Q1 2021 Owens & Minor Inc Earnings Call
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[music].
Good day, and thank you for standing by and welcome to the Owens and minor first quarter 2021 earnings Conference call.
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I would not like the hand, the conference over to your first speaker today to Centrica and the gum director of Investor Relations. Mr. Mcgough, you may begin.
Thank you operator, Hello, everyone and welcome to the Owens and minor first quarter 2021 earnings call.
Our comments on the call will be focused on financial results for the first quarter of 2021 of one thing the spa 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 and sit on our website and the Investor Relations section. Please.
Please note that certain statements made on this call and I'll 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 all of the statements of historical fact are forward looking.
And and include statements regarding the anticipated financial and operational performance.
Forward looking statements made on the school and represent management's current expectations and are based on information available and sign 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 of those predicted.
And by the forward looking statements. The company has explained some of these risks and uncertainties and the SEC filings, including the risk factors section of the annual report on form 10-K, and quarterly reports on form 10-Q, except as guided by law or the listing rules of the New York Stock Exchange the company expressly disclaims any intent or obligation.
Patient to update any forward looking statements Additionally, and all.
A discussion today, and we will reference certain non-GAAP financial measures and information of all these measures and reconciliation to the most comparable GAAP financial measures are included in our press release and our annual report on form 10-K, two day I'm joined by our President and Chief Executive Officer, and Andy Law.
Executive Vice President and Chief Financial Officer, I would now like to turn the call over to Ed who will start things off and.
Thank you Sandra and good morning, everyone. I appreciate you taking the time to join us on the call today.
As I reflect back on the call from a year ago, we were still unsure of what COVID-19, pandemic had and still for us.
But here we are today continuing to battle the impact of COVID-19.
And I wanted to minor we are incredibly proud of the small role that we've played and then we will continue to play and this battle.
It is our hope that it will soon be behind us. So that we can serve our customers beyond the pandemic needs. However, in the meantime, I would like to again, thank all of the Owens <unk> minor teammates and.
Along with all of the frontline workers for their dedication and sacrifice and commitment to winning the battle.
From a business perspective, the Owens <unk> minor team has certainly stepped up and 2020.
And I'm also very pleased with our continuation of the momentum and the utilization of our solid foundation built in 2020, which has enabled us to deliver a strong start for 2021.
This strong start includes a record first quarter, along with our raised guidance for the full year and while it may be some time until we return to a more normal earnings pattern.
It should be clear that we deliver on what we say we're going to do.
In fact, delivering on our commitments is ingrained in our values and core to everything we do while they're working with customers suppliers and teammates for shareholders.
And we have the Owens <unk> minor business blueprint as the foundation to continue to perform at the highest level and sustained success the blue.
The print consist of our culture, our business discipline and our investments all of which are designed to provide long term profitable growth.
The investments and the business our constant drive for operational excellence and our customer centric culture continues to pay off and.
And as I've said in the past we will focused on the long term you should expect a regular cadence of the following.
The infrastructure investments across all business lines to stay ahead of the customer requirements.
And the non stop pursuit of operational excellence with the expectation that we get better every day.
Although it's still early in the year, we are well underway with reinvesting in the business here and just a few examples.
One we are developing a broader product portfolio and leveraging our manufacturing strength and brand equity.
We are expanding into new verticals to sell more products into different end markets.
We are selling of cross start businesses as one and Owens <unk> minor.
Four we have begun to expand our own manufacturing capability for nitrile gloves, and our existing factory, allowing us to have greater control and improved cost structure and as a result, relying less and external manufacturing partners.
Yes.
We continue to invest and technology like key sites and Milan to ensure our offerings are amongst the best.
Our technologies provide our customers with important data that is usable timely and reliable while assisting our customers and managing their supply chain and finally, we are also investing to provide customers with the best blend of both technology and touch across our distribution network.
And we do this so that we are able to meet our customer's particular needs with the ability to be flexible while scaling quickly.
Rather than and force them into a cookie cutter and on scalable solution.
We will be sharing more examples throughout the year, but again, we are committed to reinvesting in the business for long term profitable growth.
Now, let me dive a bit into the first quarter.
During the fourth quarter earnings call. We told you that the momentum of 2020 would carry into 2021.
And the year with begin much like 2020, and it and then of certainly playing out it is great to see the strong start with the first quarter better than the prior year fourth quarter, which is rare. However, the strong first quarter as a result of of all of our businesses continuing to operate and a very high level of the fixture.
The seat.
Starting with global product segments, we continue to optimize our production to meet the ongoing elevated demand for PPE.
This performance translated into very strong operating income and our global products business continues to hit on all cylinders.
And within our global solutions segment, the medical distribution again shows the operational excellence as we continue to provide best in class service and demonstrated the resilience that had been missing in recent years.
With the outlook for elective procedures, improving and our stable customer base. This business is expected to continue to improve.
And once again, our byrom patient direct business continued to grow nicely as a result of strong operational execution combined with growth investments into e-commerce and portfolio expansion.
We continue to be excited due to this business being very well positioned and an extremely attractive part of health care.
In addition to the operations it's important to note that we ended the quarter with the balance sheet that we're proud of and one that provides the flexibility to invest and grow.
And the first quarter, we paid off another $44 million and debt.
<unk>, our desk of below $1 billion, the lowest level since 2018, our leverage is comfortably below <unk> and our credit profile of significantly improve which led to the recapitalization. During the first quarter that gives us the financial platform for growth now.
Now turning to the rest of the year focusing on several key factors, including electric procedures, PPE demand opportunity pipeline and expectations of our buyer and patient direct business relate.
The related to electric procedures, we have good line of sight of few months out and continue to believe electric procedures will gain traction towards pre pandemic levels. This expectation is consistent with our customers' outlook, but the timing and the extent of the return to normalcy remains less clear.
However, as the data point electric procedure activity continued to increase throughout the first quarter with an acceleration in March and we see this momentum continuing into Q2.
Next we continue to believe PPE demand will work its way back towards the new normal and price we will moderate as the year goes on and although today demand remains strong.
We still believe ultimately the long term demand for PPE products will be below the peak levels, but well above the pre pandemic levels of.
Also we remain very engaged with government and industry to address the future of PPE manufacturing and supply our.
Our largely north American owned and operated manufacturing resources and capability will continue to be a distinct advantage for us.
As we think about our medical distribution business, we like how we're positioned our pipeline of opportunity has never been larger and are regularly witness how well our value and breadth of offering resonates with current and prospective customers.
And finally I couldn't be happier with the recent performance and outlook for our patient direct business within the faster growing part of healthcare and our outlook for new patient capture recurring revenue and stellar management of the reimbursement cycle will lead to another good year.
The strong start to the year as a result of our strategy and operational execution resulted in a record first quarter.
The continuation of our strategy and execution has allowed us to provide new guidance range for adjusted earnings per share of $3 75 to $4 25.
And the annual adjusted EBITDA range of $450 million to a half of $1 billion.
As I've talked about before everything we do is based on the Owens <unk> minor of business blueprint focused on our culture and operational excellence based on the Owens <unk> minor business system and strategic investment. This enables us to best serve and provide value for many years to come to all of our stakeholders, including customers.
Teammates suppliers and shareholders.
We will be shedding more light on all of this at our Investor Day later this month and I believe you will see why we are so excited about our future.
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 morning, everyone. Today I'll review, our first quarter financial results and the key drivers for our quarterly performance and then I'll discuss our expectations and assumptions for the rest of 2021.
We're pleased to report a strong first quarter with good growth and revenue and earnings per share earlier today, we announced our revised full year adjusted net income guidance, which has been increased to $3 and 75 to $4 and 25 per share and our full year adjusted EBITDA projection of 450 to 500 million.
Based on our current outlook for the remainder of the year.
Ill elaborate on all of these and my remarks today.
Beginning with the top line revenue for the first quarter was $2 3 billion compared to $2 $1 billion per the prior year. This represents 10% growth the primarily occurred and our global products segment as the momentum that we achieved as we exited Q4 carried into Q1.
As we guided last quarter, we've experienced and will continue to see higher nitrile gloves acquisition costs relative to last year and.
And as previously discussed higher glove costs are being largely pass through resulting in higher revenue.
And Q1, there was the revenue lift of approximately $160 million due to this dynamic.
Also I want to remind you that the bottomline impact is expected to be minimal over time, but in any particular quarter. This could have the positive or negative impact on earnings due to the timing of when price and cost changes hit the P&L.
We have raised the expected revenue impact of the pass through of these cost increases to $700 million to $800 million for the year.
Turning to gross margin the first quarter was 19% and improvement of 638 basis points over prior year due to strong revenue growth with favorable mix comprised of higher margin sales from the global products segment.
Favorable timing of the pass through of glove costs as well as improved operating efficiency.
Distribution, selling and administrative expense of $293 million in the current quarter was $39 million higher compared to the first quarter of 2020 to support topline growth and to fund ongoing investments across all business lines net of productivity gains.
Interest expense of $14 million and the first quarter was down over 41% or $10 million lower than the same period and the prior year. This improvement was due to continued debt reduction as a result of our disciplined approach to capital deployment, coupled with lower effective interest rates, resulting from the improvements and our capital structure of.
I'll elaborate on this later in my remarks.
The combination of our strong execution across the business and strength and global products, coupled with productivity gains resulted in adjusted operating income for the quarter of $163 million of <unk>.
Fivefold improvement of $135 million compared to prior year.
Adjusted EBITDA for the first quarter was $176 million, which was $135 million or more than three times higher year over year.
On a GAAP basis income from continuing operations for the quarter was $70 million from 98 of share.
Adjusted net income and the first quarter was $111 million, which yielded and adjusted EPS for the quarter of $1 57, and represents an almost 40 fold increase compared to Q1 of last year.
The year over year of foreign currency impact and the quarter was favorable by <unk>.
Additionally, it is important to remember that there were $10 4 million more shares in the first quarter of 2021, EPS calculation and and the prior year as a result of the equity offering from the fourth quarter.
Now I will review results by segment for the first quarter.
Mobile solutions revenue was essentially flat year over year at $1 $85 billion.
The segment saw continued topline growth and our patient direct business, along with higher sales of PPE through medical distribution.
Revenue was negatively impacted year over year as a result of having one fewer selling day in the quarter. Additionally.
Additionally, volume associated with elective procedures began to improve as we exited the quarter. However, it was still slightly behind where we were in Q1 of last year.
Global solutions operating income was $8 $9 million and increase of 15, 6% compared to $7 7 million and the first quarter of last year as a result of productivity and efficiency gains on the back of our largely stable cost base and our medical distribution business.
Turning to our global product segment net revenue and the first quarter was $659 million compared to $391 million last year and increase of 68, 4%, which was driven by the significant growth and PPE, including the previously discussed impact of higher global prices slightly offset by the <unk>.
<unk> of lower electric procedures.
Operating income for the global products segment was $164 million yearly and eight fold increase versus $19 million from the prior year's first quarter.
The increase is attributable to higher revenue, resulting from PPE capacity expansion favorable timing of cost pass through and gloves and productivity initiatives and favorable product mix improved fixed cost leverage and operating expense discipline.
Foreign currency impact was favorable on a year over year basis by $5 million.
Now, let's turn our focus the cash flow the balance sheet and capital structure in the quarter, we generated $25 million of operating cash flow, which was $68 million lower than the same period last year, primarily due to higher levels of working capital to support growth and the business.
During the quarter, we achieved another milestone and our financial strategy by successfully issuing $500 million of senior unsecured notes due in 2029, while entering into a new five year $300 million revolving credit facility and amending our three year of $450 million of accounts receivable securitization.
<unk> facility.
These actions provide additional liquidity and lower cost of financing that enhances our operational and strategic flexibility as well as extending our debt maturity profile with no maturities until 2024.
Our continued focus on enhancing our capital structure has resulted and significantly improved credit ratings were upgraded by all three credit agencies during the first quarter and expect further upgrades during the year of.
Accordingly total debt at the end of the first quarter was $982 million, a reduction of $44 million versus year and I'd like to note that despite the working capital requirements associated with topline growth, we were able to lower the debt load and maintain our leverage profile of well below three times EBITDA, we are very well positioned.
Financially to execute our growth strategy by continuing to invest across our businesses.
Turning to guidance for the year earlier. This morning, we revised our guidance for 2021 upwards as our visibility into the third quarter improved our revised adjusted EPS guidance is now and the range of $3 75 to $4 and 25 per share and adjusted EBITDA guidance is in the range of 450.
The $500 million, let me walk you through the assumptions that went into developing our guidance.
We now expect revenue to be and the range of $9 $6 billion to $10 billion, which will be driven by several factors.
We know of improved visibility of the PPE market into the third quarter. While the timing is uncertain. We continue to expect post pandemic PPE volume to normalize at levels lower than what we experienced during the peak yet higher than pre pandemic levels due to post COVID-19 changes in regulations practices and protocols and the health care industry.
Our recently installed PPE capacity is expected to achieve full utilization during the first half of the year and our recently announced the glove manufacturing capacity expansion should begin contributing to our financial results and early Q1 of next year.
Continued strength and byrom, our patient direct business as the result of strong growth and the benefits of our investments to improve our b to b and B to C offerings.
We continue to expect elective procedures to return to pre pandemic levels. During the second half of the year and should pent up demand for elective exceed pre pandemic levels, there could be upside to our forecast.
We expect further cost increases on the portion of our gloves that we source externally and have increased our expected pass through of these costs and the range of $700 million to $800 million for the full year.
Gross margin rate is now expected to be and the range of $15 four to 15, 7% and 2021.
Fluidity and the timing of the glove cost pass through is expected to be a headwind on EPS and the second half.
Sudden and unexpected declines in the market price of the gloves could result, and downside to our adjusted EPS projection.
Interest expense is expected to be between $45 million to $50 million for the year, reflecting lower debt levels and the benefit from our recent debt refinancing.
<unk> guidance is based on 71 million shares outstanding Star.
Starting this quarter, we will be providing guidance on adjusted EBITDA and for the year, we expect it to be and the range of the $450 to $500 million.
Finally, I'd like to remind you about the calendar <unk> of earnings and 2021 as previously guided we don't expect to see the typical seasonal pattern of earnings specifically, we expect adjusted EPS to be weighted towards the first half of the year.
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 that's been posted to the Investor Relations section of our website.
Over the last several quarters, we have demonstrated our ability to consistently deliver improved financial results and enhancing our financial profile, despite the challenging business environment.
We continue to make progress and our strategic goals and we are well positioned for growth and the future.
And with that I'll turn the call back over to the operator to begin the Q&A session operator.
Thank you Sir.
As a reminder to ask a question you will need to press star one on your telephone two of which.
Your question. Please press the pound key.
Standby, while we compile the Q&A roster.
I show. Our first question comes from the line of Michael Cherny from Bank of America. Please go ahead.
Good morning, and congratulations on another very solid quarter.
And so I wanted to just dive in on this commentary you have on PPE and as you think about the future. So many of the questions I think you and so many others are trying to answer is what is the Owens <unk> minor it looked like in a post COVID-19 world whatever that means and so as you think about the conversations you're having with both customers and prospects now.
What are they telling you in terms of how they foresee PPE being used and whether it's gloves masks and gowns whatever it might be but all of the products that you sell in the future state that gets you comfortable with that.
Well above pre COVID-19 level.
Hey, Mike This event. So thanks for the question and thanks for joining US today. So I think we do spend a significant amount of time listening to our customers and.
Couple of things, we're hearing is and what they've proven during this pandemic is that the the high utilization of PPE has drastically reduced infections spread which is critical and no matter, what youre doing and the hospital.
The other thing they are telling us that.
And they believe that the health care protocols, they put in place to solve that problem.
I've been in place now per year, and they expect those protocols and just the daily usage of PPE.
And again to remain significantly above where it was pre pandemic the amount of changes of PPE.
Continues to be at that high level and in addition to that we've had some customers say that they are.
And while the shortage of lasted they were using certain re excuse me reusing certain aspects of PPE does that now theyre getting away from reusing it to now going back to more disposable because they have the ability to get more of that.
So that's why we believe it's going to be drastically higher than where it was pre pandemic will be slightly lower than it was at the peak.
And Thats, what we believe that because we think stockpiling of stockpile and as part of the reason why we think it would be and slightly below their peak, but we still see customers continuing to build stockpiles or we're building stockpile for them or we're creating idled capacity and our production lines. So that way should there be another pandemic, we have the ability to <unk>.
Divide the product for them.
The other aspect of this.
And these things start to think about it is beyond the health care field currently.
We're not selling the non healthcare industries, whether that's retail international and consumers.
There is opportunities for us once we get our customers completely satisfied with their PPE over the over the long term to continue to move into more of our new adjacent or verticals with that product too. So.
I think Michael it's really the combination of the two things it's back to you with a health care protocols of change a change drastically. It's validated the fact that if you're constantly re.
Constantly use PPE and use it appropriately for the clinicians as well as anybody entering the hospitals you can drastically reduce the spread of infection. Those protocols are in place. We expect those to continue and Thats why we expect to be much higher than it used to be I think you continue to have the need for medical grade PPE and you have stuff that was being reuse and no longer.
And being reused you have stuff that was part of the emergency use authorization the thats being removed that now they want more medical grade and opportunities beyond health care first expand and other markets. That's what we're seeing and that's why we expect this to continue that demand would be well above pre pandemic levels into the end of the future.
Okay.
And just along those lines as you think about your global products with particular, especially given the strong financial position the company as the and at this point and time, how do you think about building out the portfolio and essentially given the window, you've had and to your clients' infrastructure, especially during COVID-19.
Do you think about where the portfolio of sits right now versus other opportunities that you could have that's driving incremental value over time.
And Michael that's exactly you bet Thats exactly right and and we're going to talk a lot about that makes 26 that are and our head of virtual Investor day really that's one of the key drivers for us to ignite growth going forward.
Thats focused on that portfolio expansion, we've got multiple great brands in the market and we got Halyard and we've got many choices of that other brands and and.
It's going to be the ability to broaden that product portfolio.
With our brands, that's going to drive and ignite significant growth and move forward, but to take.
The leap the teaser out there.
<unk> plan and joining us may 26 out of our virtual Investor Day, where Chris Lowery, who runs that business is going to go into this and much greater detail.
Yes, I will certainly be there thanks for the questions.
Okay.
Thank you.
Sure. Our next question comes from the line of Daniel growth slight from Citi. Please go ahead.
Hi, guys. Thanks for taking the question and congrats on the continued momentum here the product margins continue to come and much better than we and the street.
And are anticipating it's up around 750 basis points sequentially. You mentioned some of the the drivers of that outperformance this quarter, but I was curious if you could put a finer point on the particulars there.
How much of that margin outperformance.
It was due to this glove price cost mismatch this quarter and as we think about the rest of the year should we think about run rate closer to where you ended last year and products margin.
Sure I'll, let Andrew start and then I'll add some color on the at the end and good morning Daniel.
So yes, so in terms of the very strong quarter in terms of gross margin and overall, our bottom line performance sequentially gross margins up over 200 basis points from where we were in Q4 and I think a lot of that is as we talked about the continuation of the momentum that we saw coming out of Q4 going into Q1 of this year.
As we approach more of the full utilization of the <unk>.
Prior investments that we've put into place with our PPE capacity expansion. So we're continuing to get.
And the benefits of the volume and the fixed cost leverage and the efficiencies that have come through and the quarter and in the products business.
And another dynamic and the quarter as you pointed out is this is really the first quarter, where we start started to see the yet the impact of the change and glove costs that are and are being pass through to us from from the manufacturers where we.
Where we actually do purchase gloves from the piece of it we don't manufacture internally.
And so the dynamic there is that the price changes and the market can be the market price changes can take effect much quicker than the cost changes remember the cost changes take time because of the delivery times overseas and then they have to work the way through inventories. So theres a delayed effect. So those are really the two key contributing factors to the sequential gross margin.
And improvements and then looking long term.
First of all the way I would point you to our full year guidance on gross margin for the year.
In that mid 15% range.
And that really reflects the fact that the the timing benefit of this of the glove cost pass through.
Even out and the second half of the year. So I think that would be kind of more of that long term view looking towards the guidance that we've provided.
And Daniel and first thanks for joining us on the call today also and I'll add those two comments are spot on it.
The timing on the gloves.
And that will balance out as the year progresses, and obviously, we have our margin projections for the full year every day.
We disclosed but the other side of it really is continuing to get fixed cost leverage and drive operating efficiencies and I talked about it and make it as simple as this is we have to find ways to get better every single day.
And whether that we really leverage our Owens <unk> minor business system and that continuous improvement frankly, when you think about the amount of additional product we have coming off of our lines and the amount of volume we pushed through our factories.
We are continuing to learn how to be more productive and more efficient and the manufacturing of that PPE and I think that also shines through and the first quarter as we're at continuing to produce as much product as we possibly can.
Got it Okay and then on your capital deployment priorities, you mentioned that you're investing in and the business and working capital and and inventory.
I'm curious on your philosophy of of continued debt pay down versus share repurchase versus the dividend increase for this year and next how are you thinking about those.
Those capital deployment priorities outside of the investment and the business.
I want to at least cover the investment and the business and then we'll talk a little bit about the capital deployment outside of investment.
And what's important to understand is what we are not going to do is get caught flat footed as the market continues to adjust.
So we were clear we invested and operational.
Investments as well as inventory because we anticipated elective procedures to start to ramp back up and that's exactly what they did at the end in March they really accelerated in March and we made sure that we have the right inventory and the right operational expertise there to be able to deliver on that so we put that as a key priority.
Already because that continues to build customer trust and continues to provide long term partnership long term profitable growth.
For the business and on the capital deployment side of it.
I think the way, we'll think about it is obviously and you've talked about this a lot and we're gonna have a disciplined capital investment approach, we are going to focus on opportunities to invest for long term profitable growth within the business and I think related to dividend and the way we think about it right now and there are tremendous amount of opportunities we have to invest and we believe.
We provide that long term profitable growth at high levels, and that's going to be our primary focus with that let me turn it over to Andy to add maybe a couple of more comments on how we progressed and you'll see our debt and debt leverage going forward.
Absolutely I think you had so you know.
In terms of as Ed said, our capital deployment strategy and process being very disciplined and I agree with and I think the priorities are and the business are reinvesting in the business and that manifests itself and as both an operating and youll see that hitting the P&L through operating expense investments as well as you'll notice in the quarter, we did increase our guidance on capital expenditures.
For the year. So we do plan to expand our investments on both fronts and looking long term I think the cash flow that's being generated with the business will be and we'll have ample funds to fund those investments and the business and still have cash flow left over to to continue to make the improvements that we've seen and our balance sheet and.
And we're still targeting to be in that the two to three times leverage range and quite frankly being at the lower end of that range is very realistic and the short and long term.
Yes.
Got it thanks guys.
Thank you.
Our next question comes from the line of July and dressings from Credit Suisse. Please go ahead.
Thank you and good morning, congrats on a good quarter.
And you don't want to better understand the global solutions revenue trends in the quarter coming in at flat year over year, but down five puts and sequentially can you provide some of the factors Deadpool sequential decline in revenues and that business and excluding the impact of gloved cost pass through would you expect that business to sequentially grow for desktop and 2021.
This is still under this is ed thanks for joining us on the call.
So I think first and foremost so that business is really made up of two items, it's our medical distribution and our patient direct business, our buyer and business and.
Both of those business were negatively affected by one less billing day in Q1. This year versus Q1 last year. So that was one of the impacts on it and you think about it it's a consumer based businesses, we have less less days in the quarter less billing days and you have less revenue.
I think there is a clear expectation and we're seeing that already for that business to continue that business should be able to continue to grow and we look at that we look at that business and a lot of ways. The business when I say that business. The medical distribution, we're sitting there with net new wins, so PPE of side, we've got net new wins that we're beginning to implement.
And we started to implement many of those at the end of Q1 and.
In addition to that we've seen elective procedures starting to ramp in March and we expect that to continue through the year.
And like I spoke earlier, we are well positioned on that to make sure. We have the ability to capitalize them on the on that is the electric procedures.
<unk> to ramp where they are ready to serve.
And I haven't talked about this but our pipeline of opportunity and our medical distribution is greater than it's been and my two years that ive been here there are more opportunities for us to continue to capture and then any capture new wins.
The reality is though any of those you do it takes probably six to nine months until you start to implement those so those would be late in the year as possible and addition to that and global solutions. We continue to work with our customers to renew contracts in advance of the exploration. So that way you don't have that risk when it's out there. If you look at our patient direct business that's part of it.
We continue to grow our existing relationships with our customers and broad and what we do for them. We're entering in the new relationships to expand our market opportunities and in various existing chronic conditions that we currently support and in addition to that we've invested in our patient direct business and pursuit of organic growth and underpenetrated areas. So those are all of the <unk>.
And why we expect this bit of this segment to continue to be strong and strengthen as the year progresses and I think the first quarter is really a result of you look at it year over year again, one less billing day year over year that had a slight impact on it.
Yeah actually kind of caught up on the.
Comments on bite of the patients that the business can you be most of the thick like bought part of the key drivers of kind of driving the outperformance there and how much of that is sustainable and maybe talk about some initiatives you got the focus to further drive go to conduct business.
So I'll just cover a couple of which I've just briefly touched on before so we didn't and we looked at our commercial organization did an analysis across the U S and we recognize there are some pockets where we were call. It up we were underpenetrated and we actually invested in new commercial resources in those areas.
To capture share in different parts of the U S, where we already have relationships with the payers. So that's one example of a simple investment and others is with we brought on a new line in and existing chronic category that we were in it was just it was and expansion of additional products within that line.
And we're seeing and significant growth and then lastly.
Our presence and diabetes, we have a strong presence and diabetes and that is one of the fastest growing areas of health care of that's also driving the ability to grow and then you look at it more from a macro level of Solyndra and you think about home health. The one thing. The pandemic has proven is home health is here to stay.
And it's going to we believe it's going to be able to continue to grow at a very fast pace and we believe that because we can impact 85% of insured Americans with our contracts and relationships as that grows we have the ability to growth.
Okay, and one last one quick hit with the sequential decline in EPS from first half to second half this year, but youre, indicating and the guidance seems to imply how do you still comfortable with the double digit EPS growth in 2020 two because of the double digit growth next year would imply a much higher growth compared to second half run rate, maybe just quickly out of there.
Yes.
Haven't disclosed 2022 guidance, yet and that will happen later in the year.
Okay. Thank you.
Thank you.
I show. Our next question comes from the line of Robert Jones from Goldman Sachs. Please go ahead.
Good morning, Thanks for taking the question and I guess just to go back to some of the rationale behind the guidance range. It sounds it sounded like improved line of sight what was the part of that obviously seeing ahead and this.
This pandemic window around PPE is obviously challenging but interested in those comments could you maybe share a little bit more detail regarding how you're expecting things to trend relative to the results you posted this quarter and couldn't help but notice you mentioned a few times PPE volumes, obviously normalizing at some point beyond peak levels are.
And we at peak levels today as you as you think about the line of sight over the balance of 2021.
I would say I would say right now if I think about where we are as the company. We are probably at that peak level. Our machines are running outside of the glass. Let me let me separate gloves from this conversation so.
All of the investment we made we're still running at capacity.
Still have strong demand and I think this is what the other aspect of why we think of it continues with US is we're one of the few companies that actually manufacturer and product. We're wondering if you have companies that manufactured on scale. We're wondering if <unk> companies that manufacture of the entire suite of broad based portfolio line of PPE so of.
All of those become of importance because.
You can come to one location and get fit testing.
And 90 fives and we can provide all of the all the product thats needed versus having to work with 30 or 40 different smaller manufacturers I think that's something why we see ourselves at peak and that extending for an extended period of time plus some of the longer term relationships. We've worked with all of the support we worked with the customers because of all of the <unk>.
And we provided them during the pandemic.
So that's critical the one area I would say no one is as our glove manufacturing. So we talked last quarter that we are doing a significant investment and our factory in Thailand to expand our gloves and addition of part of that investment. We are doing is we're continuing to enhance our employee workspace too so.
And we're really setting that up for for growth of our own manufacturing of of gloves and Thats, the one area, where theres still as constraints and.
And it gives us the ability to help fill some of those demand. So I would say that gloves is still not at its peak and.
And that's how we see the PPE space going forward.
No that's helpful and and I guess, maybe just one big picture question and I have of feeling well, we'll probably wait for the analyst day for for more on this but you know clearly improving the balance sheet has been a big focus and as you and Andy discussed and the prepared remarks, as you think about that normalized PPE level.
Below peak, but above historical trend and then thinking about where you are on you know on the distribution side and obviously that will recover you would imagine is as the industry and utilization recovers.
And think about adding a third leg to the stool or when do you think about capital deployment and investment is it really more within the two businesses that you currently obviously operate today.
We are going to cover that and a little more detail of.
On May 26 of where we're going to be investing but.
I think let's hold it till then if we can cause.
And that could start to get into here, but it would take a long period of time, but I would prefer holding at the May 26, when we talk about capital deployment, our M&A strategy.
Well as you know our investments into what businesses, we're going to invest in.
That's fair and I'm looking forward to it thanks Ed.
Yes.
Yeah.
Thank you I show. Our next question comes from the line of Eric Coldwell from Baird. Please go ahead.
Thanks. Good morning, I was hoping you could just hit quickly on cash flow of the influences and the quarter and then how you see cash flow of phasing through the year and I have a couple of follow ups. Thanks.
And I'll, let Andy ill take that one yeah. Good morning, Eric So, yes, as we look at cash flow.
Cash flow and the quarter generated about $25 million and that was lower than where we were last year. At this time and theres really a number of factors driving that lower cash flow figure and and I'd say, probably first and foremost as working capital investment so.
And with growth and the business, we're continuing to invest and working capital I think the good news is is that the accounts receivable is performing as we expected days are in line with where we want it to be our ageing profile is good inventory is up that's consuming cash, but again thats, a very proactive meaningful investment and inventories that has talked about right. We want to maintain service levels.
We want to put and inventory in advance of new customer wins, we want to make sure inventories available.
Should elective procedures tick up and when they did tick up we were ready for it. So that's all very purposeful and independent investment.
I'd say were the probably the drain on working capital is historically when inventories up you get a nice offset and your accounts payable and that that's not happening for us and and.
Key driver of that is really it comes back the gloves.
<unk> seen the.
The impact of the clothes manufacturers third party manufacturers in Asia. The influence that they've had on pricing we've talked about that a lot will also have influence on payment of payment.
Payment terms, so what we're seeing is that we're accelerating payments and some cases to glove manufacturers. The cycle time, then to get the product into the into the United States has been delayed as the backups and the west coast with the ports getting product in and so that's caused the delay and the combination of the two Eric has really led to the fact that we are.
We're seeing longer cash collection cycle times, and that's that's caused a little bit of a drain on working capital now again over time, we expect that to work out and even out and improve as we move through the year, but it certainly plays a big factor and the first quarter just another comment on cash flow that's unrelated to the gloves and just to note that while we did increase our <unk>.
<unk> on capital investment capital expenditures that also will be very tail end loaded. So our guidance is and the $80 million to $90 million per the year I think we spent less than six or $7 million and the first quarter. So we expect that to have a drain in the second half of the year.
And that's that's a great answer thanks for that.
The other one I had the remaining was just.
Maybe putting a little more pressure on to see if you would actually quantified the impact of the time of the profit timing on the the nitrile gloves in the quarter. We all realize that that is expected to be net neutral the profit over time, but.
It would be helpful to understand the the actual influence and Q1.
And I don't know if you want to do dollar terms our percent of the operating margin increase and global products are however, but a little finer point on the actual influence of that would be I think very helpful to everyone.
Sure Eric So I guess, the two data points and I would point you to in the quarter would be the top line impact of the $160 million.
And again the guidance that we've tried to provide on the full year of the 700 $800 million impact. So that's one data point and in terms of margins, while we haven't really disclosed any of the the many drivers of our gross margin improvements and the one point that I would probably turn to assist.
Looking at the sequential profit to change in the in the global products segment from Q4 to Q1 to 75% pull through that we saw sequentially. So that might be another data point to help quantify the impact, but youre absolutely correct that we.
We expect that Taylor.
Tailwind to become a headwind and the second half of the year as cost of catches up with the of the price increases and over the long period of long long term, we expect as those prices and costs normalize.
The impact in total over that period will be very minimal and any more of that though even with that.
And that balancing has been through the year of the front half versus back half of the year.
Extremely comfortable and confident and our new range that we put out there.
Yeah, no. That's that's great so not not unreasonable to assume global products margin would've been somewhat similar to second half of 'twenty.
Absent this impact.
I think from modeling purposes.
That's reasonable yes.
Thanks, very much guys I appreciate it.
Thank you.
Sure on the next question comes from the line of Kevin Caliendo from UBS. Please go ahead.
Thanks, Thanks for taking my question of.
I wanted to talk a little bit about the solutions margin.
I know theres, some seasonality to it and you talk about some of the improvements was there anything.
One time in nature of that affected margin this year other than sort of the volumes and how should we think about the progression I know it increased year over year is there should we expect sort of a year over year improvement similar to what we saw in terms of absolute base.
Basis points on a quarter by quarter basis.
You said it would improve over the course of the year I'm just trying to understand how to think about modeling the operating margin for that business going forward.
Yes, good morning, Kevin It's Andy and again, thank you for for joining US today, So I'm looking at global solutions margins in the first quarter and specifically looking at it sequentially from Q4.
Did see the volume drop off sequentially Q4 to Q Q1 on the topline again key drivers of historical seasonality.
And also just slight easing of.
The pandemic volumes and.
And then you see the corresponding margin changes of result of volume. So that's one of the key drivers also there is an element of seasonality in the global solutions business and in particular, it's driven by the Ah patient direct firearm business and the reason for that is as you get into the first quarter of the year.
And you see a change and your payer mix range. So you see it more weighted towards the individual or the consumer as opposed to the payer and thats because of the.
The individual has not yet met their deductibles and with that mixed shift more towards the payer.
And we appropriately reserved for that the payment or collection risk that's associated with that and then again net eases as you move through the year as the peer mix normalizes and ships back towards the payer.
And then we continue to invest and the business and drive productivity. So I think those are really the four of 504 dynamics that look at the drive that business sequentially and.
And then longer term as well.
Look at that business.
Again.
The patient direct business continues to perform very strong and that continues to drive solid margins and and the medical distribution business.
As we've said, it's really of fixed cost leverage gain right. So it's the.
The additional volumes that we can put through that business.
Should generate.
Additional fixed cost leverage and that business and I'll add just a little bit of comment on some of those investments when the and I talked about it earlier and not only do we invest and inventory and working capital.
Also investing and some operating expense for one of electric procedures ramp up and two for new wins. So we wanted to make sure. When we did when we do when we do have a new win will actually put the expense and in advance of the implementation so that way the implementations of our flawless and we've had several of those that happened in the first quarter.
And where we did put the expense and in advance to make sure we were prep and the and the execution of those implementations when flawless and the head three customers reached back out to us complementing of how the only thing. They saw was the next day and Owens <unk> minor truck show it up the product beside somebody else's, but they've got all of the product they need and stuff showed up on time it was accurate.
And it has everything they need it so we will make those investments and advance and we did some of that and Q1.
That's great and just a quick follow up you talked about the impact of the gloves and the pull through this quarter and how that's going to normalize over the over the course of the year and if we think about the net net net the impact that we saw and <unk> versus the normalization of expected over the rest of the year as we think about that sort of.
Normalizing going forward for your gloves business is the margin similar to the rest of the PP&E. The higher is it lower how should we think about that longer term.
Yes, we really have not talked about within PPE or within global products, even specifically any commentary on margin profiles of specific categories of product lines within global products.
Well okay.
And if I'm to say the pull through was 75% this quarter and the rest of the year and debt.
Breakeven and it's still positive.
The expectation.
And any sort of help to try and think about that part of the business and we can kind of back into it but.
Yeah, I think Paul.
Of all kind of done the PP&E pull through on margin and the past and tried to figure out sort of what had been and I'm. Just wondering if clouds. If you think that gloves and would be typical for the rest of the PP&E, giving us numbers, but is it would it be higher margin do you think are lower margin than than what youre seeing with the rest of your peaking and revisit.
I would say really the only thing I could point to to help you out here would be that the pull through the sequentially Q4 to Q1 and global products was higher than normal and I would say that's largely attributable to the dynamic. We just described and then I would look to the full year gross margin guidance, knowing that probably the big fluctuations going to include the.
It happened and our global products segment as opposed to the global solution side and I think over time its been all balanced out to over long periods of time that dynamic should even out and even in light of that that's we're still extremely comfortable and confident and our new range that we put out there even in light of that the balancing of it out and the back half.
No that's helpful. I appreciate it thanks, so much guys.
Thank you.
And I share all of last question comes from the line of micro and check from J P. Morgan. Please go ahead.
Yes, good morning, and thanks for taking the questions. So.
And so just putting aside the unique dynamics with respect from the exam gloves and can you talk about what youre seeing with respect to current pricing trends and the spot market for other PPE categories do you still see prices elevated relative to historical levels and I guess once the supply demand does begin to normalize and what are your assumptions around where we could ultimately see spot pricing go relative to.
Pre pandemic levels, just trying to better understand the dynamics at play there.
So we see spot price pricing continues to be fluid and we talked about this and the fourth quarter about it and the fourth quarter, we do see spot price coming down from the peak the pandemic.
We still are our pricing because we have contractual relationships with our customers are below spot pricing spot by pricing.
Which is what we've tried to lift through the processes whatever contract price when we have we're going to honor that.
Versus going out and adjusting based on the spot price. So we are seeing them come down we did see clubs go up drastically and we're starting to see that balance out.
And again gloves is probably the exception right now the outlier on that.
But we and we would anticipate it to continue to adjust.
As we go forward, but again I think.
What's critical is we think the usage and the main from PPE remains remained much higher than it was before this business was profitable pre pandemic of pre pandemic pricing and it will continue to be profitable.
The pandemic and and post pandemic pricing, which we expect to obviously demand can be much higher than it was before which enables us to get significant throughput and leveraging of our manufacturing facilities.
Got it that's helpful. And then maybe just a quick question around GPO contract renewals can you talk about how you see those sort of playing out and how that impacts the results I guess, maybe relative to what <unk> seen in the past and around those renewals.
And so we've recently renewed busy and fit the two year renewal, we're continuing to work with our two other key GPO healthtrust and Premier and.
Look we've got great relationships with them and I think there and the pandemic, we've really strength in that relationship. We did everything we could get all of their members.
And we expect to continue to work with them and.
And move forward.
Got it thanks for the comments.
Thank you that.
That concludes our Q&A session at this time I would like to turn the call back over it too much of a at the secret of President and CEO for closing remarks.
Well, let me first start by.
Thinking everyone for joining us on the call today, Let me also had the comment that I would like to think of.
All of the Owens <unk> minor teammates, who really had the privilege to work with side by side and <unk>.
Over the last two years and the amount of effort and work that our teammates have done to go out and support the cost due to fight. This COVID-19 side by side and I would be remiss not to think the frontline workers who have.
Basically done everything they possibly could over the last 14 of 15 months and this battle.
I'll close by adding this as you know pleased with what the weight of Q1 started and in the year of Q1 was and the year started but we still have a lot of a lot of the year left in front of us and a lot of hard work ahead of us, which we expect to continue to be successful as we move forward and then lastly, close with and hopefully we will hope to see everyone may 26th the virtually.
See everyone May 26, when you can we're going to do a deeper dive into Owens <unk> minor and how do we ignite growth into the future. So thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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