Q3 2021 Owens & Minor Inc Earnings Call

November 3, 2021

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Good day, and thank you for standing by and welcome to the Owens <unk> minor third quarter 2021 financial results conference call. At this time, all participants are in a listen only mode.

Good.

After the speaker presentation, there will be a question and answer session to ask a question. During this session you would need to press star one on your telephone.

Please be advised that today's conference is being recorded.

If you require any further assistance please press star zero.

I would now like to hand, the conference over to your first speaker today to Jackie Marcus Investor Relations MS markets you may begin.

Thank you operator, Hello, everyone and welcome to the Owens <unk> minor third quarter 2021 earnings call.

Our comments on the call will be focused on financial results for the third quarter of 2021, and our outlook for 2021, both of which are included in today's press release.

I'd also like to call your attention to the supplemental slides related to our 2021 outlook posted on our website in the Investor Relations section.

Please note that certain statements made on this call are forward looking statements, which are subject to risks and uncertainties. These forward looking statements are intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act of 1995.

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

Forward looking statements made on this call represent management's current expectations and are based on <unk>.

The information available at the time such statements Army.

We're looking statements involve numerous known and unknown risks uncertainties and other factors that may cause our actual results to differ materially from any results predicted assumed or implied by the forward looking statements.

The company has explained some of these risks and uncertainties and the SEC filings, including in the risk factors section of its annual report on the Form 10-K and quarterly reports on Form 10-Q.

Except as required by law or the listing rules of the New York Stock Exchange the company expressly disclaims any intent or obligation to update any forward looking statements.

Additionally, in our discussion today, we will reference certain non-GAAP financial measures and information about these measures and reconciliations to the most comparable GAAP financial measures, which are included in our press release and our annual report on Form 10-K.

Today, I am joined by Ed <unk>, 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 Jackie and good morning, everyone and thank you for taking the time to join us on the call today.

I am extremely excited to be here today to discuss our third quarter and I'm pleased that in the third quarter. We continued on our path to a record setting year.

Our performance reflects the results of consistently providing high quality service and value to our customers, while strengthening the financial position of the company.

As I reflect on the key drivers of the third quarter as well as on our outlook. It is clear that our ability to deliver strong revenue growth across the entire business.

Combined with our focus on continuous improvement has enabled us to effectively navigate a rapidly changing market that includes the COVID-19 pandemic global supply chain prices inflation and an acceleration in the shift of health care to the home or as we talk about it internally.

Our new norm.

I'll start with our global solutions segment, which I am pleased to announce delivered significant topline growth, while nearly doubling operating margin year over year.

As I continue to dig a little deeper into this segment and more specifically into our medical distribution business.

Great to see that the hard work, we did to enhance our service levels.

Support our customers at the highest level during the pandemic is paying off.

Our competitive position has clearly improved and we continue to win new customers and consistently renew existing customer agreements.

Becoming clear that customers value, our ability to provide scalable and flexible solutions due to our balance between technology and touch as we operate in these rapidly changing market conditions. Our medical distribution showed marked improvement leading to higher revenue and meaningful operating income improvement.

The business line is really starting to hit on all cylinders and this is being recognized by customers as we solidify a meaningful wins again this quarter.

And finally in our global solutions segment, our patient direct business already a leader in this space once again posted growth rates ahead of the market.

Patient direct remains rock solid and we continue to see strong underlying growth in the home health market as home treatments are becoming increasingly more commonplace.

Next in our global products segment, we showed solid growth in total, but I want to focus you on the fact that when you strip out the price increase related to the glove cost pass through we delivered 8% volume growth.

As we have stated in the past the strong sales are a result of increased output of our previously adequate capacity to fulfill continued high PPE utilization due to the adoption of healthcare infection prevention protocols share gains during the pandemic and increased electric procedures.

And both of our segments. It is clear that our customer wins and our strong overall growth has been facilitated by our business blueprint our business blueprint that is focused on our culture, our continuous improvement based on some minor business system, and our disciplined strategic investments, which ultimately drive in any.

<unk> customer experience, while also improving our financial performance our business blueprint continues to pay off and provides us with the confidence of delivering long term profitable growth.

Moving on to our balance sheet.

While Andy will have more to share on this in his remarks.

<unk> to report that we reduced our net debt by $42 million.

Down to $921 million, taking our net leverage to one seven times.

Just to put this into context, the last time, our net leverage was this low was Q4 of 26 team.

Our balance sheet strength gives us the opportunity to make strategic investments that will drive continued long term profitable growth across our business.

Looking ahead.

Like many businesses, we are monitoring the increasing inflationary environment and have begun to take steps to mitigate this impact.

But as I think for the balance of the year and into 2022 I'm excited about the many prospects we have.

These prospects include one the implementation of our new wins and there's still a large opportunity pipeline in medical distribution to the continued expansion of newer future proprietary products through our existing customers new wins and channel expansion.

Three the continued strength of our patient direct business.

For our disciplined approach to capital deployment, and lastly, our never ending commitment towards operational excellence and continuous improvement.

So.

As we look at the third quarter and full year two.

2021 is shaping up largely as we previously indicated.

The first half was very strong in the back half of the year, albeit lower than facing tough comparisons will still demonstrates that we're operating at a very high level. Andy will elaborate on these in a few minutes, but before I turn the call over to Andy I'd like to emphasize that the strength of our year to date results.

And our continued execution of our long term strategy gives us the confidence to narrow our range in 2021 guidance for both adjusted EPS and adjusted EBITDA.

As well as reaffirm our previously issued full year guidance for 2022.

As I've said before it is our focus on our customers our culture, our business system and our investments that allow us to build the Owens <unk> minor up today.

Everything we do at Owens <unk> minor is tied to our mission of serving our customers.

They are empowered to advance health care.

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 financial results for the third quarter and the key drivers for our performance and then I'll discuss our expectations and assumptions for the balance of the year.

Let's begin with the results for the third quarter, starting with the top line.

Revenue for the third quarter was $2 5 billion.

Compared to $2 2 billion for the prior year. This represents over 14% growth compared to this time last year with both segments. Once again contributed to the improvement.

Our growth in the third quarter was driven by share gains the ongoing recovery of elective procedures and other strong performance from our patient direct business.

Through elevated loss costs and higher usage of PPE excluding.

Excluding the pass throughs, well cost our topline growth was 7%.

Gross margin in the third quarter was 13, 1%, which was lower than the prior year, mainly due to three drivers the timing of our club cost pass through as discussed last quarter, increasing inflationary pressures, which were partially offset by positive operating leverage on higher volumes.

Distribution, selling and administrative expenses of $262 million were essentially flat compared to the prior year.

This was primarily a result of higher variable spending due to volume inflationary pressures and investments in growth, which were offset by productivity initiatives.

The adjusted operating income for the quarter of $79 million, and adjusted EBITDA of $92 million or $13 million and $12 million lower respectively than our record setting third quarter in 2020.

Interest expense of $12 million in the third quarter was down 45% for $90 million year over year, which was driven by lower debt levels and effective interest rates.

The adjusted effective tax rate of 16, 3% compared favorably to 39% in Q3 of 2020.

On a GAAP basis income from continuing operations for the quarter was $44 million or <unk> 58, a share adjust.

Adjusted net income for the third quarter was $56 million.

Which yielded an adjusted EPS for the quarter of 74.

Which was <unk> <unk> lower than Q3 of last year.

It is important to note that the average dilutive shares outstanding of $76 million or 25% or $15 million higher during the quarter versus Q3 of last year, which resulted in year over year reduction of <unk> 19 cents.

Year over year foreign currency impact in the quarter was unfavorable by <unk> <unk>.

Let's turn to our quarterly performance in each of the segments.

Global solutions revenue of $2.02 billion.

Represents a $158 million or eight 5% growth over the year ago quarter.

The continued growth was largely driven by ongoing improvements in our medical distribution business and continued momentum in our patient direct business.

Contributing to this growth was the ongoing recovery in volumes associated with elective procedures, which continued to trend at pre pandemic levels.

Also excited that we saw attractive sequential growth, which includes the contributions noted above as well as recent customer wins.

Global solutions operating income was $20 million, which was $9 million or 86% higher than the prior year, primarily driven by an improvement in our medical distribution business.

We experienced higher volumes, coupled with productivity and efficiency gains in the quarter, which led to our strong results in.

In addition, we saw margin expansion year over year and sequentially.

And our global product segment revenue in the third quarter was $679 million compared to $474 million last year, an increase of $205 million or <unk>, 43%.

Revenue grew by 8%, excluding the $170 million impact of passing through higher LOE costs.

Volume growth was led by higher S 19 usage, including PPE volume as we continued to benefit from our previous investments to expand capacity.

Meeting the requirements for stockpile fulfillment.

The increase in elective procedure volumes.

Sequentially. The segment grew in the low single digits, excluding the impact of low cost pass through as demand for <unk> products remains strong compared to Q2.

Operating income for the global products segment was $51 million versus a difficult comp of $90 million in the third quarter of last year.

The adverse impact was a result of the timing of close cost pass through higher commodity prices and higher transportation costs, which we were able to partially offset through volume growth and productivity initiatives.

As a reminder, we experienced a net benefit to operating income from the timing of glove cost pass through during the first half of 2021.

FX favorably impacted operating income by $6 million as compared to the prior year.

Turning to our balance sheet and cash flow statements year to date cash flow from operations was $74 million of which $61 million was generated in the third quarter.

This result was driven in part due to improved working capital management, such as improved payment terms with glove manufacturers <unk>.

This performance is in line with our previously communicated expectations.

At the end of the third quarter total net debt was $921 million.

Reduction of $330 million compared to last year and down $42 million sequentially.

Total net leverage is now at one seven times trailing 12 months adjusted EBITDA.

Our net leverage is now at the lowest point in nearly five years.

I want to emphasize that over the last two years, we've deployed capital to invest in infrastructure technology and working capital to support customer service levels, while driving down our leverage profile to below two times adjusted EBITDA.

Our enhanced capital structure provides us with operational flexibility and we are very well positioned to implement our growth strategy.

Finally, turning to the outlook, we are narrowing the range of our full year expectation for adjusted EPS and adjusted EBITDA. In 2021, we now expect adjusted EPS to be in a range of $3 90 to $4 10 and.

And adjusted EBITDA in the range of $475 million to $500 million.

Our guidance for adjusted EPS is based on 76 million weighted average shares outstanding additions.

Additionally, we are reaffirming our previously announced guidance for 2022.

I'd like to spend a few minutes walking through the rationale for our guidance and we'd like to point out that these key modeling assumptions for full year 2021 can be found in the supplemental slides that were filed with the SEC on form 8-K earlier today have been posted to the Investor Relations section of our website.

We expect full year revenue to be in the range of nine 6% to nine 8 billion key assumptions supporting this include gloves cost pass through in the range of $650 to $700 million of which approximately $530 million has been realized year to date <unk>.

Elective procedures remaining flat to Q3 at near pre pandemic levels and a normal flu season.

Note that Q4 will have two fewer selling days than in Q3, and one fewer day than in Q4 of last year, which is the main driver of an expected sequential decline in revenue versus Q3.

We expect sequential margin expansion in the business with both segments contributing to this expansion in the fourth quarter specifically.

Specifically in Q3 global products saw better than expected margins due to the timing of higher gloves cost moving from Q3 to Q4.

We expect to see the delayed impact of the glove cost pass through ticket in Q4.

Even with this shift we still expect sequential margin expansion in Q4.

This timing issue does not change our outlook for this segment.

Finally regarding the balance sheet and cash flow, we anticipate carrying higher inventory levels throughout the rest of the year to support typical seasonal activity and the onboarding of new customers.

This will be partially offset by lower inventory in our product segment as global inventory levels continue to decline.

We also expect the fourth quarter to have a higher level of capex spending compared to earlier in the year as we continue to invest in our business for the long term profitable growth.

In conclusion, I'm delighted with our performance in the third quarter, we were able to show year over year and sequential growth in both of our segments after normalizing for glove cost pricing.

We've delivered another quarter with margin expansion in our global solutions segment.

And our team continues to execute superbly in the face of challenging market dynamics.

And despite a higher number of shares outstanding and accelerating headwinds due to inflation year over year, we've been able to find ways to hold adjusted EPS flat on an FX neutral basis by expanding customer relationships to drive profitable growth, while utilizing our business system to become more efficient in how we operate on a daily basis.

It's incredibly exciting to see the significant progress, we're making against our long term strategic goals.

At this point I'll turn the call back over to the operator to begin the Q&A session operator.

Thank you Sir.

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Richard Your question. Please press the pound key.

We 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.

Hi, Good morning, this is downloads in for Mike.

And market share gains in the PR and then followed up with talking about new customer wins can you talk about why you're winning in the market.

With that 8% growth can you talk about how much some of these new wins are contributing to top line growth.

Sure.

Alan Thanks for the question.

Tom.

Historically I've talked about net new wins and look I don't want to get into every quarter doing a tally sheet.

What we have but.

Since you're asking let me go into little more detail. So as I sit here today, if I look back in the last several months we've won.

Three and $400 million of incremental business.

And Thats new wins.

You look at that gas y and its clear from our conversations with our customers as well as what we're doing they liked our operating model, we've proven that operating model out even in the height of the pandemic. So they really like what we were able to provide they liked the value. We can provide also.

When I think about the operating model what they really are excited about is that ability for us to be able to be flexible as scale very quickly as well as thats based upon the investments we make to have the right level of technology, that's out there, but still balanced that with our ability to have the right human touch.

If I think about those wins and as I share with them this quarter here.

Where we are today is it's also now moved on to some larger wins, it's not just the smaller medium. It's now more medium and large wins to get to those numbers that we're starting to see.

And then I'll I'll make two other comments around that.

When a customer I've talked in the past it could take up to three to six to nine months to implement.

We have one of our major wins, just recently challenge us and say Hey, we want a <unk> 45 gates and this customer is going to go live within the next week. So from call. It 35 days ago to 40 days ago, the customers signed with US we leveraged our Owens <unk> minor business system to be able to put together this implementation.

And very fast and the expectation of implementing implementation will go over.

It can be executed flawlessly.

The other last thing I'll talk about within the implementation of new wins and some of the things that makes it different and tie. This all together as we talked about our debt ratio of a $1 seven what's that doesn't that also enables us to make the right investments we need in advance in working capital and inventory to make sure that we can handle a flawless execution. So.

A lot of great stuff going on in our medical distribution business you know I'm extremely excited about where we are from that standpoint, let me maybe add Alan another comment so.

A lot of times you didn't ask this question, but a lot of times. It. Good question about our GPO renewals and I want to note that just recently renewed with premier for five year and five year deal, we've reworked that contract where there's opportunity to provide more value for premier as well as significant more value for for Owens <unk> minor so.

Another reason why on Premier looked at it again, they liked what they see in our operating model they like our ability to help serve our joint customers. They like that ability for us to be flexible has scaled quickly regardless of the circumstances and the marketing to consider but the quickly changing market. We have today, that's critical and that's really because of <unk>.

The operating and capital investments, we made around both the technology and touch so hopefully that helps frame it.

To answer that question.

Yes, that's really helpful. And then last quarter, you mentioned that elective procedures were.

Effectively back to pre pandemic levels and you kind of saw that continuing for the remainder of the year. I guess can you just give us an update what are you seeing there and what are your early thoughts into 'twenty two on that thanks.

I'll start and then fan who wants a little more color on it.

Clear answers, yes, we've absolutely seen elective procedures come back to the pre pandemic levels. If I look at it at a macro across the United States in the last quarter in the third quarter. We did see some spots where there were COVID-19 spikes, where constricted a little bit but the reality is in aggregate across the U S. We have seen elective procedures come back to pre pandemic.

<unk>.

And what we continue to do is making sure that we're prepared in advance with working capital investments as well as having our teammates ready to quickly adjust SaaS mode, but we see that back to where it wasn't there was an expectation that that continues well into 2022.

Alan It's Andy just to add a little more color there. So in our Q3 results. We did see a slight sequential improvement in electric procedures not material, but because it.

It was a slight improvement we are back to where we believe pre pandemic levels are our Q4 forecast assumes that really that's going to continue at that level, we don't assume a change up or down in that.

And that level, so should electric procedures spike up in Q4.

We would now we'd be ready for that based on the comments I'd make on our inventory levels, but that would be upside to our forecast and again I think we continue to play that into 2022 at maintaining a pre pandemic levels with those same dynamics.

If it does improve there would be upside to 2022 as a result.

Great. Thank you.

Thank you I show. Our next question comes from the line of Joel interesting from Credit Suisse. Please go ahead.

Thank you and good morning, good morning, everyone.

Flush out a little bit bored on b accelerating inflationary pressure you guys called out multiple times in terms of the magnitude where you are seeing that inflationary pressure that cost to a business and what are you assuming for the remainder of 'twenty, one and as well as like next year and I understand that likely push up gross margin, but I'm sure there must be some impact on SG&A.

So how do I reconcile that could be sequential decline of $30 million in SG&A expense in the QUADRA.

Yes.

I'll cover it and Andy can add some color on that showed cylinder gasoline.

We're going to continue to look at the volume to help help offset that you know in addition to the volume that volume can also drive additional fixed costs leverage and then lastly, where appropriate we will look at price as needed as appropriate for from a short term standpoint continued ought to continue to mitigate the risk of.

The inflation.

Look at a prospectively into 2022.

The expectation is that that inflation continues into 2022 and in the positive is you have time to not just pull the traditional levers, but use the time between now and 2022 in early to 22 to continue to look at maybe broader scale ways to drive productivity and further integrate our business. So that's what.

Some process today. So that's how we thought about inflation in Q3 as well as where we expect inflation to go in the levers we're gonna pull in queue for to mitigate that and the expectation of that continuing into 2022 and the broader levels lovers will pole. So with that you know Andy if you want to add any.

Any additional please feel free yeah.

Wonder I think the only thing I would add is that.

End of your question you did talk about the queue to to Q3 sequential decline in SG&A and I would say.

Clearly there were drivers.

Driving SG&A upstairs volumes.

And whatnot, but.

Snared pressures as I've mentioned, but again in the quarter.

[noise] continued to drive efficiencies of productivity and some productivity and some of that decline sequentially is also just seeking lumpiness or timing of investments in the business.

Got it and then a quick follow up so you guys called out boats sequential an ear or what he had a volume growth and Phoebe products can you help us understand the mixed up that growth in terms of both coming from expanding the number of customers expansion and how much would that might be triggered by like hospitals preparing for the winter months and.

You cannot you can provide a bill.

Yeah, I guess just at a at a macro level, we saw pretty much across our entire base of customers and again it goes back.

What we've talked about it in the past is one is the protocols are in place and the customers are continuing to use the P. B.

The the elimination of the emergency use authorization that.

People coming back and buying the P. P associated with medical grade and then really what makes US different is the other reason why are we also continue to see that volume strength.

One we are a broad manufacturers P. P across all the categories everything from masks to respirators and 95, two isolation gowns surgical gowns drapes rap the broad based of PPE and the next is we do it on a scale.

So that is something that's important the next is that we sell great high grade medical grade P. P products and lastly, let's not forget this is we're making it in the Americas with all the fabric of virtually most of the fabric coming from our facility in Lexington, North Carolina to make those products and then we make the bulk of that P. P. In our factories. So you think.

[noise] about the supply chain impact that others may be having right now versus us. That's another reason why we expect this to continue to grow.

About the seasonality there may be some of that in there, but I think most customers are really have been prepared as they continue to build the right level of stockpiles in those continue to grow. So I think it's all of those factors to Linda.

A value that makes us different it's our manufacturing footprint, it's the vertically immigration that vertical integration rehab from raw material of the finished goods. It's the broad portfolio not just one category all categories ability to make it on a scale, where we make it in our ability to deliver as well as the market factors that are helping us too.

Great. Thanks, guys.

Thank you I sure. Our next question comes from the line of Eric Coldwell from Bear. Please go ahead.

Thanks, very much good morning, I wanted to dig in on the gloves, a little bit and I apologize I missed a couple of minutes of the call.

Did you say specifically what the glove revenue was in three Q the pass through revenue and then what the EBIT impact in <unk> at this point.

It should be good morning, Eric is Andy so regarding plus.

We just stepping back a little bit so we gave.

A revised our full year guidance on the expectation of low pass through we're now at.

$650 to $700 million and.

In terms of the quarterly impact in queue too we saw about $170 million on the top line.

And then bringing the year to date total to about $530 million, a total glove cost impact on the top line through three quarters and then when I talked about on the bottom line is really just the shift in margins.

Based on gloves cost shifting from Q3 to Q4 and really the the reason behind that Eric is that there's just there's a fair amount of variability in the time it takes to get gloves from our manufacturing through the congestion in the points on the west coast and into our distribution centers to be sold and some of the higher cost gloves that we expected to hit the piano in Q3.

<unk>.

We believe now will slip into queue for based on those transportation delays that I think we're all aware of so overall I view it as a right pocket left pocket net zero for the year.

And I think the important thing is is that we still have an expectation that sequentially from Q3 to queue for our global product segment will continue to have margin. We continue to believe that will have margin expansion sequentially into Q4.

Thank sandy for all the details and then for the quarter itself, though on gloves was the contribution positive neutral slightly negative.

What was the quarterly impact on me, but.

Yeah. So as you were compound of the cadence of gloves.

As you follow that the impact by quarter Q1 was our strongest quarter were pricing was put into place before costs caught up Q2 was where cost caught up the pricing and then Q3 think of Q3 is that offsets to the strong Q1. So so Q Q3 was our most difficult quarter in terms of margins in the.

In the global product segment, largely driven by that cost dynamic and gloves.

When you think about it versus plan was actually favorable to our plan in the quarter, but unfavorable the prior year.

Got it and I don't suppose I could tempt you into quantifying that.

That would be correct.

[laughter].

Got to try byrom or direct to patient talking about continued above market growth, but I think there's a lot of debate about what the market is actually growing.

And I think in the past you've talked about growth rates that at least in your view may be doubled or better the the market growth rates. So I was hoping to get a little more.

Detail, where you see the market growing and and what kind of outperformance you're seeing in direct to patient versus that that market view.

From that standpoint, I guess, we use a couple of different properties on the market. We would you look at what.

Here from our suppliers.

We also look at what we hear from our customers. We also look at what we're seeing our some of our competitors in the market.

And the reality is we know our growth rates are are great are much greater than what we've seen historical year to date on what we continue to hear in the market again from both our suppliers our customers and what we see now I also got to remember too that some of the major categories or and or some of the faster growing categories like diabetes, that's one of our bigger categories and that's.

It's that category alone is generally outpacing that the general market from home now and then you've got asked me in wound care and other things and as elective procedures are ramping.

We also are seeing the downstream benefit of that when a person goes home.

Considering what type of surgery, they have or what type of procedure what type of Doctor visits. We're now seeing additional volume come in there. So that's why we continue to see why that is is as good or much I should say.

Better than what we're seeing and what we're hearing from the data points, we have today and Eric continued to just to add a little color to that as well as we talk about organic investments in the business reinvesting in the business. This is clearly an area, where we put the investments in both the technology and in terms of expanding the salesforce moving into new geographies, where we may be doing.

Currently so that's another.

Just evidence of where we're investing in where we're seeing growth as a result of those investments if.

If I could ask.

Asks for just one more back to the glove topic there has been.

Incredible.

Naked of headlines on some of your competition from.

From Asia in terms of you know.

Working conditions labor issues quality.

And now more recently, there's headlines of.

Effectively criminal organizations that are taking us clubs and recycling them and trying to.

Pan Am office knew.

What kind of an impact is that having on one spot pricing in the marketplace and then two on.

My assumption would be that would actually help a company like Owens in minor where people can have higher trust and quality and be confident in the product that would.

Actually seemed to be a long term driver of.

Not only goodwill, but significant share when in that market places you roll out new capacity, but I'd I'd love to give your get your thoughts on them.

<unk> I think.

All those factors, we see and.

Gives the customer confidence is that work different and we are making a good percentage of our gloves and our own facilities. So that level of operating control vastly different than going in sourcing the glove from some company in China.

So that's the first and foremost second of all we've talked about the past or.

We're in the process continuing to add capacity at outlet between $1 billion and $1 billion of incremental gloves, a year, which gives us more control over that and then next next Derek is really we have a very rigorous and disciplined process that when we do source gloves.

Ballad gates, our suppliers that provide that incremental grows beyond we're making the factories so and.

There's a lot of suppliers frankly, our manufacturers that we just won't do business with regardless of what they are offering or what's out there and I think that has been translated and that has been recognized and seen both of our customers because of what they're seeing in the market.

Regarding pricing, we haven't seen it drastically changed the market pricing, yet, but the other aspect that.

We're seeing is because of the amount of product that is coming from China in the shipping delays. It is creating a bit of a supply chain issue on products and ours are made not in China, we make ours in Thailand. So there's a different little bit of a different shipping route for US, which has helped us too but you are absolutely right. We've all read the articles about.

Labor issues. We've all recently saw the articles about used gloves that are being repacked and so again when you make them yourself you can control a good a good portion of that and just by having that manufacturing capacity also gives you a different leverage against the other manufacturers, whereas you can be we can be much more selective and.

So.

That's why I think our strategies the right strategy and we're actually seeing benefit from that.

Thanks, very much guys.

Thank you.

As a reminder to ask a question you would need to press star one on your telephone to withdraw your question. Please press the pound key.

I'm sure. Our next question comes from the line of Daniel gross like from City. Please go ahead.

Thanks for taking the question and congrats on another strong quarter here.

It's a great Daniel that you renewed that premier contract, which comes on the heels of the vision renewal earlier. This year I think before you you mentioned that the other kind of big GPO outstanding would be with health trusts in terms of the renewal can you provide any update on that one and if there are any other large.

Re procurements upcoming for the next year or so.

Yeah and helped US we're actively working with them, we've got a great relationships in that relationship expanded during during the pandemic. So.

Just going through very similar to Vivian and premier going through the process.

Have an open dialogue transparent dialogue and trying to find ways that can be beneficial to both so we are that's the process on that one it's just part of the normal cycle of what we're going through so that's really the last major one that's out there.

Got it okay, and you're thrown off a fair amount of free cash flow now and.

And your leverage ratio is pretty healthy can you rank your capital deployment priorities for the next year now investments in the business and perhaps an increased dividend share repurchase continue that beta.

Sure I'll start and Andi can't some color.

I will I will say that the team has done an excellent job paying down debt, but but I don't want to just focused on that because over the last two years, we haven't just pay down debt, while we pay down debt. We've made substantial investments in the business and additional operating operating tightened initiatives to drive more efficiencies. So it wasn't.

Like we just we focused completely on debt pay down debt, but what yet we still reinvested in the business and capex as well as from an operational standpoint.

Think about it going forward yeah, you're right. We're at one seven I think an animated communists the lowest <unk> been in nearly five years and we've talked about this throughout the year is we're going to continue to look at capital deployment from a from a fungible capital deployment standpoint, we're going to look at what provides the best long term ability to provide long term profitable.

Growth to our shareholders.

And that could be internal capital organic investments that could be inorganic investments.

As well as continuing to invest in operations, but we believe right now we have significant opportunities to reinvest in the business for long term profitable growth as of today versus share buybacks or dividends increases, but we're going to be very disciplined as we have been in the past on that.

Yeah, Daniel it's anti the only thing I would add to that is.

I think that's a real could currently in certain covers our strategy very nice and I think the only thing I would add is just in recognition of the lower debt levels just to mentioned within the last week or two we did get another.

Upgrade from the rating agencies. This time it was at Moody's upgraded US a couple of weeks ago. So I just wanted to mention that.

Got it very helpful. Thanks, guys.

Thank you.

I sure. Our last question comes from the line of Michael and check from J P. Morgan. Please go ahead.

Turning it thanks for taking the question as we think about your global products business that the margin right. There is bounce around quite a bit this year, obviously with the glass pass or on pricing dynamics and some of the other unique drivers.

20, how should we think about the baseline margin profile that business. If we do sort of normalize for some of the various puts and takes that you've experienced over the past 18 months.

Yeah, Michael Good morning, and thanks for the question.

So you're absolutely right. There's there's been a lot of movement. This year I think the cadence of the year in 2021, even going back to 2020 quite frankly, the cadence of the year has been very disruptive that a typical seasonality that we've seen the business is really not applied over the last 18 to 24 months.

And certainly no quarter within 2021 would be a quarter, where you would want to take our margins in the global products business and annualize them right. There's just there's just too much distortion caused by the glove cost pricing so <unk>.

Originally when we talk back and Q2 I would have said that we were planning to exit.

Here in 2021 with glove costs, starting to see some normalization in queue for being relatively clean I'll say with the the shift that I talked about a cost moving from Q3 into Q4 due to those delays in transportation that we referenced.

Q4 is not as clean as we once thought it would be again I think that slippage is contained to 2021, which is good you saw him that doesn't impact our era total outlook for the year.

But we're not exiting the year at a place where I would take.

Take any kind of run reading the business. So I still think sequentially from Q3 to queue for global products will have merchant expansion.

But we just won't be in Q4 at that level of where you would want to annualize going into our expectation for 2022.

Got it appreciate the color on that and then.

You'd previously talked about the opportunity to sell through PBE products into some newer vehicles, both within health care, either nursing homes or dental and outside of healthcare you mentioned clean room consumer retail international markets any update on the progress you are making around those efforts at this point.

Yeah, and that's those are other factors I should've added earlier that really are driving that continued growth of our global products. When you exclude the glove cost pass through impact. That's just another factor of those the launching of the products into retail into other ancillary healthcare markets as well as the global market. So that's another factor that is driving that growth.

Got it I appreciate the color.

Thank you for this concludes our Q&A session at this time I'd like to turn the call back over to Mr. Ed procedure for closing comments. Please go ahead.

So thanks to everyone for joining and then I'll just close with verses I'm extremely pleased with how we performed in the third quarter and I don't want to Miss This and the fact that this is a continuation of our path answer really a record setting year for the company from a profit standpoint, if I.

I think about our performance in the quarter. It was exceptional and it's really our business model that the customers appreciated the customers are looking for set focus on high quality service, while still providing value in that vertical integration to make sure that they could have the continuity of supply and then lastly, we continue to strengthen our financial position.

Which gives us tremendous flexibility going forward and I look forward to the conversation after the end of the fourth quarter, and then add that call sharing a lot more insight into 2022. So thank you everyone.

Thank you. This concludes today's conference call. Thank you for participating Jimmy amount disconnect.

[music].

Good day, and thank you for standing by and welcome to the Owens <unk> minor third quarter 2021 financial results 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.

Ask a question during this session you will need to press star one on your telephone please.

Please be advised that today's conference is being recorded if.

If you require any further assistance please press star zero.

I'd now like to hand, the conference over to your first speaker today to Jackie Marcus Investor Relations Ms. Marcus you may begin.

Thank you operator, Hello, everyone and welcome to the Owens <unk> minor third quarter 2021 earnings call.

Our comments on the call will be focused on financial results for the third quarter of 2021, and our outlook for 2021, both of which are included in today's press release.

I'd also like to call your attention to the supplemental slides related to our 2021 outlook posted on our website in the Investor Relations section.

Please note that certain statements made on this call are forward looking statements, which are subject to risks and uncertainty.

These forward looking statements are intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act of 1995.

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

Forward looking statements made on this call represent management's current expectations and are based on <unk>.

The information available at the time such statements Army.

The company has explained some of these risks and uncertainties and the SEC filings, including in the risk factors section of its annual report on the Form 10-K and quarterly reports on Form 10-Q.

Except as required by law or the listing rules of the New York Stock Exchange the company expressly disclaims any intent or obligation to update any forward looking statements.

Andy Wong, 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 Jackie and good morning, everyone and thank you for taking the time to join us on the call today.

I'm extremely excited to be here today to discuss our third quarter and I'm pleased that in the third quarter. We continued on our path to a record setting year.

Our performance reflects the result of consistently providing high quality service and value to our customers, while strengthening the financial position of the company.

As I reflect on the key drivers of the third quarter as well as on our outlook.

It is clear that our ability to deliver strong revenue growth across the entire business.

Combined with our focus on continuous improvement has enabled us to effectively navigate a rapidly changing market that includes the COVID-19 pandemic global supply chain crisis inflation and an acceleration in the shift of health care to the home.

Can we talk about it internally our new norm.

I'll start with our global solutions segment, which I am pleased to announce delivered significant top line growth, while nearly doubling operating margin year over year as.

As I continue to dig a little deeper into this segment and more specifically into our medical distribution business.

It is great to see that the hard work, we did to enhance our service levels and support our customers at the highest level during the pandemic is paying off.

Our competitive position has clearly improved and we continue to win new customers and consistently renew existing customer agreements.

It is becoming clear that customers value, our ability to provide scalable and flexible solutions due to our balance between technology and touch as we operate in these rapidly changing market conditions. Our medical distribution showed marked improvement leading to higher revenue and meaningful operating income improvement.

Yeah.

The business line is really starting to hit on all cylinders and this is being recognized by customers as we solidify meaningful wins again this quarter.

And finally in our global solutions segment, our patient direct business already a leader in its space. Once again posted growth rates ahead of the market.

Patient direct remains rock solid and we continue to see strong underlying growth in the home health market as home treatments are becoming increasingly more commonplace.

Next in our global products segment, we showed solid growth in total.

But I want to focus you on the fact that when you strip out the price increase related to the glove cost pass through we delivered 8% volume growth.

And both of our segments. It is clear that our customer wins and our strong overall growth has been facilitated by our business blueprint our business blueprint that is focused on our culture, our continuous improvement based Owens <unk> minor business system, and our disciplined strategic investments, which ultimately drive and enhance.

Customer experience, while also improving our financial performance.

<unk> business blueprint continues to pay off and provides us with the confidence of delivering long term profitable growth.

Moving on to our balance sheet while.

While Andy will have more to share on this in his remarks.

<unk> to report that we reduced our net debt by $42 million down to $921 million, taking our net leverage to one seven times.

Just to put this into context, the last time, our net leverage was this low was Q4 of 26 team.

Our balance sheet strength gives us the opportunity to make strategic investments that will drive continued long term profitable growth across our business.

Looking ahead like many businesses, we are monitoring the increasing inflationary environment and have begun to take steps to mitigate this impact.

But as I think for the balance of the year and into 2022 I'm excited about the many prospects we've had.

These prospects include one the implementation of our new wins and there is still a large opportunity pipeline in medical distribution to the continued expansion of new and future proprietary products through our existing customers new wins and channel expansion.

Three the continued strength of our patient direct business.

Our disciplined approach to capital deployment, and lastly, our never ending commitment towards operational excellence and continuous improvement.

So.

As we look at the third quarter and full year.

2021 is shaping up largely as we previously indicated.

And our continued execution of our long term strategy gives us the confidence to narrow our range in 2021 guidance for both adjusted EPS and adjusted EBITDA.

As well as reaffirm our previously issued full year guidance for 2022.

As I've said before it is our focus on our customers our culture, our business system and our investments that allow us to build the Owens <unk> minor up today.

Everything we do at Owens <unk> minor is tied to our mission of serving our customers.

So that they are empowered to advance health care.

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 financial results for the third quarter and the key drivers for our performance and then ill discuss our expectations and assumptions for the balance of the year.

Let's begin with the results for the third quarter, starting with the top line revenue.

Revenue for the third quarter was $2 5 billion.

Compared to $2 2 billion for the prior year. This represents over 14% growth compared to this time last year with both segments once again contributing to the improvement.

Our growth in the third quarter was driven by share gains the ongoing recovery of elective procedures and other strong performance from our patient direct business the pass through of elevated loss costs and higher usage of PPE excluding.

Excluding the pass through of well costs of our topline growth was 7%.

Gross margin in the third quarter was 13, 1%, which was lower than the prior year, mainly due to three drivers the timing of our glove cost pass through as discussed last quarter, increasing inflationary pressures, which were partially offset by positive operating leverage on higher volumes.

Distribution, selling and administrative expenses of $262 million were essentially flat compared to the prior year.

This was primarily a result of higher variable spending due to volume inflationary pressures and investments in growth, which were offset by productivity initiatives.

The adjusted operating income for the quarter of $79 million and adjusted EBITDA of $92 million were $13 million and $12 million lower respectively than our record setting third quarter in 2020.

Interest expense of $12 million in the third quarter was down 45% for $9 million year over year, which was driven by lower debt levels and effective interest rates.

The adjusted effective tax rate of 16, 3% compared favorably to 39% in Q3 of 2020.

On a GAAP basis income from continuing operations for the quarter was $44 million or.

<unk> 58, a share adjusted.

Adjusted net income for the third quarter was $56 million.

Which yielded an adjusted EPS for the quarter of 74.

Which was <unk> <unk> lower than Q3 of last year.

It is important to note that the average diluted shares outstanding of $76 million or 25% or $15 million higher during the quarter versus Q3 of last year, which resulted in year over year reduction of 19.

The year over year foreign currency impact in the quarter was unfavorable by <unk> <unk>.

Let's turn to our quarterly performance in each of the segments.

Global solutions revenue of 2.02 billion.