Q2 2020 Owens & Minor Inc Earnings Call
Ladies and gentlemen to these contracts are scheduled to begin shortly you. Please continue to stand by I think you patients.
[music].
Good afternoon, ladies and gentlemen, and welcome to wins in my notes second quarter 2020 financial results Conference call.
My name is still well and I'll be operator for today at this time, all participants I know listen only mode. We will be facilitating a question and answer session.
The end of this conference call.
But anytime during the call you requires us and.
She's got star.
And then we'll be happy to assist you as a reminder, this conference is being recorded for replay purposes I would now like to turn the presentation over to your host for today's call Mr. grading. Please proceed mr. grades.
Thank you drill good afternoon, everyone and welcome to the owns a minor second quarter 2020 earnings call.
Truck grades on behalf of the team I'd like to read the Safe Harbor statement before we began.
Our comments on the call today will be focused on financial results for the second quarter 2020 for ongoing response to the coping 19 pandemic and our outlook for the remainder of the year old which are included in todays press release.
Please note that certain statements made on this call are forward looking statements, which are subject to risks and uncertainties. These forward looking statements are intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act of 1995.
All statements made on this call today other than statements of historical facts are forward looking statements and include statements regarding our anticipated financial and operational performance.
Forward looking statements made on this call represent 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 could differ materially for many results predicted assumed or implied by the forward looking statement.
We will reference certain non gap financial measures and information about these measures and reconciliations to the most comparable gap financial measures are included in our press release and our quarterly report on form 10-Q.
Today, I am joined by <unk>, Our President and Chief Executive Officer, who will provide commentary on the second quarter and an update on our ongoing efforts to help those on the front lines of the Covid 19 pandemic.
And Andy long or executive Vice President and Chief Financial Officer, who will discuss our financial results for the quarter and provide additional insight into our outlook for the remainder of the year.
Now I would like to turn the call over to Ed will start things off Ed.
Thank you Chuck good afternoon, everyone and thank you for joining us on the call today.
Before I get into my prepared remarks, I'd like to start by thinking the clinicians caregivers and frankly, everyone else on the frontline for their tireless effort in this battle against Cove at 19.
I would also like to think our Owens in minor teammates for their focus in intensity and near flawless operating execution during the first half of 2020.
This enabled us to deliver on our humble mission to empower our customers to advance healthcare.
Before I review, our progress related to our 2020 focus areas. Let me provide you with a quick summary of what we accomplished.
First we delivered over 5 billion units are PPE to our customers since February.
Next we increased or intensity around productivity and operational improvements, allowing us to one significantly increase our America's based P. P output, enabling us to better serve our customers. Although demand continues to outpaced supply and to continue to reduce operating expenses.
While maintaining service levels and these improvements will continue to provide value into the future.
Next we made the proper investments to provide flexibility and product assurance too quickly adjust as home health care demand strengthened and as electric procedures ramped up faster than expected and finally, we closed the sale of our <unk> business for $133 million delivering on an important part of.
[noise] strategy, and allowing us to focus on our three strategic colors.
Distribution products and services.
The previous items or just a few examples of the accomplishments in the second quarter as well as year to date. These accomplishments helped us feel will be improved financial performance highlighted by the following.
One we doubled are adjusted net income per share compared to the second quarter of 2019, too we expanded our second quarter operating margins by 68 basis points when compared to prior year and three <unk> significantly pay down debt.
This improved financial performance has not new and not just one quarter.
This is the third consecutive quarter of year over year adjusted earnings per share growth.
It is the fifth consecutive quarter of year over year gross margin expansion.
It is also the fifth consecutive quarter of generating positive operating cash flow. In addition, we include increased or sequential adjusted earnings per share by five times compared to Q1.
And today, we are reconfirming, our expectation of double digit adjusted EPS growth in 2021 above the revised full year 2020 guidance.
I will now reviewing a little more detail or 2020 focus areas consistent with our previous to earnings calls.
The focus areas are as follows financial performance for cue to an outlook continued operational improvements and disciplined reinvestment in our business to further strengthen our foundation for long term profitable Grove.
Let me start off with financial performance for the quarter and factors that will impact the rest of the year and into 2021.
And it will provide a detailed look at the improved numbers during his prepared remarks, but now I'll provide some color on what drove the current improvements along with the opportunity for future performance.
Starting with PPD demand for PPE remains an unprecedented levels and demand continues to exceed supply.
In order to address this issue we immediately took aggressive actions to optimize production out putting Q2, resulting in record levels of PPE produced we expect to realize a full quarters worth of these improvements in Q3 Q for raising our PPE output to new record levels.
However, we expect that the gap will still exists between supply and demand.
This increased output has helped us to begin fulfilling our commitment to the federal government, while maintaining customer unit volume fulfillment above pre covid levels for America's base manufacturing PPE.
Mixed in the second quarter, we saw improvement an elective procedures compared to our previous forecast as many states opened up.
We were prepared for this quote change and we were able to capitalize on it because we leveraged our investments in inventory are teammates and our processes that provide flexibility and product assurance.
Finally improved operating efficiencies continued to provide benefits to the income statement and balance sheet. This focus has enabled us to deliver improved cash flow to strengthen our balance sheet by paying down debt as well as make investments and infrastructure technology and service.
Based on our strategy preparation and continued operational execution, we aren't position to double are full year 2020, adjusted Vpn's guidance range.
And today, we are able to reconfirm, our expectation of double digit adjusted EPS growth in 2021, we have established a positive track record of financial performance and we will maintain a high level of continued improvement going forward again annual provide additional financial data is prepared comments.
Now, let me move on from the financials to discuss our second time operational improvements.
Operational excellence delivers more than just financial benefits as previously discussed operational excellent enables us to deliver and enhance customer experience and builds trust.
I continue to be impressed with the way our teams have performed in consideration of the unprecedented and ever changing challenges we are face this year.
Our controllable service metrics remain high and continue to run consistently at or above pre covid levels.
Our customers have recognized our efforts and flexibility in finding solutions during these challenging times.
Two examples of our ability to provide critical and flexible solutions to our customers include.
The creation of quick Kidding services for Kovac testing within our Byrom home health care business.
And securing pandemic storage some supplies for our hospital customers across our network.
Now, let me move onto our final topic and discuss some of the recent investments we've made.
One we continue to invest in expanding manufacturing capabilities at our North Carolina location to produce nonwoven laminated fabric used and products such a surgical gowns masks and thousand 90 fives.
The vertical integration enhances are America's base manufacturing and our control over the supply chain of critical fabric needed to produce are PPE.
Second we're retooling our existing production lines for and 90 fives and surgical mask to increase the output of each line.
Third we continue to install new and 95 production lines in North Carolina in Texas facility and I am pleased to say that as of today, we have begun to see product roll off of these lines.
Fourth we are adding capacity in our America's based count production and finally, we continue to solidify our investment in commercial and operational support resources to better serve our customers.
So we expect 2020 to continue to be a very dynamic year.
But we intend to maintain are intense focus on our mission to support our customers in hospitals home health care and other health care related markets. We will accomplish this with increased production in flexible solutions to address the challenges our customers are facing.
Additionally, we believe the heightened demand for PPE will be a key elements of the new normal in the future of health care.
The reasons for this belief include.
Our customers protocols and new regulations are calling for increased use of PPE.
We are seeing increased compliance to these protocols.
Ah customers have made it clear to us that they have a long term preference for medical grade PPE.
We expect demand to stockpile PPE will continue to grow and finally, we have identified new channels for PPE in healthcare non healthcare and international markets.
With the continued execution of our strategy relating to operating efficiency increased outputs an investment for long term profitable growth, we are ready to capture this demand.
By continuing to add incremental production lines for incremental output to address the demand supply imbalance.
Optimize these new production lines to the existing production line output levels continued process improvement to increase output of all production lines.
Ramp up our new nonwoven fabric machinery.
And expand our customer relationships as our cobot performance has built the foundation of trust and capability.
Our confidence is reflected in a significant adjusted EPS guidance increased to one dollar to $1 20 per share for 2020.
And Ah Reconfirming, our expectation of double digit adjusted EPS growth in 2021.
Thank you.
And now I will turn the call over to Andy for a discussion of our financial results.
Andy.
Thank you Ed and good afternoon, everyone. Today I'll review, our second quarter financial results and the key drivers for a better than expected quarterly performance and then I'll discuss our expectations and assumptions for the rest of 2020.
As we mentioned on our July 21 pre announcement press release, we increased our full year guidance range for adjusted net income from 50 to 60 per share to one dollar to $1.20 per sure I will spend time discussing the primary factors. We considered embracing are guidance later in my remarks.
First we're very pleased with close the moving onto a sale in mid June delivering on another key part of our strategy as a reminder to former movie <unk> business unit has been treated as discontinued operations through the June 18th clothes date, and our quarterly and year to date financial results.
My comments today, unless otherwise indicated will be on a continuing operations basis.
Starting with the topline net revenue in the second quarter was one $8 billion compared to two $4 billion for the prior year. This change was primarily driven by the impact of the Covid 19, pandemic unelected procedures and account nonrenewals dating back to 2019, partially upset by greater sales of personal.
Protective equipment or PPE, coupled with revenue growth in our home health care business line within global solutions.
Oh, the virus had a negative impact on revenue the severity of the impact was less than projected is elective procedures began to return earlier than we had previously expected.
Gross margin and the second quarter was 14, 9% an improvement of 284 basis points over prior year as a greater portion of sales came from the higher margin global products segment and is a testament to the increasing level of operating efficiencies and productivity gains we've achieved.
Distribution, selling and administrative expense of $242 million in the quarter represents of $23 million decrease compared to the second quarter of 2019, primarily as a result of operating efficiencies lower volumes, partially offset by continued investments in the business.
Interest expense in the quarter was four $4 million lower than the prior year due to less that lower base rates and the utilization of our accounts receivable securitization program.
Income from continuing operations for the quarter was $161 and adjusted net income for the quarter was 12 $5 million or 20 per sure.
The impact of foreign currency was minimal having a one headwind and the quarter.
We knew the second quarter results would be highly dependent on two key variables electric procedures and demand for PPE.
Is mentioned above revenue reflects it earlier than expected increase in electric procedures, which began in mid Q too and we have continued to see those procedures increase into the third quarter, albeit at a slower rate.
The quarterly results reflected a response to the unprecedented demand for PPE products, including productivity improvements and operating efficiencies, yielding a significant increase in the output of PPE by our America's based manufacturing plants.
Now I will discuss our results by segments for the second quarter.
Starting with global solutions revenue was one 5 billion compared to two 1 billion and the prior year.
The change comes from a decline in our medical distribution business due to the previously mentioned impact of the Coke at 19 pandemic unelected procedures and passed customer nonrenewals, partially offset by another quarter of solid growth and the home health care business sequentially Global solutions revenue declined by $300 million, which was almost <unk>.
Lyerly related to cope at 19.
Global solutions posted in operating loss for the second quarter of $10 million compared to income of $18 million last year.
The Pandemics impact on segment revenue was the primary driver of the quarterly operating loss.
Now turning to the global product segment.
Net revenue was $370 million compared to $364 million in last year's second quarter.
Increase was driven by growth and PPE sales, partially offset by the impact of the reduction an elective procedures.
Net revenue for the quarter experienced a small sequential decline due to the impact of lower electric procedures on non PPE products, partially offset by increased sales of PPE.
This segment is expected to show sequential growth starting in the third quarter.
Operating income of $52 million increased by $34 million over last year.
Increase in operating income was driven by product mix increased revenue from PPE productivity and efficiency gains fixed cost leverage operating expense discipline and continuing favorability can commodity price trends with a small offset caused by the impact of foreign currency of approximately $1 million. These.
Factor should continue for the rest of 2020 and are reflected on our projections for the year.
Now looking at our cash flow the balance sheet and that profile, we generated operating cash flow of $57 million in the quarter and $150 million here to date on a consolidated basis, driven primarily by improved profitability and further working capital gains as we effectively managed inventory to align with our sales.
Level and medical distribution and accounts receivable collections remains strong during the quarter.
Total that came in just under one 4 billion at June 30th representing a sequential reduction of $137 million compared to the first quarter and a $332 million decline over the last five quarters. This represents nearly a 20% reduction in depth over that time period.
We used the proceeds from the <unk> sale to retire a portion of our 2021 notes and set aside the remaining $79 million is restricted cash for future debt reduction.
With this quarters debt reduction, we continue to make excellent progress towards our commitment to strengthen the balance sheet, which will help enable us to execute our growth strategy and invest across our business.
Now turning to our outlook for the remainder of 2020.
Given the momentum we built in Q too we're comfortable raising our annual adjusted EPS guidance from a range of 50 to 60.
Two one dollar to $1.20 per share it is important to understand the factors and assumptions that we considered when developing this guidance.
We expect to demand for PPE products to remain very strong and that are America's based manufacturing capacity expansion programs will remain on schedule for the rest of the year.
We also expect strong performance and Byrom, our home health care business to continue.
Finally, the impact of Covid 19, an elective procedures is expected to continue to have a negative impact on revenue for the remainder of the year, whereas our previous forecast assumed a full recovery and the second half of the year. Our current thinking is that elective procedures will remain at approximately 90% of pre covid levels for the rest of the year. This.
[noise] will affect both reporting segments, but the impact will be greatest in our medical distribution business within the global solutions segment.
Key modeling assumptions have been updated on supplemental slides filed with the SCC on form 8-K earlier today and posted to the Investor Relations section of our website.
And closing we feel very good about the operational and financial improvements, we've achieved and our strategy for investing in the future of the business. As a result, we've continued to expect double digit earnings growth in 2021 relative to the revised EPS guidance for 2020.
Thank you and with that I'll turn the call back over to the operator to begin to Q&A session operator.
Thank you, ladies and gentlemen, if you wish to ask a question.
<unk> followed by one on your touch tongue telephone if you're a question has been answered are you wish to try to your question.
At first question comes from Michael Chinee with Bank of America. You line is now open.
Good afternoon, Gratulation nice quarter, and a nice results that you've delivered so far.
When you think forward as you think about some of the commentary made regarding PPE right now.
As you said.
And a strict supply at some point supply without strip demand. So can you maybe talk a little bit more of the alternative channels you are looking at in the world where.
Virtually anywhere you look even outside of the medical environment, you're going to need more PBE that you did previously.
Sure Bye.
Thanks for the comments upfront and I'll address that's so there's a couple of things let me talk about it both and Ah.
Short midterm and then long term obviously in the short in mid term. We think it's going to continue that were demand is going to significantly outpaced supply.
I talked about some other things and I spend a lot of time with customers and some of the things we have heard from them why we think it's going to continue going forward for the midterm I would say, it's the protocols that have changed its regulation of acquiring it's the fact that more people in the health care world are used to wearing masks.
And changing masked more often so that we believe it is just going to continue.
Outside of it kind of a non traditional channels that didn't use some of the PPE.
That's a nursing whether that's.
Dennis Field, you look at the academic settings, which is outside of health care that being University schools.
Just general population, we think there's a tremendous demand for that that frankly, we haven't tapped into because we have been focusing on delivering to our customers that are committed that we've been committed through in the past and honor and those commitments.
I think the other aspect of it's Mike is international and obviously, we redirected our products all to the U S markets to make sure. We can serve though so I think that also provides us the ability to grow beyond that.
And then I can take it even a step further might get as you are right at some point in time, whether that's.
2022, or some other point in time, when you start to get that supply demand balance of the other way around one of the things that we see is difference is the fact that we believe you're also has significant stockpiles with product in there that's may not be medical grade that may be approved and the temporary for temporary may be non traditional.
Product of brands that people use so we believe that's going to be another opportunity going forward as people start to want to rotate product out of their stockpile and replace it was great high quality product that we make in the United States or we manufacture the material and you estimate throughout the rest of the America's we think there's going to get an opportunity for that going forward too.
So that's the way we're looking at any other aspect of this is this is what we do we actually manufacture we make the products and our process. So we can control of good aspect of that so those are some of the reasons why we see shorten midterm that supply and demand imbalanced, consisting when it start.
To balance out we think there's gonna be opportunities to replenish stockpiles, where there is non traditional products in there and then additional markets that we think will open up over a longer period of time. So that's why we're we're pretty bullish on the future of the PPE products.
And as you think about.
Some of the operational efficiencies you've taken you sound, which I think it's been almost forced upon your at least having to be accelerated are there any other areas.
Think about the multi year strategy that.
You've been there for a little bit can you think about that had been unlocked because of coke with that could create further lovers promotion expansion on multiyear go forward basis.
Let me just talk about it again, obviously shorter in mid term and longer term is one of the things I would say are teammates at a great job on was two aspects.
And a medical distribution continuing to drive waste out of the organization continuing to drive operating efficiencies on our manufacturing product side.
<unk> ramped up production to levels, we've never been at before and I think with that has helped us as continue to look at and change mindset that.
How do we do things differently to drive more production to get more fixed cost leverage in addition to that how do we leverage our manufacturing experience and knowledge and brought in some of those PPE categories beyond what we're just making today so that some of the things that I would say.
Pandemic helped us with.
But in the same.
No different than we have the way we've been around in the business for the last 18 months.
Focused on the customer focused on operating efficiencies and continue to drive it and I think with pandemic data just elevated that and raised our organization to do it much faster as well as really challenge how can we do things better.
Great. Thank you.
Thank you. Our next question comes from a call Tomorrow with Bad you line is now open.
Thanks, very much good evening.
So.
Quite a few questions here I'll try to go quickly I was hoping we could get some since you talk a lot about.
Electric procedure rebound later in the quarter and guidance reliant on similar levels for the rest of the year could you give us a since an.
Exactly what those levels were.
In terms of percent decline year over year or what the improvements looked like as you went from April until June.
Sure Eric Yeah. This is Andrew I'm happy to take that question. So.
Look.
As we look at the.
The impact Cove it had on our business. So originally are thought when we entered the quarter was that we would be operating at about 70% of pre covid levels and I think we even quantified that it about a $480 million impact on global solutions in Q2 sequentially.
So as we move through Q too.
April tracked very much in line with that expectation and through the early parts of me.
That prediction was really on track, but around mid May I would say things started to turn and the situation.
Increased in terms of output and we will probably.
85% or so by May and we exited the quarter in June and the low nineties in terms of pre cope with levels and that's pretty much where we remained today and that's really form the basis of our guidance for the balance of the year is to be in that 90% of pre cove, it and as you recall back.
Last time, we spoke the anticipation for the second half of the year was that in the second half we would be that only recovered, but potentially that making up for some of the recovering some of those last surgeries and procedures that did not take place in Q too and again are really revisit that assumption.
So that we believe on a full year basis that cold and we'll have negative impact on revenue primarily affecting the global solutions business. Eric. This is that I think they are they going to think about is Andy talked about that 90% rain dress expecting in the Q3 Q for.
Some point in time, whether that's in Q3 Q for even into next year. There are elected procedures that will be pent up demand and eventually at some point in time some of those would happen.
So, but what are the way we model that right now is that roughly 90% of pre covid levels for the back half of the year.
That's that's really helpful and then on the PPE.
I know historically PPE was for at least for traditional solutions for traditional distributor Ppe's typically.
Hello to mid single digit percent of total revenue can you give us a sense on where you where you were say starting February and then how that's changed as a percent of your total mix as you whether it's a <unk> average or maybe here in July where PPE as a percent of total revenue is today.
Yes. So this is Andy again, Mike So I would say that obviously PPE continues to ramp up as we move through through the year.
I'm, sorry, Eric as we move through the year and.
But.
Total percentage of our business I don't believe that's something that we have it disclosed at this point.
Could you.
Could you give us a growth rate, perhaps if you don't want to quantify the dollar size could you maybe give us a sense on on growth or Alternatively, you still talk about demand being significantly greater than capacity, maybe give us a since on.
What those ratios might look like today.
Yeah. It really we probably don't get into that level of detail into our specific product lines within the business.
Let me, let me try one more of this one should be easy.
Tax rate of 40% in the quarter, if I'm looking at updated model, which I think I am.
Guidance, 27% to 29%.
How does that how does that play out over the next three quarters.
Yeah. So so we will issue full year guidance on the effective tax rate in the range of 27, 29%.
So that's really are full year guidance I know that our gap effective tax rate is somewhat skewed quarter.
Combination of them.
That operating Los utilization and you put that in perspective of our net income. It's just the denominator slow so it kind of excuse the percentage, but overall I think if you work with a full year ETR guidance of 27% to 29% you should be okay.
I'm just I. Thank you I'm, just I'm trying to figure out if we should use the math that gets us to that level and have it flatline through the three quarters or if there could be some volatility individual quarters that we should be paying attention to.
Yeah, I think the cute two number that you have feels a little bit high.
Sorry, I wish I was.
Bring lapse into a a long day 26, 5% is what we're showing but I believe but 40% them first quarter, I think I said that wrong, but.
I'm just curious if we should be using something more similar to <unk> linearly through the year or if there's volatility and <unk>.
Yeah, I think I think we're probably in the low thirties for Q too and so modeling that out for a full year, it again and that 2029% range I think.
The best guidance.
Alright, well, we will follow up offline, thanks very much for that.
Okay sure.
Thank you.
[noise] question comes from Kevin Kelly under with UBS. Your line is now open.
Hi, Thanks, Thanks for taking my call.
Talk a little bit about P P E and sort of understand.
The trends you said it expects to Ram and get your sort of that capacity certain extent. So they are added capacity coming.
<unk>. Thank you need to do that in any way shape or form and then secondly, I guess what percentage of your PP&E is currently source versus manufacturer.
That's the start anyway [laughter] sure. Kevin This is that I'll take that one so here's the way we're going to theaters or do you think about <unk> and let me just maybe sure a little bit more detail. So.
So in the second quarter, we knew that we had demand far exceeding supply. So we took our machines for and 95 for isolation gallons for surgical gowns for masks.
Perfect example, and 90 fives, we went through and through our internal organization along with external support.
Graham Ah process initiative on each machine and each line and we looked at every single bottleneck and we were able to get 10 2030, 40% increases on those machines by identifying bottlenecks fixing those bottlenecks and increasing production. So that'd be an example on in 95, what we did on that we.
Increased.
During the quarter also production of isolation gown. So in the quarter, we actually retooled some machines that weren't being used before have those up and running in the U S. Producing isolation gowns and then we use our process improvement to continue to drive more output on all those machines, we're adding additional we added an additional nonwoven fabric machine to be able to produce.
The raw material when I say, the raw material the fabric that's used in mass gowns.
And then 90 fives. So that's one aspect of it is really getting the output higher on those existing machines.
Then throw a grant received from the U S government, we're adding five additional machines.
Plus additional other ones five additional scenes with the government grants and our Texas facility and here's what I'm impressed with our team on is the fact that those machines. We got the order in April is supposed to take six months to get those machine up and running as of today, we already have product coming off of it off of one or two of those lines are ready.
So those are production lines that are coming into place once those get into place. It's then how do we increase product coming off of those going forward by optimizing the production output consistent with the machines you've been running for years. That's the next way we get demand up.
So you think about all that increased demand that's what partially of that happened in the second quarter by optimizing it will get a full impact of the optimizing of the existing machines in Q3, Q for having new machines come in now.
And then continuing to optimize those to get a full impact of those as the second half of the year continues on so that's just one thing to think about it. In addition to that we're putting in a new lamination or nonwoven fabric machine in North Carolina to make sure. We don't have any any material outages, we have the ability to make that material. So that's the way we're thinking.
About it will work in 24, seven we're adding productivity increasing output, adding new machines, and it's helping us continue to maintain pre cope with level delivery to our customers as well as honor of commitment we have from the U S government.
On our HHS order that will continue on so.
That's the way to really think about that PPE production and what we're doing too well, how <unk> ramped how that ramp will continue through productivity as well as additional.
<unk>.
Okay. That's helpful. So five lines and then two wogan.
Lines that are sort of being added and how many what would that do to total capacity like how many lines did you have running prior I know you're also increasing the capacity the existing lines now you're adding five more lines is this doubling the capacity increasing it by 50% is there any any sort of I'll just say, it's a significant I'll just say, it's a significant increased I haven't gone.
[noise] into whether it goes from.
X number lines to why number of a production lines, because we're continuing assessing that and continuing to add based on the demand and based on the long term purchase commitment orders too.
The U S government.
The HHS contract if I remember correctly that was through the end of the year is there an understanding that that's going to continue as well into 2021, yeah. It's actually it's through approximately a little after it's through the second quarter of.
Actually I'm, sorry, I'm wrong it goes into the into the third quarter of 2021, My apologies third quarter 2021.
Okay, Great. That's that's helpful.
Okay. That's very very helpful. So when we think about.
And just looking at the guidance increase.
Your expectation around.
Procedures as a little bit worse, right, that's right and it was before in the second happy at your guidance as up materially.
Should we say I guess byrom as maybe doing better.
As well, but if we think about the increasing.
Is it almost all from PP&E or is there other.
Other aspect higher revenues and there's a cost leverage as well, but how how much of this would you say it's from PP&E versus where you were before or is it better cost management.
Maybe help us out a little bit in terms of thinking about.
Basically doubling of guidance.
Or a portion of it is a good portion of it is from the PPE increase in the fixed cost leverage, but then a good portion of it.
Portion of it is also from our operating efficiencies and all of our businesses.
Again, a lot of those products are manufactured we manufacture those and then we still distribute them through hours and other channels, but we have gotten much more efficient at managing inventory within our distributions managing the the delivery of those products. We continue to see that same focus in our home health care. So a significant portion of it isn't P. P.
But yet we continue to see operating improvement across the other businesses, although as Andy talked earlier, there was significant revenue impact because of lack of elected procedures in our medical distribution business.
Sure.
Has been very helpful. Congrats on.
The successes.
Thanks, Kevin.
Thank you.
Question comes from Jaylen Jesting with credit Suisse. Your line is now open.
Thanks, Good cadre congrats.
Kevin question here it seems the margin trends in the global products business did benefit from operation efficiencies and improve productivity, etc. I know, you're giving fully gross margin guidance, but what are your underlying at themselves with respect to the EBITDA margin trends in global products business, just wondering how much of this <unk>.
[noise] outperformance in the segment of sustainable on a reckoning business in the second half or at least.
Yeah, so it sounds great Andy I'm happy to take that question. So.
As we move through the year and efficiencies is Ed talked about and operational efficiencies and productivity increases as volume increases in PPE. We continue to see if favorable utilization of our fixed cost basin of our of our footprint and that's certainly driving per juniata per unit basis costs down.
That's going to translate the higher gross margins and EBIT margins as we move through the year and continue to ramp up production. So I think that's the right trend to be thinking about.
But again, we haven't commented specifically on any specific range of gross margins on a business unit level. We have however provided guidance for gross margin at the total company level again that you can find posted in the supplemental scandals on our website and that's the 14th one to 14, 4% range for the year.
Okay and then.
Maggie modem manufacturer and distributors entering the marketing P. B, how would you would think about any market shows shift as well as any pricing pressure, there's more competition arise.
What are you thinking about that in short term address long term.
Yeah I think.
Lee.
When that comes into play even more is when you get that started to get to equilibrium up supply and demand and I think right now.
It's really.
We're going to drive that based on our ability to create product and put it out into the marketplace to our customers and I think the benefit we get by being able to ramp up production substantially we get more and more customers that can become customary to use our product and our product becomes prevalent we think that could have some level of stickiness I think the other thing that I think about is yes.
There will be significant number of players in the market, but as you get to that equilibrium or even the other side of it we're actually demand as less than supply were built in where structured to be able to produce products at pre cove, it pricing and pre Cove in style, that's what makes us very very different than others.
Sure something that I'm extremely proud of is the second quarter with our America's base manufacturer Pp product, we honored are pricing commitments to our customers through the entire quarter. We did have some products that we manufacture.
That had price increases we held those but as we go forward.
Certain items, where we've had we have to go out and just pricing a good example of that is gloves.
Seen a large demand increase for gloves, we've seen constraint of the product the products, we manufacturing facilities, we've been able to hold extremely strong pricing, but those that we have to acquire the places at times, we've had to push on price, but I think.
What we look at is.
P. P manufactured in our facilities and are controlled operations, we've been able to continue to take those products entirely for the second quarter, even in light of everything going on and maintain our pricing which shows you we have the ability to operate in this.
<unk> that may happen years from now again.
And one last one if I I kind of.
What are you seeing in terms of audit fees and saw that has been made in the current selling see them I know last time. When you spoke you guys talked about some active rfps getting delayed in light of Corbett.
Update bed are you seeing those activities come back.
We are we are starting to not necessarily in the second quarter. We had several that were out that that the customers paused on and I get that it makes a lotta sense, but now.
As as our customers are getting.
I don't see it used to the current environment because I don't know if you will ever used to this type of environment, but have the ability step back and reassess we're starting to see some level of increase in rfps.
That are in the market.
Okay. Thanks, a lot.
Thank you.
Next question comes from Steve adequate with Barkley's. Your line is now open.
Thanks, you can't Jonathan Yeah, Christine just in relation to the global solutions business.
That was obviously down pretty pretty materially in the quarter I guess, how are you thinking about that kind of moving forward because it's obviously global products outperforming and expect it to continues out before I'm just wondering if global solutions swings back to profitability or is it still going to be challenge just because of the revenue headwinds.
Yes. This is Andy happy to take that question. So so thinking about it sequentially as I mentioned in my prepared remarks, Q Q1 to cue to.
Looking at about a $300 million headwind reduction.
Sequentially.
And then as I talked about the ramp as we saw coming up through the quarter, primarily with that inflection point in the middle of May.
Ramping up through through June and ending the quarter.
Low 90% of free Covid levels, and then our expectations and continued forward. It those same level. So sequentially between Q2 in Q3, we do expect to see.
A revenue increase although.
But not quite the pre covid levels.
In terms of how that affects the margins.
So I kind of like to think of global solutions, not individually, but holistically as part of the entire company right then.
Certainly the volume increase sequentially will help the margins, but you'd have to realize that global solutions is really an integrated player with our overall global products business and using.
Those channel relationships to drive global products revenue and.
Revenue that is the margins recognized in our global products business are really only recognize that kind of that arm's-length transaction price in the solutions business. So so thinking about margins Holistically I think we have to incorporate global products into that thinking.
Okay, Great and then just some on your commentary regarding gloves.
And the pricing have you seen other players come back into the market.
Given some of the glove issues out there and how long do you kind of expect this.
Price in case, you guys take price.
Persist as we move into 2021.
And a new players in the gloves I think that it's really tough category and as you really start to understand gloves.
Owns a minor owning manufacturing facilities gloves.
Something you just turn on overnight. So we just if you've ever been in one of those facilities.
That's something that takes years to get up and running.
So we don't think there's going to be on the short term significant number of new players per se and gloves.
I think.
Very diligent to continue to drive and more product out of our facility. So we can continue to provide those products, but we do see we do see some level of cost pressure I'll call. It on gloves, and we've been opening transparent with our customer base on those products and we're we're seeing that and helping them fine alter.
<unk> where possible.
Alright. Thanks.
Thank you next question comes from Robert Jones with Goldman Sachs. Your line is now open.
Great. Thanks for the questions I guess, maybe just a follow up on on global solutions.
It looks like clearly just highlighted sales were down I think is like 30% year over year mid teens sequentially profits fell obviously a lot more than that.
Could you just maybe go back and talk a little bit more about the disparity you're seeing there is it is it volumes driven is it mixture than any kind of any color around the order of magnitude and what's driving it disparity between the topline and profit and then I guess more importantly.
What what level of a recovery do you need to see.
And your mind over what timeframe to kind of see this this segment returned closer to producing profit growth in the future.
Sure Robert Yeah. This is antique now great question. So.
In terms in terms of the the overall profitability of the business yet.
Think about the decline in revenue in the disproportionate change on the bottom line at the way I think about that is is that.
We knew that that at some point in time procedures, we're going to come back. So we did not take the position of taking out a lot of costs.
That could potentially jeopardize our response in our ability to service customers on the rebound so.
There was a significant amount and I'll say deleverage as we lost volume second quarter. However, since those costs are already in place is the volume returns I think we can return.
With that revenue pulling through with some higher higher pull through rates as well on the upside.
So I think that's kind of a key driver and as I mentioned earlier question again, when you think about what does it take to return to profitability again, I do look at global solutions as being in the medical distribution products in particular is being more holistically integrated into our global products business I'm looking at that more holistically, but.
Absolutely is the volume returns that the profitability will follow.
And then I know, you're not giving segment guidance.
Certainly not an hour or for 2021, but just underlying that assumption a double digit EPS growth can you maybe just directionally talk about what's assumed in distribution solution, specifically as it relates to that 2021 expectation.
Yeah. So I think one of the key drivers going forward into 2021 for medical distribution is the return of volumes post Covid pandemic impact right. So we lost $300 million of revenue alone in just a few too and we'll lose additional revenue in the second half of the year only operating at 90% of pre covid levels.
And not only do we expect that volume to return at some point, but as I've mentioned, there's going to be some pent up demand for recruitment or makeup of Los surgeries from 2020, social I think volume will be a key driver in the returned to profitability that business.
That makes sense and then I guess, there's one last one I know we talked about the impact on PPE from from Covid, but was curious about testing.
Is this an area I know you mentioned, some kidding and I think and prepared remarks, but could you maybe just help us think about how important or what size opportunity to covid testing could be and then maybe how those economics would play out relative to the rest of the enterprise.
So the testing aspect, we don't actually.
Play in that testing that testing market.
We are doing is for our customers is actually creating all the supplies needed for the clinicians and or the patient so that way. They can administer the test so little bit differentiation I think it's the nuanced there that we're not actually distributing tests. The test today, we're actually creating the kids so that way of tests can be delivered in it protects the patient.
And the clinician.
Okay got it that's the helpful distinction. Thank you.
Thank you. Our next question comes and Lisa Gilbert J P. Morgan Your line is now.
Thanks, It's actually make me check on for Lisa today, just two quick ones here.
So first following up on the global solutions business.
Talked about customer non-renewals in medical distributions being headwind your revenue growth and the second quarter can you remind us the magnitude of that headwind or when you cycle that impact.
Yeah I'll I'll start this is that we'll talk about the cycling on that so that we talked last year.
Take six months to nine months plus from our customer making their decision until it gets out that's going to cycle through the end of this year at a minimum through the end of this year and then there's still has a little bit of that tail that will continue to impact us.
Into the beginning of next year, but the bulk of it'll be behind us when we by the time, we get to the end of this year.
Got it in a second you use the proceeds from the movie answer to repay that.
Talked about an additional 70 $79 million you'd set aside for future debt reduction just wondering if you could talk about where leverage currently stands and your longer term target there.
Yeah, Yeah overall, we've been able to reduce that significantly in over $130 million in the corner and $332 million or so over the last five quarters. So.
That now stands in total to just under one 4 billion.
Again, we see.
Like you would correctly mentioned, we've got another $79 million that has been set aside is restricted cash.
Be used primarily for the for the 2021 pay down.
Got it appreciate comments.
Thank you.
But as of questions at this time I will not turn the call back over to Mister to secrets, Macy's closing remarks.
So first of all let me think everyone for joining on the call. Today I also as I opened up I talked to live at about the clinicians and those on the front line and wholeheartedly I want to thank them because they have been working tirelessly.
To fight this battle against Cove at 19, I also want to thank our teammates or teammates that.
They can to live by our mission and really support those who are serving the patients.
These teammates help us help help us to drive and it drove that strong operational execution, which really field are strong financial performance in this quarter.
That financial caused this financial court as well as the previous really has enabled us to establish a consistent and strong financial record.
And as I look into the future I really believe that market demand for a unique offering is really is expected to remain at a very high level going into the future and then finally, we're going to make sure. We can accomplish that and capture that by investing in different things to best serve our customers and also provide long term profitable growth so with that.
Let me think everyone on the call and look forward to talking to everyone in the next quarter. Thank you.
Thank you for your participation in today's conference. This to call you may know disconnect.
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