Q4 2020 Owens & Minor Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Owens <unk> minor of fourth quarter and full year 2020 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
The ask a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any photo of assistance. Please press star zero.
I would now like the hand, the conference over to century kind of gum director of Investor Relations. Mr. Mcgough, you may begin.
Thank you operator, Hello, everyone and welcome to Owens and minor fourth quarter and full year 2020 earnings call.
Comments on the call will be focused on financial results for the fourth quarter and full year of 2020, our ongoing efforts to the COVID-19 pandemic.
And our outlook for 2021, all of which are included in today's press release.
I'd also like to call your attention to supplemental slides related to our 2021 outlook posted on our website in the Investor Relations section. Please.
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 for fun.
Forward looking statements made on this call represent management's current expectations and are based on information available at the time such statements are made forward looking statements involve numerous known and unknown risks uncertainties and other factors that may cause our actual results to differ materially from any results predicted assumed for in flight.
The forward looking statements. The company has explained some of these risks and uncertainties in the sense.
SEC filings included in the risk factors section of the annual report on the form 10-K, and quarterly reports on form 10-Q, except as required by law for listing Who's The New York Stock Exchange the company expressly disclaims any intent or obligation to update any forward looking statements. Additionally.
The discussion today, we will reference certain non-GAAP financial measures and information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release and our annual report on form 10-K.
Today I'm joined by entity, our President and Chief Executive Officer, and Andy Long, our executive Vice President and Chief Financial Officer.
I would now like to turn the call over to Ed who will start things off.
Thank you for Centrica good morning, everyone and thank you for joining us on the call today.
I'd like to start by thanking all of the clinicians and frontline workers that continue to care for those in need in the face of the unrelenting pandemic.
I would also like to thank the Owens <unk> minor teammates.
As I am extremely proud of their monumental effort during 2020 and the relentless focus on serving our customers.
This operating focus has reinforced our position in the healthcare industry as a trusted partner.
By delivering on our mission.
Of empowering our customers to advance health care.
In addition, I'm extremely pleased to be here today and reported another strong quarter and closed out of a record year.
The strong performance in the quarter as well as the full year was the result of the successful execution and implementation of the key initiatives discussed during the previous quarterly earnings calls.
Which included two major items, one infrastructure investments with a focus on current and long term profitable growth.
And to operational improvements with a focus on enhancing the customer experience and increasing operating efficiencies.
Starting with our global product segment, let me remind you of the infrastructure investments and operational improvements we shared previously during the past year.
At a high level, we expanded our manufacturing output to align with the volume commitments of our customers.
Here are just a few examples of these investments and operational improvements one of the installation of new 95 production lines in our U S based manufacturing facilities.
Two we added non woven fabric manufacturing in our Lexington, North Carolina facility.
Three we continue to expand our isolation in surgical gown production capacity and for we optimize the operational process to maximize output of the production lines.
These investments and operational improvements enabled us to strengthen our position as one of the world's largest vertically integrated manufacturer of healthcare PPE.
We manufacture of full range of health care PPE categories, and subcategories, primarily manufactured in the Americas the.
These products are manufactured in our factories with our teammates with our technology with our fabric with our patents with our processes and with our quality and regulatory oversight.
And then the delivered through our network of distribution centers with our teammates and our technologies.
Along those lines, let me remind you of the infrastructure investments and operational improvements we shared previously during the past year related to our global solutions segment.
One we expanded our low unit of measure of warehouse infrastructure system.
We improved our inventory planning processes and algorithms three we enhanced our data management service offerings for Q site and the launching of minor AUM.
We improved our beat of B and B to C offerings in our home health care business.
And lastly, we optimize the operational process to continue to improve our controllable service metrics.
The combination of these investments and operational improvements in our global products and our global solutions segment continue to strengthen our position in supporting our customers across the entire value chain with our products and our distribution network delivering what is needed for both the hospital as well as the home.
While utilizing our services and data management to increase customer efficiency.
The compelling results in Q4, and the full year of 2020, we're driven by these investments and operational improvements along with the dedication of our teammates and our overall commitment to enhancing the customer experience.
Let me now share a few items from Q4 of that validate our solid results. One we achieved an increase of nearly 400% in adjusted net income per share compared to the fourth quarter in 2019.
We realized an increase of more than 200% in adjusted operating income versus the fourth quarter of the prior year three.
Three we expanded our Q4 adjusted operating margins by 340 basis points versus the prior year.
Four we launched and successfully executed an upsized follow on equity offering of nearly $200 million.
Five we reduced the debt by over $300 million in the fourth quarter.
Six and specifically related to global solutions segment, we grew revenue by 5% sequentially from Q3 to Q4, while maintaining industry leading service levels.
Specifically related to global products segment, we grew revenue by 21% sequentially from Q3 for Q4 and since the beginning of the year, we manufactured record levels of PPE with approximately 5 billion units produced with materials manufactured in our American factor.
<unk> for Owens <unk> minor owned facilities.
We generated operating cash flow of $71 million as a result of the increased earnings and working capital improvements and.
And lastly, we continue to make investments in infrastructure service and technology.
As you can tell the fourth quarter was a remarkable close to 2020.
It is in fact, an extension of our track record of strong performance during the entire year.
Here are some of the highlights from the full year of 2020.
One for the full year adjusted EPS increased 265% from 62 to.
The $2 26.
Two we continued the trend of recording year over year gross margin expansion with gross margin expanding by 285 basis points free we've more than doubled our operating cash flow to $339 million as a result of increased earnings.
Working capital improvements for.
We paid down debt by $534 million during the year and it should be noted that we have reduced debt by more than $700 million over the past seven quarters.
Five we achieved year over year gross margin expansion in every quarter of 2020, making it for seven consecutive quarters of year over year gross margin expansion.
We generated positive operating cash flow in every quarter of 2020 also making it seven consecutive quarters of positive operating cash flow.
Next we delivered year over year adjusted EPS growth on a constant currency basis in every quarter of 2020, making it five consecutive quarters of year over year adjusted EPS growth on a constant currency basis.
And finally, we reached the milestone in the COVID-19 fight with nearly 12 billion units of PPE delivered during the year.
Look I'm extremely pleased with our incredible results in 2020.
With signifier of stellar operating performance across the board. It is our Americas owned and operated facilities along with the strong distribution network that provides owens <unk> minor with the unique ability to support the entire value chain.
This differentiates us and puts us in a strong position for long term profitable growth.
Let me now shift to 2021 and focus on the areas that will shape the year and the future of Owens <unk> minor.
These areas of focus will be investments operational improvements and financial strength.
Let me begin with financial strength.
During 2020, we significantly deleveraged, our balance sheet implemented sustainable operational improvements and made investments for growth.
We expect 2021 to be an extension of these actions, enabling continued deleveraging of the balance sheet and profit improvement as a result of the deleveraging achieved in 2020, we now have greater latitude to make investments in our business for future growth.
So moving on to investments.
We will focus our investments on both organic and inorganic growth our investment strategy will remain disciplined and we will continue to focus on infrastructure technology and operational improvements are.
Our organic growth investments will consist of one <unk>.
Product portfolio expansion within our PPE surgical infection, and prevention categories, and subcategories to product portfolio expansion outside of our PPE surgical infection and prevention categories and subcategories three expansion into new verticals the.
Utilize our product portfolio and expanded product portfolio.
For enhanced technology.
Utilizing the data and services, we provide to our customers.
Five harnessing our enterprise wide offerings to further enhance our customer experience.
And six.
The build out of our continuous improvement teams.
Related to the inorganic growth investments, our focus will be primarily on portfolio and end market expansions.
Let me now discuss operational improvements.
We have begun the implementation of the Owens <unk> minor business system.
As an enterprise wide business disciplined consisting of the following.
One continuous improvements.
Continuous improvement, which is focused on delivering an enhanced customer experience, while providing efficiency improved output and financial achievements.
The standard management systems, which is based on the final metrics that will be measured and evaluated and finally program management, which will be utilized for alignment and execution of our strategic priorities and key initiatives.
The Owens <unk> minor business system is the next step in the formalization of the actions utilized over the past two years to significantly improve our medical distribution service levels too.
To increase our manufacturing output to record levels to develop and implement new technology and the to deliver our strong performance.
Let me now close with our 2021 outlook first we expect the strong momentum from Q4 to carry into 2021 related to the demand for a manufacturer of PPE.
Secondly, we expect the elective procedures to continue to improve throughout the year and finally, we expect continued increase in demand for our home health care business, which is positioned well and one of the fastest growing healthcare market segments.
As I have discussed earlier, we had a strong fourth quarter and successful 2020, and I'm immensely proud of our accomplishments and the dedication of the Owens <unk> minor teammates and we expect this momentum to continue into 2021.
It is clear that our robust operational execution combined with strategic investments have fueled 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 needs of health care for years to come based on our strong value proposition.
Accordingly, I am pleased to state that we expect 2021 adjusted earnings per share to be in the range of $3 to $3 50.
Thank you.
And I'll now turn the call over to Andy for a discussion of our financial results Andy.
Andy.
Thank you Ed and good morning, everyone I am pleased to be here of this morning to discuss the financial highlights of what has been an extraordinary year for Owens <unk> minor.
Today, I'll review, our fourth quarter and full year financial results as well as the key drivers for our better than expected quarterly and annual performance later in my remarks, I will share details regarding our expectations for 2021.
Clearly, we finished 2020 and a very strong fashion with good revenue growth in the fourth quarter and exceptional increases in operating income and earnings per share I will elaborate on each of these next for.
For the quarter revenue was $2 4 billion compared to $2 2 billion for the prior year.
This represents 8% growth and was driven by greater sales of PPE across both segments as well as growth in sales in our home health care business line and stabilization of the medical distribution business.
Elective procedures were better than expected, but overall continued to trail pre pandemic levels.
Gross margin in the fourth quarter was 16, 9% an improvement of 390 basis points over prior year as a result of higher margin sales from our global products segment, driven by continuing PPE demand as well as an improved operating efficiency.
For the full year gross margin was up 285 basis points to 15, 1%.
Distribution, selling and administrative expense of $283 million in the current quarter was $29 million higher than in the fourth quarter of 2019, as the result of topline growth and ongoing investments across all business lines net of productivity gains.
Interest expense of $17 million in the fourth quarter was down 23% or $5 million versus the same period in the prior year.
For the full year interest expense was lower by 15% for $15 million the.
These improvements for the result of continued reduction in debt, along with lower base rates and utilization of our accounts receivable securitization program.
Our strong execution in serving our customers along with very high demand for PPE growth in home health care and productivity gains across the company list of very strong bottom line results.
On a GAAP basis income from continuing operations for the quarter was $51 million for 72 of share and $88 million or of $1 39 per share for the full year of.
Adjusted net income in the fourth quarter was $80 million and adjusted EPS was $1 14 about a five fold increase compared to the prior year.
For the full year adjusted income from continuing operations was $144 million, which equates to an adjusted EPS of $2 26 of.
A significant increase from the 62 in 2019.
Foreign currency impact on EPS for the fourth quarter was six cents favorable and for full year 2020, It was <unk> <unk> favorable.
Next I'll discuss our fourth quarter highlights by segment.
The whole solutions revenue was 195 billion compared to $1 $94 billion in the fourth quarter of last year.
The slight increase in revenue was due to growth in our home health care business, coupled with higher levels of PPE sold through medical distribution, partially offset by the negative impact of COVID-19 on electric procedures versus the prior year.
The typical seasonal growth in this segment was muted by the pandemic.
Operating income for the segment was $22 million compared to $19 million last year.
Despite the negative impact of COVID-19 growth in home health care, and our productivity and efficiency gains helped to drive nice growth in bottom line operating results, particularly in the back half of the year.
In our global products segment net revenue in the fourth quarter was $575 million.
Paired to $363 million last year, an increase of 58%, which was driven by growth in volume of PPE sales slightly offset by the impact of lower elective procedures.
Global products operating income for the quarter was $100 million.
More than a four fold increase versus the $22 million in the prior year's fourth quarter.
Higher revenue through capacity expansions for PPE products productivity initiatives favorable product mix and improved fixed cost leverage as we ramp up production throughout the year all contributed to the very strong improvements in performance.
Foreign currency impact was favorable on a year over year basis by $5 4 million.
Moving now to cash flow the balance sheet and capital structure.
In the quarter, we generated $71 million of operating cash flow and for the full year, we generated $339 million of operating cash flow, which was more than two times the prior year.
Increased profitability and disciplined working capital management for the primary drivers of the progress in this area.
The strong cash flow was achieved despite current investment in the seasonal inventory build to ensure continuity of supply for our customers.
We expect cash flow to continue to be strong in 2021.
During the course of 2020, we accomplished several milestones in our financial strategy.
We strategically divested moving out till for $133 million to remain focused on our core assets and used the proceeds from the sale to pay down debt.
We entered into an accounts receivable securitization program to provide additional lower cost financing that enhances our financial flexibility.
We issued new equity in an upsized offering netting $190 million to strengthen our balance sheet and finally, we fully retired our 2021 notes with cash further reducing our debt.
As a result total debt was $1.03 billion.
At December 31, reflecting a significant reduction of 34% or $534 million during the year.
As we exit 2020, our balance sheet is in very good shape and our leverage is down to around three times EBITDA.
Going forward, we intend to further deleverage the balance sheet, while we continue to reinvest in our businesses for future growth. In fact in early January we paid off the remainder of our term a loans. The work we did during the course of 2020 by deploying cash generated by the business to pay down debt, while maintaining ample liquidity has helped to create.
The strong foundation to execute our growth strategy our.
Our success was recently rewarded with another credit upgrade by Moody's we.
Plan to further strengthen the foundation in 2021.
Turning to guidance for the year earlier. This morning, we announced our adjusted EPS guidance for 2021 in the range of $3 to $3 50 per share.
Given the complexity and uncertainty of the markets, we serve I'd like to provide you with as much color as possible as I walk you through the assumptions that went into developing our guidance range.
Starting with the top line, we expect revenue to be in the range of nine two to $9 7 billion.
Which is expected to be driven by several factors.
For the throughput from PPE related capacity expansions will continue to benefit 2021 to date demand for PPE remains very high and we believe a great deal of runway remains due to post COVID-19 changes and practices and protocols in the healthcare industry.
Also throughout 2021, we will remain focused on driving productivity, increasing operating efficiency through existing and incremental capacity.
New patient capture and growth from existing customers of firearm our home health care business will drive growth as investments towards improving <unk> and b to C offerings payoff.
Also revenue will benefit from the number of elective procedures returning to pre pandemic levels in the second half of the year. We assumed there will not be a repeat of shutdowns of electric procedures as we saw in Q2 of 2020.
It's critically important to understand the final component of our revenue growth projections.
During 2020 and continuing into 2021 significant cost increases from call of producers are translating to higher end user prices in the market. This.
This is particularly true for the portion of clubs, we don't produce in our own facilities to date, we have successfully pass through these cost increases which are reflected on the revenue line and it should be noted for their extraordinary impact of.
Our revenue forecast for 2021 includes a glove cost pass through in the range of $300 million to $500 million. However, there will be minimal bottom line impact, resulting from this revenue lift.
Gross margin rate is expected to be in the range of 14, 9% to 15, 4% in 2021, as we continued to expand our breadth and scale.
The gross margin rate will be negatively impacted by the pass through of growth cost increases as I just described.
Distribution selling and administrative expense is expected to trend higher than last year, our ongoing investments in infrastructure technology and services to enhance the customer experience along with volume is fueling this increase and should be partially self funded with ongoing productivity efforts.
With the substantially lower debt our interest expense will follow suit.
We will continue our drive to reduce leverage and plan to be in the range of two to three times.
As a result of interest expense is expected to be between $60 and $65 million for the year.
Our guidance is based on a full year average diluted share count of $78 million, which includes the impact of issuing an incremental $9 7 million shares based on our equity offering from October.
Let me talk about the market dynamics to frame our projection for 2021.
Based on our current line of sight, the 2020 trend of demand supply imbalances in the PPE market are expected to continue in 2021.
Looking ahead, we expect the benefit from PPE supply contracts that are multiyear in duration were increasingly confident that the post pandemic demand for PPE will land above historic usage, but clearly below peak pandemic levels at.
It's also very important to understand the expected calendar <unk> of earnings from 2021, the dynamics of that helped drive our strong fourth quarter results remain in place heading into 2021.
Given this momentum carrying into Q1, we do not expect to see the typical pattern of earnings throughout the year.
Specifically, we expect Q1 earnings to be more in line with the back half of 2020.
Please note that these key modeling assumptions for full year 2021 had been summarized on supplemental slides filed with the SEC on form 8-K earlier today and posted to the Investor Relations section of our website.
While the look back at our performance in 2020.
It's one where we showcased our ability to adapt to changing customer needs and deliver really strong results. I also see a track record of consistently improving financial results that have positioned us well for the future.
I'd like to close by thanking our global teammates for the resilience dedication and performance during the year of unprecedented challenges. Thank you for them with that I'll turn the call back over to the operator to begin the Q&A session operator.
Thank you Sir.
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I show. Our first question comes from the line of Michael Cherny from Bank of America. Please go ahead.
Good morning, Thanks for all of the colored congratulations on the tremendous quarter and year across the board.
Yes, I wanted to dive in the little bit to some of these views in particular on PPE and how you think about that.
I think you mentioned the the new levels above.
The traditional and I wanted to parse the a few comments you made on the Paul B you mentioned the dynamic of expanding your portfolio on both PPE and non PPE for products as well as new verticals is there any of any sense you can give us in terms of kind of things through the magnitude of what that new level that could be or if not that maybe.
Think through when we can start to see some of the visibility on some of those expansions that you have both on the product the market size and how that should sector in particular for your tight quite late line guidance.
Sure Yes.
This is Mike. Thanks, Thanks for the comment thanks for the question.
Let me start and it really frame out how we're thinking about it.
First and foremost we see the momentum that we saw in Q4 that strong momentum continuing right now into Q1 with the people related to PPE and we have a really good line of sight into Q2 also kind of do you think about the back half of the year related to PPE, it's going up.
Somewhat fluid, but we don't expect the demand for rolled back to pre pandemic levels for quite some time and here's some of the reasons why on that.
First and foremost it's the health care protocols that have been adopted and if you think about that they've been adopted now for nearly a year and it's just in the way business is being done in the hospitals is of tremendous focus on infection prevention sort of.
The utilization of that PPA is going to continue.
Beyond the pandemic is how we feel about that next the opportunity we see in the back half and continuing even beyond that is really around stockpiling. There are a lot of states, whether it's the federal government states locals or even.
Hospitals themselves setting criteria of what they want from of stockpiling or safety stock. We believe thats kind of continue on for an extended period of time.
I'm talking about stockpiling, Mike I also think about whats already in there and I think about our customers.
During the height of the pandemic there were products that were approved for emergency ethos for emergency use authorization narrow of products that may not have been traditionally medical grade or medical brands that they were purchased there is the opportunity is as that stuff's in that stockpile to start the convert that over two great brands like our Halyard brand of American.
Product to put into the stockpile and replace it longer term of stockpiling. There is an exploration of those products. So is there an opportunity on that standpoint, the other way we think about it too is.
We have we worked on our customers the supply chain resiliency and continuity of supply has become critical for our partners in.
In the customers. So we've worked for them for longer term contracts have we as we've added lines, making sure. There is a dedicated production for them that's the <unk>.
The thing that continues to extend the runway, it's probably unique the Owens <unk> minor because of our manufacturing footprint.
And then on to the new product portfolio of new verticals.
I think the way we think about that Mike is really you look at all of the PPE today that we have today right now as we've focused on U S need. So there is the international market opportunities for us to expand taking that existing portfolio and growing it outside of the U S. There's industrial market.
That's that use PPE that we can continue to provide for it so thinking about that modeling that's really late 'twenty, one and really starting to get the the opportunity into 'twenty two as we're thinking about those additional verticals and then the very similar thing you'd take the the fabric we use to make our mass.
Net fabric is used in many other health care products. So that vertical integration continue can continue to expand and again thinking about that into the late part of 'twenty, one and really into 'twenty. Two one on those types of expansions. So that's how we're thinking about that.
Through the year as well as all of the different factors.
I'll add one last one Mike.
Think about <unk> 95.
As an authorization to re use disposable and 90 fives.
And that May have made great sense 1090, fives, we are selling at prices significantly above historical prices, but those mass really were made for single use and as hospitals take a look at that there may be an opportunity when they stop reusing and re sanitizing the start increasing the amount of usage of N 95.
Because they stopped the process of reusing them, because it becomes cost prohibitive to reuse versus buying a new one.
And then and then the last thing I'll focus on is when you think about pp demand here's the other thing that we really not and so post pandemic I can.
See consumer use of PPE going down that's not what we sell into the today, we're selling primarily into end of health care and then obviously as we expanded the beyond health care again into the business the business or the potentially industrial markets. So hopefully that helps frame out how we're thinking about this.
And of the.
A lot of great details on my over the rambling question I'll try to be more concise with my second one you mentioned the kickoff of some of the business process improvements can you just give us a sense on how the how your customers are starting to feel that already in and what type of feedback that you get from them as you pursue some of these cost improvements and also the maximize the customer.
Service opportunity.
Yes. So this is really the formalization Mike of what we've been doing the last two years and making it more of a repeatable process because the operational improvements. We've made we believe are sustainable and we believe will add value continuing not just in fourth quarter of 2020 in Q3 of 2020, but all the way through 'twenty, one and beyond.
Some great examples of that around two areas. So we look at our shipping accuracy.
Makes sound simple, but making sure the right products and the right box going to the right customer that's now at above 99, 9%.
Cause of the focus we've had on this and the continuous improvement. Another Great example of that is on time delivery of making sure we're optimizing our routes as well as the picking times. So now we're at 99 plus percent of on time delivery you look at another example of that Theres been tremendous during the pandemic.
We're focused on operational efficiency within our own facilities of manufacturing, how do we get more output and I'll share with you why we don't share the number of specifically we've seen theoretical output double based on our ability to drive operating efficiencies through our production lines and it's the.
It's an effort across the entire organization working with the manufacturing teammates on the shop floor of who understand the equipment. The best who can help drive that operating efficiency and driving output.
All of that is part of the customer experience because we have the ability to produce more products during the pandemic and continuing to get it to our customers improve on time delivery improved the accuracy and all of those things also helped drive profit improvement of operating efficiencies within our own business. So those are a couple of three examples of what we've done with it and those.
Some of events will continue going forward.
Great. Thanks, so much.
Thank you I show. Our next question comes from the line of Kevin Caliendo from UBS. Please go ahead.
Thanks, and thanks for taking my thanks for taking my question.
As we think about the.
Of these growth drivers sort of at this in the second half of 'twenty, one and into 'twenty. Two I think the one question a lot of US are a lot of investors have is.
Is 2021 sort of the peak for Owens <unk> minor of your press release talks about of long term growth prospects is it possible that you can grow earnings operating earnings.
In 'twenty, two 'twenty $3 20 for office space.
The fact is that sort of the target and goal that the company has at this point.
No there was a little bit of a bolus here, we're just trying to understand how much in sort of what the run rate.
B sort of exiting <unk>.
<unk> the first half of this year, yes.
Yes.
Absolutely first of all kind of in absolutely the intention as year over year profitable growth and that's the expectation.
And the.
That's why I thought it was important to share with you.
Beyond the PPE why we think PPE is going to continue for extended period of time.
Through this year and really in the index and that's really around the protocols and the opportunities. We have I think in addition to that also explained to you one of our strengths of manufacturing and focused on the ability of what makes US different is we actually manufacture of good portion of our products. We don't just have them source with the with our label on them.
So a good portion of that PPS manufacturing again in our facilities and it's expanding that manufacturing footprint into other products in other categories.
That healthcare needs and we clearly have that defined that's in process today.
And that that is a process that does take time, which is why I talked about it late into 2021 and into 'twenty two on that.
And then verticals frankly Owens <unk> minor historically has been somewhat.
Probably the award would be the myopic focus primarily on healthcare with our products, we're not going to lose that focus and we're not going to lose that commitment, but having great brands like our halyard brands.
There is opportunities for that to serve in other markets, whether that's retail whether that's other industrial markets and frankly growing internationally too. So so that's how we're thinking about to drive long term sustainable growth with the investments for.
<unk> around that into 'twenty, one 'twenty, two 'twenty, three and 'twenty, four and continuing that thats, the expectation and Thats really the basis of our long term strategic plan.
And I'll share with you you'll see a lot more of this at our Investor day in May when we start to talk about some of the innovation in products and packaging and how the various markets and demand.
That's great I don't want this to get lost in.
It's obviously fantastic results, but the solutions margins were meaningfully above us and the street and <unk> and I'm wondering if there was anything specific to that if thats sort of the new run rate for solutions going forward, how much leverage you're PP&E expertise.
<unk> is helping on the solutions side in terms of either customer wins or our sell through on the margin yes.
Here's what's really driving that and I would tell you I'm extremely pleased and excited of what the teammates debt and our global solutions business. So the couple of different factors.
First of you think about it from a growth standpoint, there are several things of that drove that drove the growth obviously electric procedures sequentially continue to improve PPE throughput through our own channel continued to improve.
And we had net new wins in 2020 of the amount of of new wins, we implemented was a positive net new wins and I don't know how long has it been since we've been able to say that you would take that and we talked I talked about our operational improvements the Owens <unk> minor business system that's debt.
We were using and now we're formalizing that drove operational improvements in 2019 and through 2020, we expect those operational improvements to be sustainable. In addition to that the business is relatively simple.
Fixed cost leverage distribution business the more volume we can put through the more products. We can put on our trucks, we able we're able to get that fixed cost leverage. In addition to the operational improvements. So those are a lot of the factors that drove that and why we expect that to continue in addition to that the segment also.
Has our buyer of home health care patient direct business.
That's a business that is executing extremely well in the has for the last several years.
In the different industry segments, it's in that home health care standard of one of the fastest growing segment and same thing with that we're very effective driving operational improvements in that business for driving nice growth in that business again in one of the fastest growing market segments and the thing that that business does well is its ability to collect it has the ability.
Two two impact 85% of insured Americans and also collect.
Our collect from them also so those are the reasons why we saw.
Global solutions of 5% increase in revenue sequentially from Q3 to Q4, we doubled sequentially, we doubled our operating margin of operating income margin.
Really of 16% year over year growth in operating income in the fourth quarter. So it's that top line growth driven.
Combined with our ability to drive operational improvements and get fixed cost leverage.
As well as the ability to we see that continuing into the future.
Great guys. Thanks, so much.
Thank you.
I share. Our next question comes from the line of <unk>, Inc. From Credit Suisse. Please go ahead.
Yeah. Thanks for thanks for taking questions. Just wondering about for Q2 of those are it does go to 'twenty 'twenty. One items include any benefit from participating in the vaccination of rollout for it and sort of the PPE supplies as of acclamation of that kind of being ramps up should we think of this as the potential opportunity for you guys in 'twenty one of all is it part of <unk>.
Starting with the outlook.
Yeah, Theres not theres not a lot of in there for the traditional vaccines the vaccine rollout the bulk of the products. So most of the kids are coming with syringes and vials.
<unk> themselves.
But the traditional PPE, that's being used as people are vaccinated.
So there is not we have some of that baked in but it's not a significant or material amount for the Medicare of the amount for the full year.
Okay and then the.
Looking at your EPS guidance range, when we think about your low end and high end, maybe a kind of a.
A little bit more about.
What are the underlying assumption of debt in the low end in the high end of the.
Driven by relations around the commodity prices or are there some of the elevations we should be aware of I'm, just curious about Europe and the length as I'm sure on the two end of the range.
So let me start and let me first address.
None of US are the EPS range, but the revenue range because I think that's important.
We have seen cost increases in gloves.
A significant supply demand imbalance and gloves, and we've seen cost increases on glass.
We have worked with our customers we have been completely transparent that we are going to pass on only our costs and we have the ability to.
Pass on much lower cost because of good portion of those loans are made in our own factories and then some of them. We have manufactured for us. So there there could be an impact and there is an impact on this of glove price increases.
That has virtually no impact on earnings per share because we're just passing that through and it's really around trying to respect everything we can with our customers and give them the best possible price.
And not make a profit off of this increase is purely as prices go up our cost goes up we're going to pass those through so that can have an impact on revenue and margin rates for margin margin percentage.
And that's not going to necessarily have a major impact on EPS I'll, let Andy talk about kind of the major assumptions in the buckets on the low end high end and overall, how we're thinking about EPS.
Yes, the lender. So so other factors kind of helping us shape that range of the earnings per share guidance would be.
Terms of our PPE outputs of our ability to ramp up of PPE quickly our ability to bring on debt capacity and generate the efficiencies that we expect to see going forward just as we've seen throughout 2020, and it's the rate of continuation of that it's the rate of output of production and it's those the efficiencies.
Well, so I think thats, probably the other big driver two of smaller expense.
What we've given some guidance on elective procedures and our thoughts on how that shaped the guidance.
As we talked about in the first half of the year, we still expect the trail of pre pandemic levels and as we move into the second half of the year of those those electric procedures coming back to potentially historic levels. There is also an element in the.
In the <unk>.
Let the procedures of pent up demand from procedures that were foregone in 2020, and the potential to make those up in the second half of the year. That's not included in our guidance, but could certainly pushed us to the higher end of that range.
Debt were to occur.
Okay. Thanks, a lot.
Thank you I show. Our next question comes from the line of Steve Valiquette from Barclays. Please go ahead.
Hi, it's Jonathan young on for Steve Congrats on the results for the year on the quarter.
Ex channel in the comments just.
Some of the commentary in relation to the so the <unk>.
Expansion of what products are you looking to expand zone.
The more kind of one of your customers looking to I understand the vertical side, but one of your customers needing a.
No.
Products from you to manufacture et cetera.
Without going into specifics on the categories and subcategories, its certainly going to be products that are core to us as the company.
And continuing to make sure that we can add value within our manufacturing capabilities of those we will do that we'll continue to look at that in various ways, but we haven't come out inside of its going to be product X y or Z. It's really the way to think about it as categories that are core to us at the company and where our strengths and capabilities.
Sure.
Okay Fair enough and then just on the increase the PPE capacity kind of given that we're like over the next call. It two quarters will kind of be the peak for PPE within health care I understand you expand to other verticals, but.
Do you really need to push the capacity and production on PPE, even further more.
Or is it more shifting to produce those other product lines within those of facilities because I.
I assume that the health care side is significantly bigger on the PPE side, but.
Just wondering about that thanks.
Yes.
I guess the way to think about this the only think about a ton of thing is is the pp I think people generally has been used as abroad as a broad statement and you really have to think about the various categories and we've added capacity over the last year in most of the fabric related categories.
The easiest way to think about it the one shortfall we have is in gloves, and we are adding capacity in our own facilities that we own.
Up gloves, and we like our stated earlier.
Gloves portion of the gloves, we make ourselves in our own factories of our people and technology and patents.
And of those we have outsourced or we have contract manufacturers for it.
So what we've what we've determined is the demand for gloves is going to continue to be a long is going to be of long term issue. In addition to that there's always the opportunity to bring more in sourced. So that's one category, where we are expanding we are aggressively expanding that and we believe we can do it quickly because.
For one of the few companies.
And it is specifically American owned companies that are of that have the make gloves on that scale and magnitude for.
For the industry.
So that's an area, where we see that continuing net demand continuing into the future.
And we're going to aggressively expand there based on what we see and working with customers on commitments. In addition to that having the ability to control more of the manufacturing process if necessary.
With more product being manufactured in our factories versus some of those which are currently contract manufacturer. So that's how we think about it it's the varying by category. The other thing to think about too is.
The Owens <unk> minor.
Were really the one.
One of the few of our only that make the broad manufacturing of the broad based all the categories. Some companies make N 95, some make masked some make gowns, we make all of those we make gloves, we make the rest of the we make the raw materials. So we're positioned very well even as supply demand balance comes back down.
Because we're not selling anywhere near current spot by pricing.
We're continuing to sell substantially below spot buyer market pricing as that demand supply balance gets close to equilibrium.
Those that are at the spot buy high prices will be the ones that most likely.
You did get impacted first and then from our standpoint. The other thing you've got to think about is we are extremely effective at pre pandemic pricing with this business now.
Now we've added operational improvements and operational efficiencies on that which means we can be even more competitive going forward. So that's why we think capacities connect you know we're going to continue to need to produce a lot of it because there is still going to be of high demand for American made.
Product that comes with fabric made in the U S and finished either in the U S or across the Americas and supply chain resiliency and continuity of the supply is critical and the difference between us with the fabric made PPE masks gowns gloves strengths.
Respirators, we can put them on a truck and get them to anywhere in the U S.
You don't have to get on a boat income across the Pacific Ocean.
That's why we believe theres going to be continued demand for that.
As of the continuity of supply we can provide in the supply chain resiliency. We can help provide which is really again back to our mission of serving our customers to empower them. So they can advance health care.
Great. Thanks, so much.
Thank you.
Your next question comes from the line of Robert Jones from Goldman Sachs. Please go ahead.
Hey, this is Kevin on for Bob This morning, Thanks for taking the question.
So I know previously you guys have talked about in your contract with the federal government to increase the national stockpile.
Believe that wraps up in <unk>, just any sense you guys can give us on the contribution you're expecting for mis in 'twenty, one and then how should we be thinking about the potential opportunity to work more with the government of the future on these types of contracts. So I think obviously, we're in we're in constant contact with the administration.
Really trying to help provide insight of what we're seeing and again and again what makes us different is.
Work.
The large scale broad PPE manufacturer of of the entire categories and subcategories in PBC. So we are constantly working with them in each category is unique and each category is different we are actually working with them and continue to work with them that theres been times, where.
We think we've been we they have asked can we make sure of that PPE is getting out to the end users and some of those end 90 fives that are going to be used to fill the stockpile will continue the filament and that will continue to happen through the end of Q3.
So that's our expectation on that again I think you have to realize is when that slows down there still is demand outside for our 90 fives and other of our products. So we're going to continue to work with the U S government on this.
Really pleased with what the administration is doing and we're going to continue to work the partner with them to help help of stockpiling and of our other solutions for PPE independence for our country.
Got it that's helpful. And then just one follow up for some of the comments earlier. So I know of guidance is a little bit more first half weighted this year, so could be some potential sequential slowdown towards the back half and then I know in response to Kevin.
The question earlier, you're still talking about growing.
Net income off of <unk>.
21 levels in 'twenty, two and so I'm just curious if you could square those two obviously some sequential slowdown in the back half, but still expecting growth for next year, just any detail you could give on the moving pieces there would be helpful. Thanks.
Yes, again as we stated earlier, we see we see the line of sight clearly the momentum from Q4 is carrying into Q1, we really see that.
And then we really got a good line of sight into the second.
Into the second quarter.
And like I said, the back half of the year Theres opportunities for elective procedures right now we're planning on you take electric procedures, we plan on those continuing to be below pandemic levels in the first half of this year, we're seeing that we're seeing certain areas of where there was hotspots, where the electric procedures slowed down even more so.
So thats why we don't think Q1.
Your classic elective procedures and again as a reminder of electric procedures used the heck of lot of PPE also.
It's not just because of Covid those those procedures used the heck of a lot of that PPE also so that's why we think next year is there is the opportunity to come across some better comparable is also in the first half of the year.
And then we continue to see I made the comment on net new wins.
Last year was the first time, we had net new wins above we were ahead of positive net new wins those are going to also have positive impact of this year the <unk>.
Expectation is that continues through 2021 and that also provides provides growth opportunities in 'twenty two and then the expansion of that I've talked about.
So theres a lot of things out there that while this year.
We see strong we see a strong year our expectation right now is that we expect 'twenty two and beyond the continued to be strong.
And the other thing I don't want to make sure is not missed about our ability to grow and we both Andy and I touched on it in our prepared remarks was the deleveraging of our balance sheet.
We think about the deleveraging of our balance sheet, it's created opportunities for us to reinvest in the business, where we haven't had that before it's created opportunities because the interest expense is going to be down net can help drive.
To help drive EPS improvement. So those are the other factors as we think about the long term strategy that of drastically change with the Owens <unk> minor from where we were a year ago or two years ago when I joined.
Net deleveraging has created a tremendous opportunity for us to fill out some of the demand we see for overall current and future services opportunities in products.
Got it Super helpful. Thanks, guys.
Thank you.
Our next question comes from the line of Daniel growth slight from Citi. Please go ahead.
Thanks, and congrats on the quarter guys I wanted to focus a little bit on the.
The supply side of the PPE demand supply imbalance and Theres a bunch of of legislation out there now.
Throwing money at bringing PPE supply of PPE.
Supply chain back to the States you had one big hospital system announced that there.
They are instituting a JV to expand access to PPE within the states. How do you see the competitive dynamic changing on that end as more companies build out their own U S manufacturing capabilities.
I think it's simple for that case I mean, obviously, we're in contact constantly whether it's with hospitals GPO of the U S government.
And the approach we've taken is we again, we manufacture of the broad categories of PPE for working with customers to lock up.
Our ability to provide the them product coming off of our production lines, whether it's the semi dedicated of dedicated production line for specific customers.
So instead of having to go out and create joint ventures, we can do product, we can do product commitments to make sure that they have long term supply of product and again the beauty of it is.
Been doing it for years, we have the broad category portfolios and you think about and 95 do you think about masks you think about isolation of our surgical gowns because for most.
That product for.
<unk> for manufacturing to so we have a broader consistency or ability to mitigate risk.
From raw material to the buying of manufacturing. So that's how we're thinking about it and that's how we're working with our customers the.
The thing we've been very cautious on is making sure that as we do make investments they are sustainable.
We have to look at the way we think about it is we don't look at what's the current pricing <unk> demand <unk> supply, we try to make sure and make those decisions on what is going to be the future demand pricing.
Again, we don't think demand is going to fall below pre pandemic levels for years to come because of all of the protocols.
We want to make sure of that as we add teammates and we add capacity, we have long term of the ability for long term employments and long term production. So we've been creative we look at different ways and we have conversations with whether it's <unk>, whether it's hospitals, whether it's the government on what.
It makes sense because again, we manufacture we understand what it takes to make these products here in the U S.
Yep got it that's very helpful. And then just on the net new wins that you announced.
Yes, that's very encouraging can you can you talk about.
Are those health systems like you traditionally sell into the acute acute side any differences in those net new wins versus the previous.
Previous customers.
And then.
I'm sorry go ahead of.
It's primarily customer our traditional customer type.
That's primarily what those are.
Got you, Okay, and do you see any changes as things open up this year and the net sales cycle and more rfps or more things going out to bid.
And and how does that play into that 2022 dynamic.
Yes.
More of Rfps of Morgan.
We did see some network of delayed last year because of the pandemic. So we know that some of those are going to are out or will be out and then I think youll have the normal cycle and when you think about a contract of three to five year terms give or take that normal cycle. So I think youll see a few more youll see a little little little more of that in 2020.
One so.
So I think that's really because of some of the pent up demand of when people held off on doing it I think also we have the opportunity because customers now want to think differently and rightfully. So.
That that there may be an opportunity.
For more rfps because of the.
How customers were impacted during the pandemic.
So short answer to the question is yes, we expect there'd be more rfps in 2021, and 2022 I'm sorry into 2020.
And that's really because of people delaying them in 2020, because they didn't want to make the change during the pandemic and I also think because of some of how customers were impacted by the pandemic. They may be looking for unique or new solutions too.
Yes.
Great. Thanks, guys.
Thank you.
I'll share our last question comes from the line of Michael Mente check from J P. Morgan. Please go ahead.
Thanks for taking the question and congratulations on the strong results. So I guess just first on gross margins. If we take out the glove glove cost increase pass through it looks like the gross margin projections. It would be in the upper <unk> 15 per cent range of the midpoint of the guidance ranges.
It's an increase over 2020, but below what you the 16th of one 9% delivered in the fiscal fourth quarter. I was just wondering if you could talk about some of the dynamics that are driving that forecast and sort of how that's expected to trend over the course of the year and how we should be thinking about the ability to drive margin expansion over the longer term.
Sure Mike This is Andy happy to take that question. So.
As we look at gross margins I think you've picked up on an important point and there's really three key drivers that I see there really.
Impacting our gross margin rate next year, you've picked up on the first one right. So so you did the exact right thing you've taken the growth pricing impact out debt to normalize for global price growth.
Pricing so the other the other factors that I would consider is as we continue to ramp up of PPE. We continue to expect good fixed cost leverage.
And the efficiencies in manufacturing will continue to drive upward pressure on margins and then kind of dampening. The margins is the third factor in net with the growth that we're expecting in our global solutions segment.
Of that segment has lower gross margin so.
While it's still accretive it will dampen that rate of improvement in line with historical sales performance. So those of the three key drivers and I think as you look mid for long term it's our.
Continuous improvement efforts I think will also will factor into that as well.
Got it that's helpful. And then just a quick housekeeping question I think you talked about an <unk> <unk> favorable impact from FX in the fourth quarter, just wondering what's built into the guidance for 2021.
Sure for for 2021, sorry, 2021 forecast is based on the December 31, 2020, FX rates that were in place at that time.
And in terms of EPS impact I would estimate that is an approximate 11% headwind.
Basically being driven by what we've seen in the fourth quarter at currency activity with the weakening of the U S dollar.
Got it I appreciate for taking the questions.
Thank you that concludes our Q&A session. At this time I would like to turn the call back over to Mr. Ed <unk>, President and CEO for closing remarks.
So thank you operator.
Let me start by thanking everyone for joining on the call. This morning.
As I reflect back.
It'll be two years on March 7th since they joined Owens <unk> minor and I will share that I am extremely pleased and delighted with the progress that we've made and that really goes to all of our teammates across the world that have worked relentlessly to support our mission and the mission is extremely important to me that being we're here to empower our customers. So they can.
Vance health care, and making sure we're doing everything we can to support them.
Any way to think about 2020 of that light is 2020 was a record year and I'm proud of the accomplishments that we've made in 2020 as well as over the previous eight quarters, but I think we all recognize we're not done yet and there is still a tremendous amount for us to do to continue to live our mission and can continue to <unk>.
<unk> value so for that I'm really excited about 2021, and really end of the future and then lastly, before I close I really want to welcome two new board members.
Astra <unk> who's joining us as well as Steve <unk> will be joining us as members of our board of directors. They both bring strong backgrounds backgrounds and transformational growth as well as finance and we believe they're going to be great. Great contributors to the Owens <unk> minor board of directors and I really look forward to working with both of them so with that.
We will we will leave for the day and look forward to talking to everybody at least in the next quarter and again as a reminder, during our Investor day in May of 2021 give you provide you a little more insight about where we're going as a company. So thanks again and have a great day.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now all disconnect good day.
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Paul.