. The matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings for a full description of these risks and uncertainties, including the risk factor section of our annual report on Form 10-K and quarterly reports on Form 10-Q. 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 on 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. It's my pleasure to now turn the call over to Ed. Ed?
spk04: Thank you, Alex. Good morning, everyone, and thank you for joining us on the call today. I'd like to start with a high-level recap of Owens & Miner's exceptional performance in 2021. 2021 was a record-setting year for our company, and it all starts with our teammates. Our teammates have continued to leverage our Owens & Miner business blueprint, a blueprint which starts with our culture that is based on our humble mission to empower our customers to advance healthcare. along with the guiding principles of our ideal values. This is then combined with our Owens & Miner business system of continuous improvement and our investment strategy that is disciplined and focused on making the right investments to provide long-term profitable growth. The execution of the Owens & Miner business blueprint has resulted in another successful quarter, the closeout to a record year, and furthering positioning our company for long-term profitable growth. So to our teammates, congratulations and thank you for a job well done. If you recall at our Investor Day in May, we presented our long-term strategy to drive sustainable and profitable growth. We presented the strength of Owens & Miner as an integrated healthcare solutions company with a scalable value chain that starts with our Americas-based manufacturing from raw materials all the way to finished goods. It then moves to our distribution channel that provides flexibility based on the right balance between technology and touch and finishes with our broad-based patient direct business to serve the patient in the home. Overall, this provides Owens & Miner with the ability to serve our customers through the hospital and into the home. Based on this, we believe that our scalable value chain strategically positions us to drive robust long-term profitable growth. 2021 is a great example of our ability to leverage the Owens & Miner business system along with the strengths of our unique value chain. So let's start with the full year 2021. I'm proud to announce that in 2021 we won delivered on our 2021 guidance and achieved record EPS and EBITDA. Two, showed strong revenue growth. And three, continued to pay down debt while reinvesting in our business. However, what I don't want you to miss is the fact that we had a record year, even in a market filled with global supply chain challenges, inflationary pressures, pricing anomalies, and other headwinds. While these items impacted our industry, it is our unique business model combined with our execution that enabled us to manage through these headwinds. We continue to pull the appropriate levers to maximize service, deliver strong financial results, while strengthening our platform for long-term profitable growth. Again, it all starts with our vertically integrated business model that provides us with a distinct competitive advantage. and that continued to be apparent in the fourth quarter. Our America's own manufacturing footprint allows us to self-manufacture the bulk of our proprietary products, which provides capacity flexibility, resilience against supply chain pressures, and significant fixed cost leverage. In short, our 2021 success was driven by our ability to meet the needs of our customers for these products when others couldn't. During 2021, We did not just focus on our existing proprietary products, but worked to provide better solutions as we expanded our product categories and made important investments in technology to provide more visibility and drive greater efficiencies for our customers. A great example of this was the launch of our Smart Card, which stands for Supplier Metrics and Accountability Reporting Tracker. and provides our customers with updates on several areas that include but is not limited to the current supply chain situation, commodity market information, supplier backlog issues, and possible product substitutions. The visibility that our smart card provides enables our customers to adjust in advance and better serve their constituents. In 2021, we also published our inaugural ESG report, which provides visibility into the performance metrics and achievements that our company supports in the ESG focus. In addition, we launched the Owens & Miner Foundation, which is dedicated to impacting and empowering communities by providing support to numerous organizations focused on healthcare, the environment, and diversity and inclusion. The momentum from 2021 has continued to strengthen our company. and has enabled our ability to recently announce the definitive agreement to acquire Apria for $1.6 billion, which, upon closing, will represent the largest acquisition in our company's 140-year history. Apria is a leading provider of integrated home healthcare equipment and services and operates in the highly fragmented home healthcare market, which is valued at over $50 billion and growing at 6% annually. When combined with our Byram Healthcare business, these complementary entities will enable us to better serve the entire patient journey through the hospital and into the home. The closing of this transaction is progressing as expected, and our integration plan is well underway. I am looking forward to welcoming the Apria team to Owens & Miner in the first half of 2022. Now let me share just a few highlights from our fourth quarter. One, All of our major businesses grew, led by patient direct, global products, and medical distribution. Two, our vertically integrated business model allowed us to offset macroeconomic pressures while continuing to capture both PPE and SNIP sales. In fact, both were up on a year-over-year basis. And three, we continue to capture operating leverage through our investments in expanding manufacturing capacity utilizing technology, strengthening infrastructure, and, of course, continuous improvement. While Andy will do a deep dive on our balance sheet in a moment, I want to discuss one area. That is our improved debt position. Let me take you back in time. Less than three years ago when I joined Owens & Miner, our net leverage ratio was about seven times. Again, it was seven times. Now at the end of 2021, just three short years later, our net leverage ratio is only 1.8 times. It should be noted that we accomplished this reduction while still making significant investments in our business for infrastructure, capacity expansion, teammates, and technology, just to name a few. We were able to accomplish this due to our disciplined approach to capital deployment and the strength of our company's free cash flow profile. So while we will increase our net leverage to around four times after the pending close of APRIA, we will take the same disciplined approach to pay down debt while continuing to make appropriate investments in our business. And we will continue to maximize the strength of our company's free cash flow. Our overall current balance sheet will be discussed in more detail by Andy in a few moments. Now, moving from 2021 to 2022, I believe that we are well on our way to another successful year, regardless of the current macroeconomic conditions. Accordingly, we are reiterating our previously issued guidance for the full year of 2022 in the range of $3 to $3.50 of adjusted EPS and adjusted EBITDA in the range of $400 to $450 million. both of which exclude any 2022 contributions from our pending acquisition of APRIA. So in closing, I'm extremely proud of our strong finish to a record year and even more excited about our future. We delivered on our commitments to all stakeholders and took major steps to help ensure the future growth of Owens & Miner. I'll now turn the call over to Andy for a discussion of our financial results and our expectations for 2022. Andy? Thank you, Ed, and good morning, everyone. Today I'll review our financial results and key drivers for our performance in the fourth quarter and for the full year. And then I'll discuss our expectations and assumptions for 2022. As Ed mentioned, our team worked tirelessly to continue executing on our overall business strategy despite the broader macro issues. I am pleased that we were able to deliver on our guidance for the year, both in terms of results and quarterly cadence. As we entered the fourth quarter, we knew we were facing a very tough comp as Q4 of 2020 was the strongest quarter of last year. But I'm very happy we were able to deliver a record-setting year while generating great momentum as we enter 2022. Let's start by reviewing our financial performance. Our total fourth quarter revenue was $2.5 billion compared to 2.4 billion, or 4.5% growth versus the prior year. This positive trend resulted from our ability to overcome the continued challenges that COVID has placed on our healthcare system and supply chain, and was driven by continuing strength in our patient direct business and the pass through of elevated glove costs. It's important to note that Q4 of this year had one fewer selling day than last year, which had an approximately 1.5% negative impact on growth. Sequentially, revenue was down as previously indicated due to two fewer selling days and a reduction in glove cost pass-through for a combined headwind of approximately $100 million versus the third quarter. However, good business performance led to fourth quarter revenue only being down $35 million sequentially. For the full year, total revenue was up 15.4% to $9.8 billion compared to $8.5 billion in 2020. From a gross margin perspective, the calendarization played out as we expected related to the impact of glove cost pass-through, yielding a gross margin in the fourth quarter of 13.8%. This was a sequential improvement of 70 basis points versus the third quarter. However, this was lower than prior year fourth quarter gross margin of 16.9%, which did not have the headwinds associated with glove cost pass-through and was favorably impacted by record levels of PPE sales in the midst of the pandemic. Looking ahead, we expect gross margin to continue to improve from the 13.8% in the fourth quarter, with a full year 2022 gross margin expected to be approximately 15%. Our full year 2021 gross margin was 15.5%, which was approximately 40 basis points higher than 2020. Our fourth quarter distribution, selling, and administrative expense was $267.6 million versus $283 million in the prior year. The reduction was due to timing of certain expenses and productivity gains, partially offset by ongoing investments in the business. For the full year, ES&A expense was $1.1 billion compared to $1 billion in the prior year. Fourth quarter interest expense was $11.3 million compared to $17.5 million in the prior year. And for the full year, interest expense was $48.1 million a decrease of 42.3%. Both periods reflect lower debt levels as well as lower interest rates resulting from our debt refinancing in March of 2021. Our gap income from continuing operations for the quarter was $42 million, or 55 cents a share. And for the full year, it was $221.6 million, or $2.94 per share, up 112% from $1.39 in 2020. Meanwhile, adjusted net income in the fourth quarter was $61.2 million and adjusted EPS was 81 cents compared to the prior year of $1.14. For the full year, adjusted income from continuing operations was $309 million with adjusted EPS up 81% to a record $4.10 compared to $2.26 in 2020. Versus prior year, the foreign currency impact on EPS for the fourth quarter was 2 cents unfavorable, and for the full year 2021, it was 5 cents unfavorable. On a segment basis, our Global Solutions fourth quarter revenue was $2 billion, up 3% year over year. For the full year, revenue was $7.9 billion, compared to $7.2 billion in 2020, representing a 9% increase. Global Solutions operating income for the quarter was $18.9 million compared to $22.4 million in the prior year's fourth quarter. The decline versus prior year was largely due to inflation, primarily in the form of higher transportation and delivery costs, which was partially offset by productivity improvements. For the full year, Global Solutions operating income more than doubled to $66.6 million compared to $30.9 million last year. The increase was a result of leveraging our fixed costs given our strong revenue growth and improving our operating efficiencies, partially offset by inflationary pressures later in the year. Turning to global products, our net revenue in the fourth quarter was $629.3 million, an increase of 9.5% year-over-year. On a full-year basis, revenue was $2.7 billion compared to $1.8 billion in 2020, representing growth of 47%. In the quarter, the revenue lift from glove cost pass-through was approximately $130 million, and for the full year was approximately $660 million. Adjusting for the full year top line impact of glove cost pass-through, year-over-year growth was 10%. Operating income for the quarter was $61.7 million, compared to the tougher comp in last year's fourth quarter of $99.7 million. as we saw lower capacity utilization as compared to last year's peak pandemic levels. Global products operating income for the full year was up a very strong 43% to $371.9 million compared to $259.9 million last year. This considerable improvement was the result of greater PPE sales, productivity initiatives, favorable product mix, and fixed cost leverage. These items were partially offset by higher commodity prices and rising transportation costs. It's important to recognize that sequentially, as we communicated during our last earnings call, margins in a segment increased from 7.6% in Q3 to 9.8% in Q4 as the unfavorable timing impact related to glove cost pass-through realized in the back half of the year comes to an end. Overall, I expect favorable utilization, profit, and margin rate momentum to carry into Q1 of 2022. Finally, the year-over-year foreign currency impact on revenue was unfavorable $4 million in Q4, yet was favorable $19.5 million for the year. The FX impact on operating income was unfavorable $2.5 million in the quarter and unfavorable $5.5 million for the year. Moving now to cash flow, the balance sheet, and capital structure. For the full year, we generated $124.2 million of operating cash flow as a result of strong earnings, along with stabilization and working capital in the second half of the year. Total debt was now $76 million for the year, and our net debt was $893.9 million as of the end of the year, the lowest level in nearly four years. Net leverage finished at 1.8 times, which is below our target of two to three times. Our progress in reducing debt over the last three years has been achieved while we have executed our balanced approach to capital deployment as we continue to invest in organic growth opportunities. As I transition to discuss our guidance for the year, note that all projections for 2022 exclude the impact of the pending acquisition of AFRIA. We expect revenue for the full year to be in the range of $9.2 to $9.6 billion. This projection reflects an estimated $400 to $450 million drop in revenue driven by lower purchase costs of externally sourced gloves and lower nitrile commodity prices being passed on to the customer. You can refer to slide number four in the slides we posted to our website this morning for an illustration of this dynamic. After normalizing our revenue for the pass-through of glove cost changes, our 2022 revenue guidance is up about 1% year over year. This reflects the combination of continued growth in patient direct, the launch of new products expanding our portfolio, and further penetration into industrial, retail, and international markets. This growth is partially offset by the completion of our N95 federal government stockpile program, which wrapped up on schedule in December, and the expectation that overall PPE volumes will ease throughout the year. We continue to fully expect the new baseline level to be meaningfully above pre-pandemic levels due to new PPE protocols in the healthcare industry and expansion of our customer base due to new wins over the last two years. We also assume that elective procedures will stay flat year over year. Additional assumptions for 2022 include a gross margin rate of approximately 15%, Interest expense in the range of $42 to $46 million, which of course excludes the financing related to AFRIA, and an effective tax rate of 24 to 26%. Our range of adjusted net income for 2022 of $3 to $3.50 per share assumes FX rates as of December 31, 2021, and is based on a full-year average diluted share count of approximately $77 million. This guidance also includes an assumption that we will be able to continue to effectively manage inflationary pressures. It's worth noting that our solid momentum exiting 2021 sets us up for a strong first half of 2022. Finally, we expect adjusted EBITDA for 2022 to be in a range of $400 to $450 million. Again, this excludes the benefit of the AFRE acquisition. Please be aware that these key modeling assumptions have been summarized on supplemental slides filed with the SEC on Form 8 earlier today and are posted to the investor relations section of our website. As a reminder, we'll begin reporting under two new segments when we report our first quarter results. Those new segments are products and healthcare services and patient direct. Now a few items regarding the pending AFRIA acquisition. We continue to expect that the transaction will close in the first half of 2022. Although this is primarily a growth-driven acquisition, we continue to identify cost synergy opportunities and will provide updates as this gets finalized. In addition, we continue to expect the acquisition to contribute annualized revenue of at least $1.2 billion and annualized adjusted EBITDA in excess of $230 million. The transaction should be modestly accreted in 2022, subject to final purchase price allocation, financing terms, and a review of potential tax benefits. We intend to provide greater details once the deal closes. As I reflect on 2021, the events of the year played out very differently than what we envisioned when we issued our guidance at the beginning of the year. The pandemic didn't end, the global supply chain crisis began, and inflation accelerated through the end of the year. I'm proud of our teammates and how they responded to these obstacles and their dedication to providing the highest levels of service to healthcare providers across the industry during another challenging year. I'm also very pleased to be part of an organization that continues to find ways to deliver on its commitments. As we build on this success and with the investments that we've made in our future, I'm excited about the year ahead of us as we continue on the path to achieving our long-term vision. I look forward to sharing our progress with you on these important initiatives, and I look forward to welcoming our new APRIA teams. At this point, I'll turn the call back over to the operator to begin the Q&A session. Operator?
spk06: Thank you, sir. As a reminder, to ask a question, you will need to press star 1 on your touch-tone telephone. To rejure 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 Cherney from Bank of America. Please go ahead.
spk00: Good morning. Congratulations on a strong end to the year and obviously the reiterated guidance. I want to dive in a little bit on how to think through not only 22 but beyond, especially given the long-term trajectory that you have. Andy, you mentioned 15% gross margins are baked into this year's guidance. As we think through whatever the future is in a post-COVID world, new normal on PPE, is this a gross margin level that's sustainable?
spk04: Good morning, Mike. Yeah, this is Andy. So, to address that, you know, it's great to be able to reaffirm 2022 guidance, you know, that we established in, you know, early 2021. And, yeah, I think the margin assumptions really reflect two things. One is not just the absolute value of 15%, but we're moving past the quarterly volatility that we had in 2021. So it's nice to have that volatility behind us due to glove cost pass-through. I think the 13.8% gets us in the right trajectory from where we were in Q3, so we're moving forward in Q4, and not just in total company, but specifically with global products, the increase in margins in that segment. And I think we've got really strong momentum as we go into 2022. And I do think that that 15%, you'll see less volatility quarter by quarter in 2022. And I think that is a much more reasonable kind of long-term rate going forward.
spk00: Got it. And then just, I guess, dive into that a bit further, especially given the complexity and moving pieces you had around the glove pass-through this year. Two-part question, I guess. One, are you done on the glove pass-through side? And two, when should we start to see what your normalized product margins will be like based on the moving pieces you had in 21 tied to that glove pass-through?
spk04: Yes. So my part one of that question is – Yeah, I think the very volatile quarterly swings that we saw in 2021 will be behind us, right? So I do not expect very large quarter-to-quarter swings. So I think that is behind us. It's another way of saying that price movements and cost movements will largely be more closely joined than they were in 2021. Got it. Thank you.
spk01: Thank you.
spk06: I show our next question comes from the line of Kevin Caliendo from UBS. Please go ahead.
spk05: Hi, thank you. Just to expand on that, on Michael's question a little bit, how should we think about the cadence for the year then? Should it look more like a traditional normal cadence, first half growing into second half in terms of EBIT and revenues? Just an outline of how you think 2022 progresses and is that the sort of new guideline for 23 and beyond in terms of cadence? You're talking about a more normal quarterly progression.
spk04: Good morning, Kevin. It's Andy again. You know, I'll start on this one and just say I don't think 2022 is going to have the typical guidance or typical cadence that we experienced pre-pandemic, right? So historically, first quarter was our weakest quarter, and then we ended with the fourth quarter as really on a high note, typically based on end-of-year flu and as elective procedures peaked in the fourth quarter. So I don't see that typical seasonality playing out in 2022, and specifically, I see the very strong momentum that we have exiting the fourth quarter carrying into the first quarter. And I do see a strong first half of the year, which is very unusual for this business. Again, unusual being compared to pre-pandemic cadence. So I do see the first half being strong. You know, the other thing I'll add to that on the first half is we still see a buildup of elective procedures. And we're starting to see that here in February come through. So our elective procedures in February are starting to ramp up. I know from talking to a lot of the customers, you know, they do have pent-up demand, and some of that will flush through earlier in the year versus, like Andy said, a traditional year where you have less in the beginning of the year and more in the back half of the year. That's going to be another impact in 2020, too. All right.
spk05: That's helpful. I guess the question that a lot of investors have is, How much visibility do you have on the product side? We see the macro slowdown in mask usage. We hear some manufacturing peers say that demand is off 50%. I know yours is much more customer-specific and contract-specific, but how much visibility do you have into demand on the product side going forward? Is it six months, nine months, 12 months, two years? Any color on that I think would be helpful.
spk04: Yeah, we do have long-term visibility on it, and that's for a lot of reasons. I think first and foremost, during the pandemic and even into this year, we continue to sign long-term contracts, committed contracts with many, many of our customers. In addition to that, I think if you just look at our performance in the fourth quarter relative to potentially others, where we actually saw strong performance in our product sales, and partially it really comes down to You know, what we've been able to do during the pandemic, it comes down to the fact that we still see protocols at much higher levels than what they were pre-pandemic. You know, we continue to see customers looking to get rid of product that are in their emergency use authorization quality products for medical grade quality products. You know, for all those reasons, we see that continuing out there. The other thing I want to focus a little bit on is some of the expansion we did over the last year by taking those PPE products and putting them into new markets. A great example of that is our retail pop-and-go gloves. We're taking the same gloves that we're making in our factories, putting them in different packaging, focusing on the retail market. We think about the long-term growth. We're seeing the ability for us to start to grow internationally again. when in the height of the pandemic in 20 and even into 21, we were focused on serving the U.S. customers, specifically when we weren't allowed to export product made in the U.S. So we're seeing that as a growth opportunity in our products business. In addition to that, taking products and using it you know, our specialty gloves and specialty products that we've expanded into. So we have a lot of different factors impacting why we continue to see strength in our product. It comes down to higher than past protocols. It comes down to agreements and contracts we have with many of our customers. It comes down to expansion of those products into new categories, into new markets, as well as, you know, the continued high demand for it. In addition to that, I think in our products, what we try to model in is the fact that elective procedures, many of those same SNIP products that were used as part of the PPE in pandemic are also used and needed in elective procedures. In addition to that, the raw material we use and we make that is used either for wrap, drapes, or traditional PPE, some of that's going to be redirected into wraps and drapes and other things as elective procedures accelerate. So, you know, we have, you know, visibility out longer term into that. And it's also, those are a lot of the reasons why we have such a strong fourth quarter relative to maybe others in the market or market conditions and why we're continuing to see the strength going into and through 2022. And Kevin, this is Andy, just one further point on that too. It's just looking at the global products revenue performance sequentially Q3 to Q4. You know, again, keep in mind, so what we're reporting is actually, you know, a decline in revenue. But again, don't forget to adjust for two fewer selling days in global products. Each day is worth about $10 million. And again, the glove cost pass-through at Q3 was $170 million. The glove cost pass-through in Q4 was $130 million. So you've got those two sequential headwinds to adjust to get to a true underlying rate there in growth. And the underlying rate when you pull those out is around 2% for the fourth quarter.
spk05: That's all really, really helpful info. Thanks, guys.
spk06: Thank you. I'm sure our next question comes from the line of Jillian Drozd-Sink from Credit Suisse. Please go ahead.
spk01: Thank you, Ian. Good morning, everyone. Actually, I want to get some clarification on gloves cost pass-through. You had $660 million impact in revenue in 2021. I want to make sure that was it still net neutral to profitability as you expected for the year? And then for 2022 guidance, when you include $235 million revenue impact, I know you said that it's kind of matched with cost, so no EBIT impact, but how should we think about the, like, you know, cadence throughout the year? Should we expect a Q1, Q2, Q3, Q4, very similar impact from revenue point of view?
spk04: Sure, Jalindra. It's Andy. So in terms of the glove cost pass-through, you're absolutely right. Top line impact of $660 million in 2021 year over year. I would say the margin impact as we ended the year was probably just slightly favorable. And again, that's a timing issue between 21 and 22. But again, the timing issue is small enough that it's not going to throw off our guidance for the year. I don't think it's going to have a material impact on the quarterly cadence, but just so you've got that as a data point. Then again, in terms of how I see the cadence of the calendarization as we move into 2022, I think the very strong momentum that we have, particularly in global products, right, from 7.6% margin in Q3 to 9.8% margin improving in Q4, and I see that momentum continuing into Q1 of next year, and that momentum far overshadowing any of the timing effects that I talked about on the glove cost pastures. So relatively more stable margins quarterly in 2022 than what we saw in 2021.
spk01: Okay, and then my two-part question on your 2022 outlook, which is unchanged, what you shared at your investor day last year. Andy, you mentioned this about that some assumptions might have changed underlying. Maybe flesh out a little bit like what were those expectations, what individual items changed in terms of assumptions for 2022 versus a year back? And the second part is that if you can give some color around what is reflected in the lower end of your guidance range versus higher end, just trying to understand the swing factors captured in some of the items there.
spk04: Yeah, Jalinder, I'm happy to take that. So just maybe a quick refresher on what has gone into our 2022 guidance and what's the same and what's changed. So just you know, real quickly thinking through the revenue drivers, right? It's portfolio expansion, and that includes the, for example, it's the glove capacity that comes online at the end of Q1. So that's continued to be unchanged. It's our expansion into adjacent markets like industrial and retail with gloves. It's expansion and continued growth internationally on the top line, fueling top line growth. It's continued growth in patient direct, continued strong growth in patient direct, In terms of electives, we've assumed electives are flat year over year, and that's in line with where we've been in the second half of 2021. We continue, you know, our assumption was that in 95, the federal stockpiling program would come to an end, and it did come to an end in December. We've assumed that does not continue. And as I said in my prepared remarks, that we've assumed an easing of PPE volumes. In terms of swing factors, you know, those last three assumptions on revenue, right? Should we... experiences I talked about, some pent-up demand and elective procedures, if that were to come through, that would be upside. If we were to win new government contracts supplying PPE, that could be upside. And again, if PPE volumes hold steady, that could also be upside. In terms of margins, that's where we see a little bit of a change from where we were in May. Because again, when we announced the 2022 guidance back at our investor day, that was largely before anyone was starting to experience the inflationary pressures. So we have baked in an element of inflation, and the key drivers here are transportation inflation. We assume that's going to remain high. Labor inflation, we assume that's not going to worsen. And overall, we've put in actions to mitigate these as well in order to hold our guidance. So we've got proactive actions like pricing, freight and transportation pass-through, identifying alternate sources for commodity sourcing. and continued strength in our continuous improvements and efficiency efforts to help mitigate those headwinds.
spk06: All right, great. Thanks a lot. Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. Actually, our next question comes from the line of Eric Caldwell from Baird. Please go ahead.
spk02: Thank you. Good morning. I was hoping to get a little bit of color on the legacy core acute distribution business. You seem to have done a better job with customer retention and share capture last year. I know you had a few accounts coming online this year. You gave some numbers around net wins. I was hoping we could get an update on that, what you're seeing in the current environment. And then I have a follow-up. Thank you.
spk04: Sure, Eric. I'm Let me talk first about customer retentions. And the reality is we had a really strong year in customer retentions in 2021. We're pleased with the high rate of customer retentions we had. And the reality is we had no what I would call regrettable churn in 2021. Think about wins. We did have a strong year also in wins. Our pipeline continues to be strong. We continue to focus on high-quality customers. We continue to focus on customers that value what we can provide in our value chain. And I think a great example of that is the most recent announcement we had with West Virginia University where we did a public announcement. We signed a long-term deal to support University of West Virginia as well as the rest of the state and others in that vicinity. We're going to add a new facility or a new center there that can provide a lot of different offerings besides distribution. So it's our ability to look at that entire value chain and continue to work closely with customers. I think those are a couple great examples of where we are. You know, but I think in the same sense, Eric, we're going to be extremely disciplined. You know, we're going to make sure we have to make sure we get a return on accounts and accounts that are higher cost to serve. You know, we're going to continue to look at how we can drive efficiencies to serve those customers, you know, and be responsible as we do that. But overall, I would say the full year of 2021 was, you know, successful related to that. And, you know, WVU was just the most recent example of a new win and expansion.
spk02: Ed, any... Any updated color comments on the RFP environment, the pipeline?
spk04: Yeah, the pipeline is still strong, Eric. You know, the RFP environment is different. You know, you have, obviously, in our industry and any industry, you have different types of customers looking for different things. I think our team has gotten much better at honing in on those customers that value what we provide, and that's become critical. I think it's been important that we've also seen in the RFP process continuity of supply and supply chain resiliency is becoming more and more and more important. Our ability to provide that in those products that we manufacture, we don't source, has been strong and has gotten great receptivity. I think our transparency, you know, has been helpful. You know, I talked a little bit about the smart card, which is a value add that we give just to our customers that is open and transparent about market dynamics so our customers can make decisions quicker to better serve their constituents. Those are what we're seeing, you know, in the marketplace today.
spk02: Okay, last one from me, the new glove manufacturing capacity. Any Any additional updates on the facility? I know you said late Q1 timing. I'm curious if your production will be at full scale coming out of the gates, or will it ramp through the year? Any thoughts on impact in 2Q in particular, how that might impact the model if it could at all in the second quarter?
spk04: Eric, what we have planned, just like any new facility expansion, not new facility, any facility expansion, We have it ramped through, you know, starting production at the end of the first quarter, ramping through the second and into the third quarter. And it's like anything. It's no different than when we added, you know, the new additional lines to make N95. You put the lines in, you get them producing, and then you have to fine-tune them over time to continue to get to the optimal output on those. So we'll get product off the line in the end of Q1 that will ramp during Q2 and into Q3.
spk02: Thanks, guys. Good job. Congrats on the outlook. Thank you.
spk06: Thank you. I'm sure no further questions in the queue. At this time, I'd like to turn the call back over to Mr. F. DeSica, President and CEO, for closing remarks.
spk04: So, first of all, thanks, everyone, for joining on the call today. You know, I'm extremely pleased with the progress that we made in 2021. But while I'm pleased with that progress that we made in 2021, I'm even more excited about the healthy momentum that we're bringing into 2022. You know, the team has done an exceptional job. You know, and we continue to strengthen our value chain, you know, along with our future, what we're going to continue to do once we close on the pending acquisition of Apria, continued growth in that home health care, or as we like to look at it, really the patient direct space. You know, we're making the right financial decisions as a company to drive long-term profitable growth. And again, I can't thank the great teammates we have at Owens & Miner for all their effort in 2021, as well as the great work they've already accomplished as we're nearly two months into 2022. You know, I'd also like to thank our customers for all the support that they've provided us over the last several years, you know, and our commitment to them to continue to support them as we go forward into the future. You know, to everyone on this call, I look forward to updating you on the progress later in the spring, and thank you, everyone.
spk06: This concludes today's conference call. Thank you for participating. You may now disconnect.
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