Q1 2020 Earnings Call

Thank you for your patience see own miners conference call will begin shortly thank you for your patience in please standby.

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You operator, good morning, everyone and welcome to the only minor first quarter 2020 earnings call.

I'm sure grades and on behalf of the team I'd like to read the Safe Harbor statement before we begin.

Our comments on the call today will be focused on financial results for the first quarter of 2020 or response to the cobot 19 pandemic and our outlook for the remainder of the year old which are included in the press release, we issued earlier this morning.

Please note that certain statements made on this call are forward looking statement, 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 at 1995.

All statements made on this call today other than statements of historical facts are forward looking statements include statements regarding or anticipated financial and operational performance.

Forward looking statements made on this call represent managements 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 statement.

The company has explained some of these risks and uncertainties and it does he see filings, including in 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 accompanied expressly disclaims any intention 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 reconciliations to the most comparable GAAP financial measures are included in our press release in our quarterly report on form 10-Q.

This morning, I'm joined by at the FICO, Our President and Chief Executive Officer, who will provide commentary on both the first quarter and only cobot 19 endemic.

And then be long, our executive Vice President and Chief Financial Officer, who will discuss our financial results for the quarter and provides additional insight into our outlook for the remainder of the year.

Now I would like to turn the call overhead who will start things off this morning dead.

Thank you Chuck good morning, everyone and thank you for joining us on the call today.

Before I get to the four main topics on my prepared remarks, I want to spend some time on the Kobin 19 pandemic that has affected the way we operate.

I'm proud of our teams response to this crisis, we have lived up to our mission to empower our customers to advance health care over.

Over the last quarter I have personally seen our values play out in real life as our teams worked with customers suppliers G.P. shows and various agencies of state and federal governments to provide creative solutions due to these unprecedented circumstances.

No more than ever customers depend on our distribution products and service teams and collaboration has never been better.

As always keeping our teammates safe is Paramount for example, we provided P. P to all our teammates and our distribution and manufacturing locations.

We have trained our teammates on the proper use a P P.

Implemented social distancing and put into practice temperature scans when our teammates arrive at work.

Related to working remotely we had an existing preparedness plans in place and we seamlessly implemented those plans to allow for remote work where it was appropriate.

We've adjusted our policy for teammates caring for six family members and provide a free telemedicine options.

We quickly adjusted our product delivery methods based on new an ever changing customer protocols to keep our drivers in hospital personnel safe and finally, we have seen great teammate engagement and low absenteeism carrying these extraordinary times.

As I mentioned earlier today I'm going to cover four topics.

I will first discuss the continued financial improvement as seen in the first quarter of the 2020 results.

Well, we expect a fluid year with downs and ups, our business model gives us comfort to reaffirm our full year EPS guidance range were 2020, along with the expected double digit EPS growth beyond 2022nd I will review our continued operational improvements strength.

Third I will discuss the returns relate it to the disciplined reinvestment in our business, which began in late 2019 and continues into 2020.

Finally, I will demonstrate the nimbleness of our company to adjust and leverage across all three pillars distribution products and services.

Related to the first topic, a financial improvement I will start with our year over year improved financial performance.

In the first quarter, we saw year over year improvement in many financial indicators.

Starting with earnings on a constant currency basis, we achieved a 33% year over year increase in adjusted net income per share.

These improvements were driven by the third consecutive quarter of year over year gross margin expansion due to operating efficiencies and revenue mix moving now to cash flow.

As we have aggressively improve the operations of the business. We are proud to say that this is the fourth consecutive quarter of generating positive operating cash flow.

Specifically, we generated 93 million of operating cash flow in the first quarter.

And this cash flow improvement enabled us to continue to pay down debt.

The strength of our balance sheet and appropriately reinvest in the business and seize opportunities when they exist.

In fact over the past four quarters, we've reduced our debt every quarter, resulting in nearly $200 million of debt reduction.

Next let me move from the financials to discuss the second topic operational improvement and strengths.

I am pleased with the way our operations have performed in response to the unprecedented requirements we have faced.

Our controllable service metrics remain high and are consistent with pre kobin levels.

We have received many accolades from our customers in recognition of our efforts. During this crisis that demonstrate our industry leading operations and strength here is just one example from a customer and I quote.

In working through these challenging times with all of the Metasearch distributors I.

I would be remiss, if I didn't pause to share that are field and disaster response teams consistently tout olin's in minus responsiveness and willingness to support our members.

You are differentiating yourself in the market when it matters. Most your team is incredible and stands out with a proactive and diligent communication and steadfast dedication to find solutions when they are tough to come by.

Keep pushing hard keep up the great work and please take a moment to share with your team how appreciative. We are members and most importantly, our caregivers are for your efforts all wins in miner is making a difference.

Wow.

I think that says it all about our operations and strength.

Now, let me move to our third topic and discuss some of the recent investments we've made.

As I mentioned last quarter, beginning in 2019 and continuing into 2020, we expanded our U.S. manufacturing capabilities to produce nonwoven laminated fabric used in P.P. products, such as surgical gallons in masks, the laminate or as we call. It enables us to significantly control manufacturing.

In supply chain of critical fabric needed to protect patients and clinicians in fact, we recently participated in operational local production a joint project with the city of New York, The White House, when you P.S., which teammates and our Lexington, North Carolina facility manufacture 1 million cubic yards the fab.

Rick for delivery to New York City garment workers, so they couldn't make medical gallons for New York City hospitals.

In addition to the Laminator, we have also aggressively retool and re commissioned equipment to produce incremental PPD.

As I previously mentioned publicly we have significantly ramped up our Americas based masking down production beginning in late January our manufacturing operations have been running 24, seven and at a record pace and we continue to add production capacity. The result of these investments are as follows production of and.

Five respirators have increased by more than 300%.

Production of standard masks have increased by more than 50%.

Overall production of Masson Respirators combined has increased by more than 50 million units per month, and finally, our production of isolation gallons in our Lexington, North Carolina facility has increased by more than 300%.

What I want to make sure that isn't missed is that these investments provide improved domestic control of the P.P.E. related to both manufacturing and supply chain, which is critical to our customers. Most recently, we have been named by the department of Health and human services as one of the five manufacturers to collectively.

We provide approximately 600 million and 95 respirator masks over the next 18 months, we're proud to oversee this award.

To satisfy the increased demand and then 95 respirators will again double our capacity to the addition of multiple new production lines in del Rio, Texas that should be fully operational later in the year.

Just to put our P.P. footprint in volume into perspective as of today, we are expected to ship, our 3 billion units a P.P. since the beginning of February.

And finally, Mike for topic I am pleased with the nimble much of our company to adjust and leverage across all three pillars of our business. During these unprecedented market conditions and I believe it has done a differentiator for us for instance.

In addition to what I've already discussed around our production or PPV and actually hurt in the quote from our customer our strengthen medical distribution has enabled us to get the products that are needed to our customers would speed due to our scale and control over the complete supply chain.

We have worked closely with Bemis supply chain cast forced to quickly deliver critical P. P into specific areas, where the impact of cobot 19 has the greatest.

And our home health care business has steadily delivered to customers and operated with efficiency and compassion when dealing with customers. During this period of great stress.

We will continue to leverage our nimbleness and the ability to quickly adjust as we expect continued demand for <unk> and as we prepare for the reemergence of electric procedures in the third quarter.

While 2020 is expected to be very fluid with downs. It helps our demonstrated ability to quickly pivot and leverage our strengths to best serve our customers provide us with the confidence to reconfirm, our full year adjusted EPS guidance of 50 to 60 cents per share.

Finally, after reviewing with you the performance in Q1, our investments in our Americas based manufacturing footprint and our nimbleness to adjust in pivots, all underpinned by our mission to put the customer first while leading with integrity. You can understand why I believe owns a minor has a bright long term.

Feature.

Thank you for your time today, and I will turn the call over to Andy for discussion of our financial results and our outlook for the remainder of the year.

Andy.

Thank you Ed Good morning, everyone. Today I'll begin with a review of our first quarter financial results and then discuss our expectations of how we believe the cobot 19 pandemic will impact our financial performance for the remainder of the year.

Consistent with the fourth quarter earnings call. Please keep in mind that results from our movie Opto business unit are treated as discontinued operations.

All aspects of the deal remain on track and we expect this transaction to close this quarter.

My comments today, unless otherwise indicated we'll be out of continuing operations basis for the first quarter net revenue was 2.12 billion compared to $2.35 billion for the prior year.

This change was primarily driven by increased global products sales of personal protective equipment or P. P E and revenue growth from our home health care business.

This was offset by lower net revenue in our medical distribution business from previously discussed customer Nonrenewals that occurred in early 2019, and too far lesser extent the impact of cobot 19 from reduced surgical procedures.

We expect revenue results for the remaining three quarters of this year will be negatively affected by the impact that Kobin 19 is having on the health care system and I will discuss this in more detail later in my remarks.

Gross margin in the first quarter was 12.65% and improvement of 88 basis points over prior year, primarily due to an improved sales mix with a greater proportion of higher margin global products revenues.

Distribution, selling and administrative expense of $254 million during the current quarter was flat compared to the first quarter 2019, primarily as a result of sales mix and investments in the business, partially offset by operational efficiencies.

Adjusted net income for the quarter was $2.4 million were four cents per share.

Adjusting for the impact of unfavorable foreign currency in the quarter. Our adjusted net income was eight cents per share, which represents a 33% improvement compared to prior year.

No wholl discuss our results by segments for the first quarter, starting with global solutions revenue was $1.85 billion compared to $2.12 billion in the prior year with the change coming from declines in a medical distribution business as previously discussed partially offset by continued growth in the home health care.

Business.

Global solutions operating income for the year was $7.7 million compared to $21.6 million last year. The change in operating income was primarily from the lower revenue.

Turning to the global product segment net revenue was $391 million compared to $347 million last year, which represents a 12.7% increase year over year.

Operating income of $18.6 million more than doubled compared to $7.7 million last year. The increase in operating income was driven by increased revenues of P.E. related to covert 19, and continuing favorability in commodity price trends, partially offset by the impact of foreign currency of approximately.

$3 million.

Now I'd like to discuss our cash flow the balance sheet and debt profile.

For the quarter, we generated $93 million of consolidated operating cash flow driven primarily by continued working capital improvements.

Total debt was $1.53 billion at March 30, Onest, a reduction of $24 million compared sequentially to the fourth quarter and a reduction of $195 million over the last four quarters.

As I mentioned last quarter, we've taken significant steps to strengthen our financial foundation to position the company for future growth.

As you know, we made a strategic decision to divest or Movianto business for a $133 million. The proceeds from this transaction will be used to pay down debt.

As I mentioned, we currently remain on track to close this deal in the second quarter.

In addition, we amended our credit agreement to provide additional financial flexibility.

We also entered into an accounts receivable securitization program, which provides access of up to $325 million of cash at favorable rates, which we can use to further refinanced debt.

In February we used $150 million and proceeds from this program to repay higher interest debt.

We have demonstrated our ability to strengthen our balance sheet by utilizing cash flow generated by the business to pay down debt, while maintaining ample liquidity at a lower cost.

De leveraging remains a top priority and we're evaluating various options to further reduce debt. We also intend to continue reinvesting in the business for future growth.

Next I'd like to spend a few minutes discussing our earnings outlook for 2020.

As you saw in today's press release, we confirmed our adjusted net income guidance of 50 to 60 cents per share for 2020.

That said the cadence of earnings across the remaining three quarters of figure is expected to be significantly affected by the impact of cobot 19 and will be much different than we originally anticipated.

Let me spend a few minutes discussing the assumptions around our guidance and the expected timing of these changes.

Starting with the topline we expect to cope with 19 to have a net negative impact on revenue for the balance of the year.

You will see this play out in our medical distribution business and is driven by a reduction in surgical procedures that began in late March at the current time, we're assuming that this slowdown will continue through the entire second quarter and create a revenue headwind of approximately $480 million.

Well $160 million per month compared to our original expectations, while difficult to predict we have assumed a partial recovery in the second half year as some of these deferred surgical procedures are anticipated to be reschedule, coupled with ongoing higher demand for our portfolio of PPG products.

Obviously increases in elective surgical procedures earlier than assumed will be beneficial to revenue and continued delays in the third quarter would be incrementally detrimental.

Turning to our global products business. The Cobot 19 pandemic has created unprecedented demand for PV products and we have been running our production of these critical products 24, seven in an effort to meet the demands.

We believe the demand for PV products will continue at higher than normal levels for the rest of the year, coupled with sales associated with the federal government health and human services strategic National Stockpile, which we were recently awarded has had previously discussed.

Sales were only partially offset the revenue shortfall from lower surgical volumes.

Our assumptions are also based on having continued access to raw materials and ongoing favorable trends as commodity prices.

While these dynamics should result in a net negative impact on full year revenue, especially during the second quarter, the favorable mix of higher global product sales with or better margin profile are expected to result in a neutral bottom line impact for the year as compared to our previously communicated adjusted EPS guidance.

As Ed mentioned, our ability to adjust our operating model to support the changing needs of our customers gives us the confidence in affirming our full year earnings guidance.

My comments and our outlook to this point is focused primarily on the full year. However, I think it's important to stress that this impact will not happen uniformly over the remaining three quarters.

We don't typically discuss quarterly expectations, but to cope with 19 pandemic has created an unprecedented operating environment rapid and dramatic change in health care I want to stress that we expect these changes will have its most pronounced impact our financial results. During Q2 as a result of the significant reduction in sales and our medical distribution businesses I did.

Described earlier.

We don't anticipate the upside in our global products business will be able to materially offset this impact in Q2 and as such it it's highly unlikely that we will get to breakeven in the second quarter before returning to better than originally expected results in the second half of the year.

Or financial targets for the year remain the same the path, we expect to take to get there has changed dramatically due to an unprecedented series of events has unfolded over the last few months that said, we believe our strong market position our ability to serve our customers to normal and extraordinary times and our disciplined reinvestment in the business.

Will allow us to achieve the 2020 financial targets, we established at the beginning of the year and to deliver double digit earnings growth into the future. Thank.

Thank you and with that I'll turn the call back over to the operator to begin the QNX session operator.

Ladies and gentlemen, if you asked a question keeps US star followed by the wondering your touched one telephone.

If your question has been answered I know you wish to withdraw your question. Please press the pound key.

Your first question on the line of Robert Jones with Goldman Sachs. Your line is open.

Great. Thanks for taking my question. This is Chuck broke off on for Bob.

Can you talk about what the level of elective procedure volume headwinds you saw exiting March versus.

What's embedded in your expectations over the remainder of the year.

Sure No. This is Andy I'm happy to answer that so.

The middle of the month of March we did see a sharp decline in elective.

Or products associated with the elective procedures.

And in terms of how that affected our guidance, we assumed that what we saw in the last two weeks of March would carry forward at the same level for the entire a second quarter.

And then at that point, we're projecting a recovery and then in actual.

A partial recovery of those elective procedures that were cancelled and didn't or delayed in Q2, but those would be rescheduled a portion of those would be rescheduled into Q3 in Q4, and then in terms of that cadence also expecting stronger PPD sales out of our medical distribution business as well. So that's part of that strength in the second half of the year.

Jack This is Ed one of the things we have done it to agree with Andy that we did see the sharp drop off in the and at the end of March there.

We have spent significant time, staying very close to our customers understanding as they are getting ready to reopen potentially and timing. So one of the things. We are doing is just like we do at the ended the year by building inventory for the beginning of the year Rush, we're going to make sure that we have the right investments in inventory throughout the second quarter so that.

Outweigh if that if the elective procedure start earlier than we expected, we're ready and if they start at the end of the quarter and beginning third quarter ready also with products that we don't have any service interruptions and we can really over serve the customers as they come back up on line.

Got it thanks Thats helpful and then.

Im sure Theres, an interplay for your hospital customers between financial challenges near term and then stimulus from the government along with the eventual return of elective procedures. I was curious how you expect this impact your working capital improvements over the balance of the year.

That your customers roughly these dynamics.

Sure.

Here's one of the things we saw in this maybe hep shed some light onto it.

If you think about when people started to work remotely. So we had a lot of our hospital networks send the people's to work the per work remotely kind of the back office accounts payable teams. If you look at a specific the around a are.

We saw a delay in collections for a period of time as people were getting used to working from home and about a week or two after people work from home plus you add into that's the cares Act. The funding we saw receivables come back to normal rates, we saw a large pickup on payables and reduction of receivable arm.

They are payables to us our reduction of receivables and we really haven't seen a big impact of that so far during the quarter and you know if you want to add any other commentary around that yes. Those are metrics that we watch very closely as an organization and overall at the ended the quarter. Our Dsos trend was favorable to where we were at the end of the year and the other metric we look at.

As our past due receivables in both of those metrics are in line with historical norms. So I think we're in good shape at that point.

Got it thank you.

Our next question comes from the line the Challenger Singh with Credit Suisse.

Thanks, how do we went up so I just want to any or in a bit mode. On you as I'm sure that on electric mostly just not coming back into queue exceed nearly seven space, a mouse, allowing elective surgeries and an expectation that we might start seeing some so just coming back in Q2 I'm just trying to understand why are you being go kind of thinking about.

Got you might not see anybody into Q3, I'd be just being guns ever do always like mode or something youre getting from hospital clients and any thoughts on that.

Yes, absolutely so.

As we put our forecast together right that was that was really formulated during the last looking at the last two weeks of March and then the for several weeks of April and.

We thought it was prudent to assume that those trends would continue through the second quarter I guess the way I would characterize it is is that if there were to be a return to normal sooner than what we've anticipated I would think of it as than taking away from the optimism I have in the second half of the you're right. So theres fewer elective procedures deferred that means there's fewer.

Active procedures to make up in the second half of the year. So.

Certainly could play out that the second quarter would be better than what I've I've laid out, but I wouldn't change my full year assumptions based on that if that makes sense.

Okay, and then maybe a Ed if you can take a step back and based on you would experience dealing with this oh, probably 19 situation. If you guys can shed some parts at all and maybe one or two structural change is called process improvements yuping should be made to the U.S. supply chain industry to make sure they industries better prepare.

The deal with any such pandemic in future any any parts like what what we should be doing going forward mix will be a bit of prepared for situations like this.

Sure again, so as I've spent a significant amount of time interacting with the federal governments, specifically on this topic and we have provided varying types of conversations around that I think the that theres really two ways to do it it's really around how do you drastically increase supply of the product here in the U.S.

And how do you find ways to reduce demand whether thats through reusing the product.

And other technology I think what its proven out in this process is if I think about owns in minor an hour Americans based manufacturing footprint versus others that primarily have product manufactured for them in China, our age or other parts of the world. What this is proven out is the ability as.

As I've talked in my prepared remarks, I want to make sure. This wasn't missed our ability to control the domestic supply chain from manufacturing to distribution to to the customer has made a big difference for us I.

I read the quote from the customer that address that specifically and I think that is what fundamentally it shows works. If you can manufacture the product in the Americas. If you can quickly get it there and you have control of that supply chain.

From manufacturing to supply to distribution to the customer and makes a big difference on ability to serve your customer during peak demands.

Okay. Thanks, a lot.

As a reminder, ladies gentlemen, you have a question that takes time.

In the number one.

Our next question comes on line and Steven Valiquette with Barclays. Your line is open.

Steve are you there you need to anew.

Okay and you may have lost.

I'm not showing any further questions.

Okay.

[noise] well, great well. Thank you operator, I'd like to start by thanking everyone for joining us on the call. This morning, and I have to tell you I was really looking forward to seeing many of you at our May Twentyth Investor Day in New York is.

I'm going to be an opportunity for us to show the extended leadership team as well as for provide everybody opportunity to see some of the great things that we're doing as a company.

Unfortunately due to pandemic, we have to propose postponed this meeting and we'll we'll scheduled for later day, but we're still going to have an investor day.

Secondly.

While this has been unprecedented time due to the cobot 19.

I believe that our business model demonstrates that we can quickly adapt we can quickly leverage our distribution products and service businesses to best service our customers.

And finally I want to take this opportunity.

So let everyone know that we take the responsibility support the frontline healthcare workers very very seriously.

And I'd like to personally thank those on the front line for all that they have gone all that they are doing and all that they will continue to do during this crisis. Thank you everyone.

Thank you for your participation. This concludes the call you may now disconnect.

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