Q3 2020 Owens & Minor Inc Earnings Call
Ladies and gentlemen, please continue to hold your conference call will begin momentarily.
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Good day, ladies and gentlemen at this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
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I would now like to introduce your host for today's conference Ms. Chandrika, MACOM Director Investor Relations Ms. Mcgough, you may begin.
Thank you operator.
Hello, everyone and welcome to <unk> third quarter 2020 earnings call.
Our comments on the call they'll be focused on financial results for the third quarter of 2020, our ongoing corresponds to the cold 19 pandemic and our outlook for the remainder of the year all of which are included in today's press release.
Please note that certain statements made on this call are forward looking statements, which are subject to risks and uncertainties. These.
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 fact are forward looking statements any people statements regarding our anticipated financial and operational performance.
Forward looking statements made on this call represent management's current expectations and are based on information available at this time such statements are me forward looking statements involve numerous known and unknown risk 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 in it and she's these filings including.
The risk factor section of this end report on form 10-K, and quarterly reports on form 10-Q, except as required by law or the resting loop of the New York stock Exchange the company expressly disclaims any intent or obligation to update any forward looking statement.
Additionally, in our discussion today, we will reference certain non-GAAP financial measures information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release and our quarterly report on form 10-Q.
Today I'm joined by Ed because he got our President and Chief Executive Officer, who will provide commentary on the third quarter and an update on our ongoing efforts to help those on the front lines of the Cobas 19th endemic.
And Andy long, our 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.
I would now like to turn the call over to Ed who will start things off it.
Thank you Sandra good evening, everyone and thank you for joining us on the call today.
I'm extremely pleased to be here today in reported another strong quarter.
The strength of this quarter has been driven by our exceptional operating performance supported by our dedicated teammates.
It is our ability to support the complete value chain, which makes us different.
The value chain starts with our Americas owned and operated manufacturing facilities combined with our broad external supplier base and finally integrated with our robust distribution network. This.
The approach allows us to operate at the highest levels of performance and provide an enhanced customer experience, enabling us to best serve our customers and fulfill our mission to empower.
Power, our customers to advance health care.
While the performance in the third quarter was strong it doesn't stand alone.
In the past 18 months, we have significantly repositioned our organization by focusing on the customer investing in the business and delivering on productivity and operational improvements.
This strategy has delivered compelling results for the third quarter as well as accelerating performance during the past year plus.
Let me start by sharing a few examples from Q3 that demonstrate the strong performance.
First we achieved an increase of more than 250% in adjusted net income per share compared to the third quarter and 2092.
Two we expanded adjusted operating margins by 240 basis points versus prior year.
Three we generated operating cash flow of 118 million as a result of increased earnings and working capital improvements.
Fourth we continue to make investments in infrastructure service and technology.
We reduced total debt by 70 million in the quarter and six we launched the $200 million follow on equity offering which has since closed.
Specifically related to the global solutions segment, we grew revenue 317 million sequentially from Q2 to Q3. The segment returned to profitability and we maintained our industry leading service levels next related to our global product segment, we achieved record profit levels and we manufactured red.
Good levels of P. P E and finally, we reached a milestone in the cobot flight.
With nearly 11 billion units of P.P. delivered of which approximately 4 billion units were produced with materials manufactured in our American factories or owns in minor own facilities all of that being done since the beginning of this year.
While the third quarter was strong. This is just a continuation of our demonstrated track record of strong performance here are a few examples of our consistency.
One we achieved year over year gross margin expansion for the sixth consecutive quarter.
True we generated positive operating cash flow again for the sixth consecutive quarter.
We paid down debt by $231 million year to date and by $402 million in the last six quarters. In addition to that we have another $130 million in cash on hand that is specifically earmarked to pay down additional debt.
Next we delivered a fourth consecutive quarter of year over year, adjusted EPS growth on a constant currency basis and finally today. We are pleased to raise our 2020 full year adjusted EPS guidance to a range of one dollar and 90 cents to $2.
Again, we are reconfirming double digit adjusted EPS growth in 2021.
It is clear that our robust operational execution combined with strategic investments have fuel increased output and improved efficiency across the entire business, thus, enabling us to better serve our customers.
Continuing with this approach is the foundation of our strategy, we are well positioned to address the current and future needs of health care.
I will now talk about our focus areas that will shape, the remainder of 2020 and the future of owns in lighter.
These areas of focus our investments operational improvements and continued financial strength.
Andy will provide additional financial color in his prepared remarks.
Let's begin with our investments.
Our disciplined investment strategy has been and will continue to focus on infrastructure technology and operational effectiveness into the future.
Let me start with investments in our global product segments.
During the third quarter, we continued to expand or manufacturing output through capital investment operational improvement and long term partnerships with our customers here are just a few examples of these investments one we completed the installation of new and 95 production line in our U.S. based manufacturing facilities.
Next we continue to invest in nonwoven fabric manufacturing and our Lexington, North Carolina facility.
And we continue to expand our isolation in surgical down production capacity.
These investments in our Americas base locations enable us to continue to be a leader in the manufacturing of P. P across the broad continuum of P. P products.
It should be noted that we also expect the P.P. supply demand imbalance to continue into the future.
Moving now to investments in our global solutions segment.
Where we expanded our low unit of measure warehouse infrastructure system.
We improved our inventory planning process and algorithms.
We enhanced our data management services offering through my win into sites.
And improved or B to B and B to C offerings in our home health care business.
These investments differentiate owns a minor in supporting our customers across the value chain.
Again this starts with products products that are manufactured at our factories, most <unk> most of which are in the Americas.
With our teammates with our technology with our patents with our processes with our quality control with our regulatory affairs.
I think you get the picture.
We know how to manufacture products in seamlessly get them into the hands of the health care providers through our distribution channels as.
As you can tell we are in a strong position to meet the demands of the changing landscape in the health care industry as regulations and protocols call for increased usage of P E and as more patients return to care and also as more patients rely on home health care.
Let me now discuss operational improvements in the past several quarters, we have significantly transformed the operational landscape to deliver an improved customer experience and do it more efficiently.
We're doing this by focusing on operational effectiveness and continuous improvement let me give you a few examples.
One we invested in technological process improvements to increase accuracy is within our distribution centers.
Next we continue to partner with our suppliers using data to better manage demand planning and supply chain efficiency.
While doing these we continue to emphasize on the safety of our teammates so we can retain or skilled workforce.
Finally, we are enhancing our business system approach to ensure that continuous improvement will be at the core of our organizational culture.
All of these will allow us to remain at the forefront with our industry leading service levels.
Finally.
Let's talk about our financial position.
As noted in the beginning of my comments today, our financial profile is strong we are de leveraging the balance sheet and investing in our future.
Based on the achievements I've walked you through we have created a track record of delivering on our commitments.
The mid point of our guidance represents a threefold increase improvement over 2019 results and we continue to expect double digit EPS growth in 2021.
The long term outlook is based on our improved company wide operating performance from operating efficiency initiatives combined with investment here are a few reasons for the expected continued positive momentum.
First we expect the demand for P to continue to remain high with changes in health care protocols stockpiling requirements, New wind markets, we believe higher demand for P. P is here to stay.
As a result, we continue to invest in ramp up our production to help service this demand.
Secondly, as elective procedures continue to recover towards pre pandemic levels, we're able to leverage our distribution infrastructure to service our customers and finally, our home health care business continues to see an increase in demand one of the fastest growing health care markets.
As I just discussed we had a solid third quarter and I'm immensely proud of our accomplishments over the past several quarters, but we recognize we're not done yet.
Thank you and now I'll turn the call over to Andy for a discussion of our financial results Andy.
Thank you Ed and good evening, everyone today ill review, our third quarter financial results and the key drivers of our better than expected quarterly performance and then I'll discuss our expectations and assumptions for the rest of 2020.
We are pleased to report a strong third quarter and were excited about our recent equity issuance and continued de leveraging of the balance sheet.
Our Q3 performance is a testament to our ability to adapt and execute during challenging times.
Over the last several quarters, we have demonstrated our ability to consistently deliver improved financial results and enhance our financial position. Despite the challenging business environment earlier.
Earlier today, we announced a revised full year adjusted net income guidance, which has been increased to a $1.90 to $2 per share with a continued expectation of double digit growth in 2021.
Later in my remarks, I'll cover the details of the factors that gave us confidence in raising our guidance.
Let's start with the highlights of our Q3 performance beginning with the topline net.
Net revenue in the third quarter was $2.2 billion compared to $2.3 billion for the prior year.
This change was primarily driven by the impact of past account non renewals from 2019 and to a lesser extent by the COVID-19 pandemic related reductions in elective procedures.
This was partially offset by greater sales of pp, coupled with growth in sales from existing customers in our home health care business lines within global solutions.
Though the revenue impact of elective procedures was better than expected, we continue to trail pre pandemic levels.
Gross margin in the third quarter was 15.7% an improvement of 350 basis points over prior year as a greater portion of sales came from the higher margin mobile products segment.
And as evidenced by the increasing level of operating efficiencies productivity and fixed cost leverage. We've achieved this represents the sixth consecutive quarter of year over year gross margin expansion illustrating our improving performance.
Distribution, selling and administrative expense of $263 million in the quarter increased 14 million compared to the third quarter of 2019, primarily as a result of continued investments in the business, partially offset by ongoing productivity gains into.
Interest expense of $21 million in the third quarter was $3 million lower than the prior year as a result of lower debt levels due to improved operating cash flows and working capital.
In addition, lower base rates and utilization of our accounts receivable securitization program have contributed to the reduction in interest expense.
The combined impact from the strong operational performance and execution resulted in income from continuing operations for the quarter of $46 million, an improvement of $43 million compared to prior year.
GAAP income from continuing operations per share for the quarter was 76 cents an increase of 70 cents versus the same period last year.
The resulting adjusted EPS for the quarter was 81 cents, which represents a year over year increase of over 250% and a four fold improvement sequentially versus Q2.
The foreign currency impact in the quarter was six cents favorable.
Now, let me review results by segment for the third quarter.
Revenue for the Global solutions segment was 1.9 billion compared to $2 billion for the same period in the prior year. The change comes from a decline in our medical distribution business due to the previously mentioned impact of customer Nonrenewals from 2019, and the impact of the COVID-19 pandemic has had on elective procedures, partially offset.
By another quarter of solid growth in the home health care business.
Relative to the second quarter Global solutions revenue grew by $317 million attributable to the increase in elective procedures to help put this in perspective revenue improved from about 80% of pre covert levels in Q2 to the mid Ninetys in Q3.
Global solutions posted operating income of $11 million for the third quarter compared to income of $25 million last year, driven by lower volume six.
Sequentially Global solutions operating income increased by $21 million or 7% of incremental revenue as volumes improved against our largely stable cost base.
Now turning to the global product segment.
Revenue was $474 million compared to $360 million in the third quarter last year driven by growth in pp sales net of the impact of lower elective procedures sequentially global products revenue increased by $103 million as new Americas based production capacity expanded into elective procedure.
Interest began to ramp up.
Global products reported operating income of $90 million, which increased by $73 million over last year. The increase is attributable to higher revenue of the products favorable product mix productivity initiatives improved cost leverage operating expense discipline and favorable foreign exchange.
We continue to operate at very high levels of efficiency and these factors should continue for the remainder of 2020 and are reflected in our revised projections for the year.
Let's turn our focus to cash flow the balance sheet and capital structure.
In the third quarter, we generated operating cash flow of $118 million and $268 million year to date on a consolidated basis as a result of improved profitability and stringent working capital management.
Looking ahead to Q4, we expect a number of factors to weigh on cash flow.
First we anticipate carrying higher levels of inventory in preparation for the traditional flu and holiday seasons.
And an expectation of a slight increase in elective procedures above our previous forecast.
These inventory changes will help ensure that we are prepared to meet customer requirements in a very dynamic environment.
Also the fourth quarter will experience a higher level of capex spend compared to earlier in the year.
These actions demonstrate our continued commitment to invest in the business to help ensure long term profitable growth and to provide customers with the highest level of service.
Total debt was $1.3 billion at September Thirtyth.
Representing a sequential reduction of $70 million since the second quarter.
And the $231 billion decline since year end.
Recently, we executed the next step in our financial strategy to further strengthen our balance sheet with a successful equity raise netting a $190 million closing on October six.
This offering resulted in the issuance of 9.7 million additional shares which is expected to negatively impact EPS by five cents for 2020.
The impact of dilution is reflected in our revised annual guidance.
We have already used the net proceeds from our equity offering to reduce debt early in fourth quarter. In addition, we recently issued a redemption notice for our outstanding 2021 notes to be completed by the end of the year.
We plan to utilize a $134 million held as restricted cash at the end of September plus other available funds to retire these notes.
Our leverage profile is well in hand, and as we continue to strengthen our balance sheet. We are very well positioned financially to execute our growth strategy by continuing to invest across our businesses.
Finally, let me provide some color on our outlook for the remainder of 2020.
As I mentioned earlier in my remarks, we revised our full year adjusted net income guidance upward to a range of $1.90 to $2 per share inclusive of the dilution from our recent equity raise the midpoint of our current guidance represents a threefold improvement over 2019 results and we continue to expect double digit EPS.
EPS growth in 2021.
You walk through the assumptions that went into developing the revised guidance.
First of all we expect the demand for PE products to remain strong and our Americas based manufacturing capacity expansion programs will remain on schedule for the rest of the year and into 2021.
Also we expect strong performance environment, our home health care business to continue.
The level of elective procedures across the nation continues to influence our performance in Q3, we experienced a faster than expected recovery in this area contributing to our over performance in both segments in the quarter.
Q3 revenue associated with elective procedures increased to the mid 90% of pre coated levels and our expectation for the fourth quarter is that these volumes will remain in Q3 levels. We.
We do not expect to see elective procedures returned to pre cobot levels until the middle of 2021 at the earliest.
Furthermore, our outlook on the strong demand for PPD going forward, along with our ability to leverage our captive north American centric supply chain for raw material input through distribution gives us confidence in achieving double digit earnings growth in 2021, we.
We are seeing increasingly strong indications of sustainable pp demand for the many reasons we have previously cited.
Please note that key modeling assumptions for the full year 2020 have been updated on supplemental slides filed with the SEC on form 8-K earlier today and posted to the Investor Relations section of our website.
We are moving forward with sustainable operational and financial improvements that will provide the roadmap for years to come.
While improving olin's and miners financial profile remains a top priority our core focus continues to be on our customers.
We put our commitment to serving physicians and caregivers at the center of everything we do.
Thank you and with that I'll turn the call back over to the operator to begin the Q and a session operator.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key please stand by while we compile the culinary roster.
I show. Our first question comes from the line of Michael Cherny from Bank of America. Please go ahead.
Good evening and thanks for the color congratulations on another nice results.
I want to do again, you just made a comment about sustained signs of demand within pp typically a little further into what are the signs that you're seeing and if possible how you're thinking about the expansion beyond your traditional.
Markets in the us.
That there does become a catch up in overall supply versus demand for your legacy customers.
Sure I think there's a couple of different ways. We look at this is one we continue to see that our orders or the demand still exceeds what we can supply today for our own manufacturing.
And at times, we have actually helped customers through spot buys with additional products. So we do continue to see that supply demand imbalance and it varies by the different categories.
I think whats, causing that to be maintained as a couple of different things. One is I think the new protocols that are in place as well as the adherence of those new protocols are continuing to maintain that separation.
In addition to that we are starting to see additional demand for stockpiling and safety stock, whether it's at our healthcare networks or whether it's through state or local requirements were continuing to see that.
We're also seeing if I think about it more longer term.
We're having conversations with customers that may have purchased some pp during the height of pandemic, that's not necessarily traditional medical grade that now they want to have that medical grade products start to replace what's out there and then obviously there is there is an expiring of these products that eventually you know whether it's two years down the road, we'll have to start to.
He replaced out of the stockpile.
I think to the second part of your question is where are there other opportunities. There's other markets for us to continue to go into with so to expand our pp outside of our traditional acute care space. In addition to that there is international markets, where frankly, we have not pressed hard on because we were really focused on.
Trying to close the gap in the US. So that's why that's what we're seeing today why we expect that to continue into the future and then as that shifts our ability to continue to adjust and shift with that.
Thanks, and then I guess one other question, let's dive into you spend a lot time rightfully so talking about the operational enhancements you're seeing across the business when do customers really start to feel that and I guess more importantly, when can prospects start to get a full understanding of some of the operational improvements.
The orders a cemetery.
Yeah. So I think when you talk about operational improvements we talk about it in multiple ways. So one we're institutionalizing it now within the organization you know for the last year and a half we've been doing it I would say more ad hoc.
I think with the operational effectiveness as a couple of different ways. We think about it one is on production output. So traditional manufacturing how do you get additional product offer the same number of line with the same amount of fixed costs.
We've seen tremendous improvement of operational effectiveness and output and that's your classic manufacturing fixed cost leverage of the facilities and already equipment.
And we've done that while bringing on additional headcount significant number of headcount to increase our output and will increase our output through our facilities yes.
If you look at it on our channel business as you know specifically in our medical distribution business and even in our home health care business. It's a lot of the same story, it's really understanding and identifying how do you get additional throughput through your operations. How do you. How do you as you grow your business and increased the amount of products for picks going now.
Out the door, how do you do that more efficiently. The reality is in the in the med distribution business, it's the opportunity to get that fixed cost leverage.
Which really drives operational improvements so that's the way we thought about it both from the manufacturing as well as in their classic distribution, whether that's home health care or whether that's in our medical distribution and then lastly on effectiveness is is back office work continuing to drive efficiency within our back office at the same time.
Perfect. Thanks.
Thank you. Our next question comes from the line of Kevin Caliendo from GBM. Please go ahead.
Hi, Thanks for taking my call.
Talk a little bit about your PPV capacity sort of where it is today versus where it was at the beginning of the year and and where it might be a year from now.
You talked about the number of units billions of of pieces ship that I'm, just wondering sort of.
How we should think about that capacity going forward like how to model it or how to how to think about it.
Yeah, I think what we havent openly talked about whether he went from X to y or what we've gone from what we have done is we've added substantial amount of capacity. So really there's been several things we've done.
One we first thing we did was took the existing capacity in added added people are teammates so that way we could run 24. Seven then we've aggressively tuned to all of our lines to move to optimize production. We saw as Ive talked in the past and 40 50, 60% increases and the different tranches of work we've done.
On the equipment and then Weve added substantial amount of lines in our existing facilities.
And while doing that we've added capacity within the fabric, our SMS or nonwoven fabric I should say to be able to fuel those types BP products. So we've had we have had substantial increases in production and output. We havent disclosed what that number is I think the way you could think about that is.
In Q2 was kind of the first step of the ramp up Q3 was the second step of the ramp up in Q4 as kind of a continuation of that.
Additional lines as well as additional productivity.
So while it's not the answer I know you want you're looking for a specific number we haven't disclosed that number but I think you can expect what we've been able to do with kind of the big jump in Q2 to Q3 here and in Q4, the continuation of that and that continuing into India and into early 2021 also.
Well I guess the question that we all have is is not necessarily the sustainability of the demand, but where the margin the sustainability of the margins or the direction of the margins going forward because the ramp on there there has surprised even the most bullish.
Investors and analysts I think so I mean, what are the factors that is it the spot pricing your end user pricing is the customer mix government versus.
Traditional customer.
Is that the amount of capacity that you have that you can keep going to fill more of the demand yourself and sort of where do you think where do you think that all of those where do you think where do you think these margins can really go I mean, if you are.
Thinking optimally in a year or two years.
So it sounds like expansion is still possible from where we are today.
That's right and there is that opportunity to continue to expand but one of the things. We're doing is we're doing a pretty disciplined were don't don't get me wrong were aggressive on our expansion, but we're doing it disciplined.
Because a portion of the margin isn't necessarily because of market price or our ability to have raw material plus our teammates plus the technology in our factories it's on.
Also running your factor is extremely efficiently to get that that that fixed cost leverage to take and make it almost a small variable cost on the addition of more output.
And what what you have to balance on that even when you're running a strong manufacturing business really is adding the capacity quickly. So you can fill the needs working with customers because we believe and they believe there is a long term need for this you know to have commitments longer term so that way if it does get very competitive which eventually make it come.
Additive again, we don't think the levels will ever come back to pre covert levels, but making sure that your position that you have high level of output you had you able to leverage that fixed cost to continue to be paint we be competitive. So a good portion of the growth is really by running our business extremely effectively gets.
The net fixed cost leverage so that way we are positioned for the long term. So that's how we've thought about it and again to the first part as comment I think the demand continues and the ability for us to continue to increase our output.
Tends to happen with expansion as well as I don't believe were done fine tuning our operations to get additional output out of the same machinery and equipment in labor hours that we have today.
Thanks.
Thank you.
Our next question comes from the line of Eric Coldwell from Baird. Please go ahead.
Thank you good evening I have three I'll do them one at a time first one should be simple could you tell me again, the timing of the $134 million of cash on hand to pay down the 21 notes.
Yes, So Ed visits this is Andy Eric So I think the question so.
Yes, so as soon as we exited Q3, you're exactly right. We have a $134 million of cash held on you as restricted cash and you'll see that on the balance sheet in our other current assets and that is what's left over from the Movianto proceeds that we received in Q2 as well as some additional operating cash.
So weve generated through the through the business. Then you can expect that cash to be applied towards future debt reduction I'll say, Kevin just to add on to that too again with our successful equity offering we do we did receive a $190 million net proceeds in.
Settling on October six so that that cash has already been applied to debt reduction so.
If we see yes, Oh I'm, sorry, just to be clear. So in the press release, you talked about the flow to pay down over six quarters.
It sounds like you've already done the 190 from the equity offering so that's for Q add on and then there is another 134.
For the note that's correct, yes, so yes, so between the two it's almost $325 million that we had available to us as of that first week in October and the one nine these venues. The 134. The one that has been used in fourth quarter and then the one the 130 plus as a remainder which is additional to.
The go to future debt pay down.
Okay. Good second one customer conversations and global solutions I know.
Kind of goal one for the company is to rebuild its core distribution customer base and you've been working through some inherited attrition this year.
What are the early signs in customer conversations when you think about new business development.
Sure. This is that I'll take that one so I think the first thing. It's Ben is really our drastic improvement in service starting last year six quarters ago and continuing to build was the first step in this process.
Second of all.
Continuing to drive operating efficiency, so that way, we can be competitive as well as continued to now take service to a new level has helped and here's what ultimately is really focused that conversation it's that during the pandemic, where customers who use our products and our distribution network, we were able to maintain.
And we'll continue to be able to maintain delivering the products well above historical levels.
So that has opened up conversation, but it really comes back to the very first thing in the basics of what we talked about when I joined which is if you don't have great service to the customer you don't even get to that point with the conversation. So we continue to have conversations we saw strong growth in this quarter and the global solution.
And.
That was driven by growing our ability of share at existing customers as well as growing business that at newer customers now all of that combined with a slight increase than what we expected an elective procedures.
As well as our home health care business performing well all of those things are data points that help to validate our service as well as what we've been able to do with our customers. During the pandemic. So we have a robust pipeline. We have we're having great conversations right now with existing customers as well as potential customers.
Yes.
Great last one.
There is the global nitrile exam glove shortage.
Im curious how you are positioned for that how it might impact you and I'll leave it at that.
So the good here's the way we are positioned for that we have a good portion of our of our Coleman, our gloves that we manufacture in our factories.
They are our own factories in southeast Asia again, with our people with our process with our technology. So a portion of that we have we have strong strong control over our use that phrase.
A portion of ours, we do buy from third parties, but we do have long term commitments with those third party and again, they're using our process and our technology to make those gloves.
There is a shortfall in the markets and the unique thing about whether its unique or not about gloves is the time for expansion could take 18 to 24 months, just because of the nature of the way a manufacturer and the glove works with the dipping process.
So we're positioned to little bit different than others, because we do own our own factories with our people that make a good portion of the gloves for ourselves that we end up selling and providing to our customers.
Diem, we've heard a lot about price increases in that marketplace is that a market, where if where you have relationships with third parties, especially those that might need to be renewed.
Or where you might face cost increases are you comfortable passing some of that increase on to the to the customer.
We are we are comfortable pass on on you know, it's never an easy conversation, but I think so.
The approach we've taken on that is we if we have to pass on cost if we do get cost increases and we have to pass month. We're just passing on that cost increase we are not using it as an opportunity to guidance our customers or to try to expand the significant profit on that we've taken a pretty transparent approach with our customers of care.
The cost increase.
And here's the hair, here's how it translates to them.
Very good congrats on a good report thanks, guys. Thank you. Thank you.
Thank you.
Our next question comes from the line of Solyndra Singh from Credit Suisse. Please go ahead.
Hi, Thanks, everyone. So this will be a comment at all and your outlook assuming that elective procedures. In Q4 remained flat compared to Q2 levels is that based on what you guys have.
Thus far in Q in Q4, and I am accused of had been driving across the country as I was trying to understand the sensitivity do elective procedures.
I mean, if we indeed see and push on that do you think that so anyway.
Based on your global solutions would be offset by Bob do impacting the global products business and trying to understand like.
The oldest given the rising how much comfort do you have it on both leftover proceed assumption.
Yes go ahead I'll, let Andy start this out and we'll cover the elective procedures, what what we've seen and what we are seeing that's right. So so to kind of summarize kind of where we've been we're where we think we're going on so we came into the quarter came.
Came out of Q2 in the at the low Ninetys in terms of what percentage of elective procedures compared to pre coated levels as we move through Q3, we did see improvement in that and we did finished the quarter in the mid Ninetys and that was part of the reason for the the over achievement in the quarter and as you look forward to as you said to Q4.
We do expect in our best estimate at this point is to say that those levels will remain flat and potentially even into early 2021 before we see maybe a return to historical levels at the midyear point of 2021.
You are absolutely correct in terms of the segment performance that that will most notably affect our global solutions segment, but also keep in mind that we do have global products that has a portion of their product portfolio that is also tied to electric procedures. So any movement up or down in have been in an elective procedures.
Well it will affect both product lines, but more pronounced in the global solutions segment and the only other thing I'll add is with elective procedures. It part of it depends on the geography, we have seen some parts of the us where elective procedures have to have have tightened up and been reduced dosing in other parts of the us where there where there may be a less impact of Cove.
Right now where it has actually increased and I think the one factor that is difficult to forecast is what happens you know should covitz flights continue or the second wave happened and Thats, a broad sense, what would that have an impact that's the thing that is difficult to forecast.
Okay and then the follow up on your competitive landscape comments earlier have you seen other vendors vying to sell beeping products. So the existing customer just wondering if there's any change in the competitive landscape and.
What is assumed in your double digit EPS.
Good without seeming that.
There's some increased competition from other vendors.
I again pp is a portion of our business, but just like anything we're competing every day with with competitors cross across the U.S. So whether it's other distributors other manufacturers, we have to compete everyday and so we see we continue to see competition.
I think theres things that make us substantially different which has enabled us to two to provide a great value to our customer and a great service for our customer and I think that's been one thing thats create a differentiation for us.
All right. Thanks.
Thank you.
Our next question comes from the line of Steven Valiquette from Barclays. Please go ahead.
Great. Thanks, Good afternoon, everyone. Let me offer my congrats on the results as well.
So I guess, we're all trying to piece together the current state of the ERP market there seems to be some mixed data points in the marketplace regarding PB, where some health care providers are talking about prices coming down some distributors are actually taking inventory write downs because of this but others are still talking about overall prevalence.
Imbalances in PV prices, staying pretty elevated so I guess I'm curious just within overall ERP we.
Are you able to discuss just maybe any notable private areas, where maybe supply demand imbalance has come down a little bit and maybe other areas, where theyre now, perhaps you're seeing new shortages that are occurring only recently or prices are still going up.
To keep to the overall pp basket size.
Saying in this state of imbalance that you're talking about.
Any color would be helpful. Thanks.
They are linked I think its a couple part question. So let me try to take the different parts. So.
I think that you know in healthcare, what we've seen in the areas that we service, which is primarily acute care home health care some of the inventory surgery centers more.
More on a broader sense, we really haven't seen a slowdown in demand from us from our customers to US. We are you talk a little about pricing.
We have seen.
Market, our spot buys I'll call them related to end 90 fives come down.
And I say that because there were spot buys out there and the early summer that worth 567 times.
Our our sale price at times, we haven't seen them higher than our 10 times our historical price. So that goes back to my comment earlier as were built as a business to be able to produce sell and be profitable at pre pandemic pricing levels. So while others have said they've seen pricing come down taken 90, fives I think thats a good.
Example, where pre pandemic it was 10 plus times the.
During the height of the pandemic and even through the summer and into the early fall we were still seeing prices at 10, X. spot buy prices at 10 X of our historical market price. So.
If it has come down.
It's still substantially above those legacy prices I would say.
So thats, where you may be hearing that and that's where that disconnect may be and then as I answered early part I think it depends on what segment of the broad healthcare market you talked about.
There may be some getting close equilibrium potentially in physician's office or other spaces, we haven't seen that in the broad acute care work as well as in the government is that are still trying to buy for usage as well as by first stockpile ore safety stock.
Okay got it I think hopefully that helps yes definitely one other quick.
Follow up here just a question on the equity offerings. Since this is your first public appearance and you announced that deal about a month ago.
Just curious if you could maybe just give us a little more color on how you chose the size of that offering relative to the amount of debt on the balance sheet et cetera, just curious to hear more about that as you're thinking about the size of deal you want it to do thanks.
Sure I'll, let Andy.
Start off and address that yes, Steve happy to address that so you know as you recall probably.
In the June timeframe, we put up the a $300 million equity shelf.
Just in preparation knowing that we had plans to go out to strengthen the balance sheet and wanted to keep our options open and when the decision was made to go forward with the equity offering the initial sizing of that was about $150 million, which.
Based on our market capitalization and trading volumes and whatnot that seems like an appropriate size, but.
As we went in and launched the equity offering there was there was just a great response, and we were multiple times oversubscribed and as a result, we made a game time decision to to not only upsize that 150, but to also exercise the greenshoe. So.
Worked out very nice too to raise $200 million gross and $190 million net out of that transaction.
Okay got it okay. Thank you.
Thank you.
Our next question comes from the line of Robert Jones from Goldman Sachs. Please go ahead.
Great. Yeah. Thanks, Thanks for the questions maybe just to go back to the pricing comments, Ed I think there's been a lot of focus there and you mentioned that in some cases brought pricing can still be quite elevated relative to the free pandemic levels I'm. Just curious what do you. What do you think that means for Omi as you think about the price.
Leasing dynamics across the PB portfolio going forward I think there is a view that as some of these imbalances normalized naturally pricing would come down but it sounds like you might actually have some headroom around pricing. So just curious if you can maybe help us level set on how you're thinking about.
Pricing across the PV portfolio as you look out to not just next quarter, but next year, yes, I think probably the way to describe our approach as we wanted to treat our customers fairly weak.
We wanted to make sure that we weren't going to we didn't we were not going to.
Really adjust our pricing based on spark spot market pricing, we're going to adjust our pricing and provide product pricing as long as we possibly could at historical pricing, we're going to continue to provide.
Because of the importance of serving our customer in the relationship so.
That's what makes US I think different also I think the other thing that makes us different is the fact that you take you take masks.
The material for those masks a good portion of that is made in Lexington, North Carolina in our factories with our machinery. So we also have some level of control over the raw material also so all of those factors together is why.
We think about this going into 2021 and even into the future.
We continued to have disciplined in pricing and didn't necessarily look at spot markets of how much can you get versus versus treating our customers fairly.
No that's helpful and I guess, maybe just looking out to next year I know, you're not giving official 21 guidance other than the double digit EPS growth anything you'd be willing to share just as far as how youre thinking about the cadence of that EPS growth as we think about next year, obviously this year.
For obvious reasons has been a bit uneven just curious how you're how you're seeing 21 set up as far as EPS across the four quarters.
So I'll, let Andy maybe cover a little bit this upfront and then I'll have some comments yet I think there is a couple of factors that.
We think about how we would move across 2021 and I think first of all there's just general seasonality of the business historically.
First quarter has been the softest use just look back to two our results in 2021, even 2019, you see that seasonal softness and then historically the fourth quarter has been the strongest quarter seasonal in terms of seasonality as you.
You've got flu as well as potential end of year elective procedures of course that may not apply to this year, but that to 2021, certainly and I think the other thing to take into consideration is.
Entering 2021, much stronger in terms of our PPD PPD production capacity stronger than where we were at.
At the comparable quarter in 2020, and and then I would say the comps in 2000 and in Q2 of 2021, assuming a nonrepeat of the shutdown that we saw in Q2. So I think those are some of the main drivers of what you can expect in terms of the earnings cadence next year.
Okay, Great I appreciate that thank you.
Thank you.
I show next question comes from the line of Michael Minntac from JP Morgan. Please go ahead.
Great. Thanks for taking the questions and congratulations on the results. Let me just following up on a couple of the previous questions as it relates to the debt pay down so using the proceeds from equity offering and what you've set aside for movianto leverage will be down substantially versus the beginning of the year. Just wondering if you could talk about sort of your longer term targets. There in terms of leverage when you expect to get there and then maybe discuss your prior.
As for capital allocation once you do get to that target leverage ratio.
Yes, absolutely Mike So happy to take that this is Andy So you know as I mentioned at the end of Q3, we were at about $1.3 billion in debt and.
Post equity offering again thats not a Q3 event, that's really a Q4 event, but the net proceeds from the equity plus what Weve had left over from the Movianto say on operating profit, that's another 325 million or so.
As of the first week, not including any additional operating earnings that we generate in the fourth quarter right. So we've certainly got well in excess of $300 million, who applied towards debt.
Reduction in terms of looking longer term what is that a target leverage ratio range I would say that.
Three to four times leverage would be a good range for us I would prefer to be in the lower end of that range.
And I, certainly think that's achievable given the debt Paydown and the increased earnings prospects and then I guess the last part of your question is capital allocation and I think that.
We've got a very robust process to look at capital allocation and that that will go towards investments in the business to grow to develop opportunities for long term profitable growth and.
We will evaluate whether there is additional debt paydown opportunities at that point.
Mike This is that I'll add one thing one additional thing and that is as we think about it.
Paydown, we're we're making sure that we are investing for the long term profitable growth. We are investing also to continue to service our customers and I know the last in a previous question was asked a little about you looking into 2021 and this actually ties to that and the fact that in the fourth quarter. We are going to continue to do our year end inventory buys to.
Make sure we have the proper level of inventory so that when we started out in 2021, we have the products necessary to serve our customers. So we're going to invest and use some of the cash in Q4, two pre invest in inventory.
Outside of ERP to make sure that when elective procedures continue to increase and as customer demands come out of that if it comes out of the gate fast in 2021, we are well positioned to service them.
Got it Thats really helpful and maybe just I'll wrap up with one more quick one here with potential for the 19 vaccines coming to market I know the cold chain vaccine distribution is not really an area, where I will explain it dissipates, but do you see any potential opportunity to benefit in other areas, whether it be incremental sales of ancillary products or PPD.
Yes, it looks like I said I mean, there is call. It 350 million people in the us if it's going to be a dual dose treatments will be a lot of gloves, a lot of mass and a lot of other pp, that's going to be needed for that for those for the vaccines.
So while we don't do cold storage I think there are there's going to be a tremendous demand for ancillary products above what is currently being used today.
Got it appreciate the color.
Thank you Doug.
Concludes our today's session for today at this time I'd like to turn the call back over to Mr. seeker, President and CEO for closing remarks. Thank.
Thank you well. Thank you everyone for joining us on the call and I am extremely pleased of the strong third quarter. We had none of that could have been accomplished without our teammates focusing on our mission to enable our customers. So that way. They can advance health care and I think it's clear that we have strong momentum the expectations. We continue that going forward and I look to look forward to talking to.
Everyone at the end of the next quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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