Good day and thank you for standing by. Welcome to the Owens & 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. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would 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 Owens & 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 supplemental slides related to our 2021 outlook posted on our Web site, 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 the information available at the time such statements are made. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any results predicted, assumed or implied by the forward-looking statements. The company has explained some of these risks and uncertainties in 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 guided 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, are included in our press release and our Annual Report on Form 10-K. Today, I am joined by Ed Pesicka, 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. Ed?

Thank you, Jackie. 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 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 the rapidly changing markets that includes the COVID-19 pandemic, global supply chain crisis, inflation, and an acceleration in the shift of healthcare to the home or as we talk about it internally, our new norm. I'll start with our Global Solutions segment, which I'm pleased to note delivered significant top line 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, 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. The business line is really starting to hit on all cylinders,…

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, 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 elevated glove costs and higher usage of PPE. Excluding the pass through glove costs, our top line 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 was 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% or $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 13.9% in Q3 of 2020. On a GAAP…

Thank you, sir. [Operator Instructions] Our first question comes from the line of Michael Cherny from Bank of America. Please go ahead.

Hi, good morning. This is [indiscernible] in for Mike. You mentioned 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, and with that 8% growth, can you talk about how much some of these new wins are contributing to top line growth?

Sure. Good morning, [Allen] [Ph], and thanks for the question. First, historically, I've talked about net new wins. And look, I don't want to get into that report or doing a tally sheet of what we have. But since you're asking, let me go into little more detail. So, as I sit here today, I look back in the last several months, we've won between $300 million and $400 million of incremental business. And that's new wins, that's -- and you look at that, you ask why. And it's clear from our conversation with the customers love us, 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 liked what we were able to provide. They like 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 and scale very quickly, as well as that's based upon the investments we made to have the right level of technology that's out there, but still balance that with our ability to have the right human touch. If I think about those wins and I share with them this quarter here of where we are today, is it's also now moved on to some larger wins. It's not just the small or medium, it's now more medium and large wins to get to those numbers that we're starting to see. And then I'll make two other comments around that. When we win a customer, I've talked in the past; it could take up to three, to six, to nine months to implement. We had one of our major wins just recently challenge us and say, "Hey, we want to…

Yes, that's really helpful. And then, last quarter, you mentioned that elected 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 '22 on that? Thanks.

Yes, so, I'll start, and if Andy wants to add little more color. And I think the clear answer is, 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 they were COVID spikes, where it constricted a little bit. But the reality is, in aggregate, across the U.S., we have seen elected procedures come back to pre-pandemic level. 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 if that's moved. But we see that back to where it was, and there's an expectation that that continues well into 2022.

Yes, and Allen, it's Andy, just to add a little more color there. So, in our Q3 results, we did see a slight sequential improvement in elective procedures. Not material, but it was a slight improvement, and 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 level. So, should elective procedures spike up in Q4, we would -- now, would be ready for that, based on the comments I'd made on our inventory levels, but that would be upside to our forecast. And again, I think we continue to play that into 2022, and maintaining at pre-pandemic levels with those same dynamics, it doesn't prove there would be upside to 2022 as a result.

Great, thank you.

Thank you. I show our next question comes from the line of Jailendra Singh from Credit Suisse. Please go ahead.

Thank you, and good morning, everyone. Can you guys flesh out a little bit more on the accelerating inflationary pressure? You guys called out medical times in terms of the magnitude, where you are seeing that inflationary pressure across your business? And what are you assuming for the reminder of '21, and as well as like next year? And I understand that lightly pressures gross margin, but I'm sure there must be some impact on SG&A too. So, how do I reconcile that with the sequential decline of $30 million in SG&A expense in the quarter?

Yes, so, I'll cover it, and Andy can add some color on it. So, Jailendra, you're absolutely right. So, let's just look at inflation in the third quarter, first of all. So, we saw inflation ramp as the quarter progressed. But I will tell you, our team did an incredible job in the third quarter. And really, we leveraged both productivity and that incremental volume and the fixed cost leverage on that to offset or virtually neutralize the impact of inflation in the third quarter. So, the team did a really good job around that. If I think about it prospectively, going into the fourth quarter, and frankly, when we looked at the full-year, we looked at the impact really on an abundance of caution. We wanted to make sure we focused on that. Because the reality is, had we not had inflation in the third quarter, and the expectation to continue to fourth quarter, we would have raised our guidance. But again, in an abundance of caution, we saw the inflation in the third quarter; we see it in the fourth quarter. Again, in the fourth quarter, the expectation is our team knows the levers. We're going to continue to drive productivity. And you're right, that productivity is both in margin as well as in SG&A. We will continue to pull those productivity levers. We're also going to continue to look at volume to help offset that. And in addition to the volume, that volume can also drive additional fixed cost leverage. And then lastly, where appropriate, we will look at price as needed and as appropriate, from a short-term standpoint, to continue to mitigate the risk of the inflation. If I look at it prospectively, into 2022, the expectation is that that inflation continues into 2022. And the positive is we have time to not just pull the traditional levers, but use the time between now and 2022 and early to '22, to continue to look at maybe broader-scale ways to drive productivity and further integrate our business. So, that's what in process today. So, that's how we thought about inflation in Q3, as well as where we expect inflation to go, and the levers we're going to pull in Q4 for mitigation, and the expectation of that continuing into 2022, and the broader levels we'll pull. So, with that, Andy, if you want to add anything additional, please feel free.

Yes, Jailendra, I think the only thing I would add is that, at the end of your question you did talk about the Q2 to Q3 sequential decline in SG&A. And I would say, clearly, there were drivers driving SG&A up [indiscernible] volumes, and whatnot, but the inflationary pressures, as I'd mentioned. But again, in the quarter, we continue to drive efficiencies in productivity, and some from productivity. And some of that decline sequentially is also just, say, the lumpiness or timing of investments in the business.

Got it. And then a quick follow-up, so, you guys called out both sequential and year-over-year volume growth in PPE products. Can you help us understand the mix of that growth in terms of growth coming from expanding the number of customers, category expansion? And how much that might be triggered by like hospitals preparing for the winter months? Any color you can provide there?

Yes, I guess, just at a macro level, we saw it pretty much across our entire base of customers. And again, this goes back to what we've talked about in the past is, one is, the protocols are in place, and the customers are continuing to use the PPE. The elimination of the emergency use authorization that has people coming back and buying the PPE associated with medical grade. And then, really, what makes us different is the other reason why we also continue to see that volume strength. One, we are a broad manufacturer of PPE across all the categories, everything from masks, to respirators, N95s to isolation gowns, surgical gowns, drapes, wrap, you know, the broad base of PPE. And then next is we do it on scale. So, that is something that's important. The next is that we sell great high-grade medical grade PPE products. And lastly, let's not forget this, is we're making it in the Americas with all the fabric -- or virtually most of the fabric coming from our facility in Lexington, North Carolina to make those products. And then we make the bulk of their PPE in our factories, so you think 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. If I think 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, and those continue to grow. So I think it's all those factors Jailendra, it's the value that makes us different. It's our manufacturing footprint. It's the vertical integration, that vertical integration we have from raw material to finished goods. It's the broad portfolio, not just one category, all categories, the ability to make it on scale, where we make and in our ability to deliver, as well as the market factors that are helping us to.

Great, thanks, guys.

Thank you. Our next question comes from the line of Eric Coldwell from Baird. 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 3Q the pass through revenue, and then what the EBIT impact in 3Q was at this point?

Good morning, Eric. It's Andy. So, yes, regarding gloves, we're just stepping back a little bit. So, we gave revised our full-year guidance on the expectation of low pass through, we're now at $650 million to $700 million. And in terms of the quarterly impact in Q2, we saw about $170 million on the top line, and then bringing the year-to-date total to about $530 million of total glove costs impact on the top line through three quarters. And then what I talked about on the bottom line is really just the shift in margins based on glove cost shifting from Q3 to Q4. And really the reason behind that, Eric is that there's just there's a fair amount of variability and the time it takes to get gloves from our manufacturing, through the congestion in the ports 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 P&L in Q3, we believe now we'll slip into Q4 based on those transportation delays that I think we're all aware of. So, overall, I view it as a right pocket, left pocket and net some zero for the year. And I think the important thing is that we still have an expectation that sequentially from Q3 to Q4, our Global Product segment will continue to have margin, we continue to believe that we'll have margin expansion sequentially into Q4.

Thanks, Andy, for all the detail. And then for the quarter itself, though on gloves was the contribution positive, neutral, slightly negative. What was the quarterly impact on EBIT?

So if you recall, kind of the cadence of gloves, if you follow that the impact by quarter Q1 was our strongest quarter where pricing was put into place before costs caught up, Q2 was where cost caught up to pricing. And then Q3, think of Q3 is that offset to the strong Q1. So, Q3 was our most difficult quarter in terms of margins in the Global Product segment, largely driven by that cost dynamic in gloves.

[Indiscernible] versus plan was actually favorable to our plan in the quarter but unfavorable to prior-year.

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

That would be correct, yes.

Got to try, 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, maybe doubled or better the market growth rate. So, I was hoping to get a little more detail on where you see the market growing and what kind of outperformance you're seeing in direct to patient versus that that market view?

Yes, so from that standpoint, I guess we use a couple different proxies on the market, we would -- you look at what we hear from our suppliers. We also look at what we hear from our customers, we also look at what we're seeing are some of our competitors in the market, and the reality is, we know our growth rates are greater, much greater than what we've seen historically 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 to that, some of the major categories we're in are some of the faster growing categories like diabetes, that's one of our bigger categories. And it's that category alone is generally outpacing the general market from home health, then you've got ostomy and wound care and other things and as elective procedures are ramping, we also are seeing the downstream benefit of that of when the person goes home, considering what type of surgery they have or what type of procedure, what type of doctor visit, we now seeing additional line would come in there. So, that's why we continue to see why that 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, it's Andy. Just to add a little color to that as well, just we talk about organic investments in the business, reinvesting in the business, this is clearly an area where we've put the investments in both the technology and in terms of expanding the sales force moving into new geographies where we maybe don't occupy currently. So, that's another just evidence of where we're investing and where we're seeing a growth as a result of those investments.

If I could ask for just one more back to the glove topic, there's been incredible negative headlines on some of your competition from Asia and in terms of working conditions, labor issues, quality, and now more recently there's headlines of effectively criminal organizations that are taking used gloves and recycling them and trying to pan them off as new. What kind of an impact is that having on one spot pricing in the marketplace? And then two, on my assumption would be that it would actually help a company like Owens & Minor where people can have higher trust in quality and be confident in the product that would actually seem to be a long-term driver of not only goodwill, but significant share when in that marketplace as you rollout new capacity. But I'd love to give your -- get your thoughts on that.

Sure. Okay. I think absolutely all those factors we see and what gives the customer confidence is that we're different. And we are making a good percentage of our gloves in our own facilities. So, it's that level of operating control is vastly different and going into sourcing a glove from some company in China. So, that's the first and foremost. Second of all, we talked about the past, we're, we're in the process continuing to put at capacity that lag between a billion and a billion half incremental gloves a year, which gives us more control over that. And then next Eric is really, we have a very rigorous and disciplined process that when we do source gloves to validate our suppliers that have provide that incremental gloves beyond what making a factory. So, and there's a lot of suppliers, frankly or manufacturers that we just won't do business with regardless of what they're offering or what's out there. And I think that has been translate and that has been recognized and seen both from our customers because of what they're seeing in the market. Regarding pricing, we haven't seen it drastically change the market pricing yet. But the other aspect that we're seeing is because of the amount of product that is coming from China and 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, it's a different -- little bit of a different shipping route for us, which has helped us do, but you're absolutely right. We've all read the articles about the labor issues. We've all recently saw the articles about used gloves that are being repacked. And so, again, when you make yourself, you can control 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 than others. So, that's why I think our strategy is the right strategy and we're actually seeing benefit from that.

Thanks very much, guys.

Thank you. [Operator Instructions] I show our next question comes from the line of Daniel Grosslight from Citi. Please go ahead.

Thanks for taking the question and congrats on another strong quarter here. It's great that you renewed that Premier contract, which comes on the heels of the Vivian renewal earlier this year. I think before you mentioned that the other kind of big GPO outstanding would be with Health Trust in terms of a 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?

Yes. And Health Trust, we're actively working with them. We've got a great relationship and that relationship expanded during the pandemic. So, that's just going through very similar to Vivian and Premier going through the process where we're having open dialogue, transparent dialogue, and trying to find ways that can be beneficial to both. So, we are that, that's the process on that one. It's just part of a normal cycle of what we're going for. So, that's really the last major one that's out there.

Got it. Okay. And you're throwing off a fair amount free cash flow now, and your leverage ratio is pretty healthy. Can you rank your capital deployment priorities for the next year, investments in the business and perhaps an increased dividend, share repurchase continued debt pay down?

Sure. I'll start and Andy can add some color there. I would say that the team has done an excellent job paying down debt, but I don't want to just focus on that, because over the last two years, we haven't just paid down debt, while we paid down debt, we've made substantial investments in the business in additional operating site initiatives to drive more efficiency. So, it wasn't like we just -- we focused completely on debt, we paid down debt, but yet we still reinvested in the business in CapEx as well as from an operational standpoint. If I think about it going forward, yes, you're right, we're at one seven, I think. Andy made the comments below. This has been in nearly five years. And we've talked about this throughout the years. We're going to continue to look at capital deployment 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 shared buybacks or dividend increases. But we're going to be very disciplined as we have been in the past on that.

And Daniel, it's Andy. The only thing I would add to that as, I think that's a really thorough answer and covers our strategy very nicely. I think the only thing I would add is just in recognition of the lower debt levels, just to mention within the last week or two, we did get another upgrade from the reading agencies. This time, it was a 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 show our last question comes from the line of Michael Minchak from JPMorgan. Please go ahead.

Good morning. And thanks for taking the question. As we think about your global products business, the margin right there has bounced around quite a bit this year, obviously with gloves, pests are on pricing dynamics and some of the other unique drivers in 2020. 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?

Yes, Michael, good morning. And thanks for the question. So, you're absolutely right. There has 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 disrupted than a typical seasonality that we see in 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 in the global products business and annualize them, right. There is just too much distortion caused by the glove cost pricing. So, originally, when we talked back in Q2, I would have said that we were planning to exit the year in 2021 with glove costs, starting to see some normalization and Q4 being relatively clean. I'll say with the shift that I talked about of 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 that doesn't impact our total outlook for the year. But we're not exiting the year at a place where I would take any kind of run rate in the business. So, I still think sequentially from Q3 to Q4 global products will have margin expansion, but we just won't be at Q4 at that level of where you'd want to annualize going into our expectation for 2022.

Got it, appreciate the color on that. And then, you previously talked about the opportunity to sell through PB products into some newer verticals, both within healthcare, either nursing homes or dental and outside of healthcare, you mentioned clean room, consumer retail, international markets, any update on the progress you're making around those efforts at this point?

Yes. And those are all the factors I should have added earlier that really are driving. That continued growth of our global products. When you exclude the glove cost past their impact, that's just been 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. Appreciate the color.

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

So, thanks everyone for joining me. I'll just close with this. As you know, that I'm extremely pleased with how we've performed in the third quarter, and I don't want to miss this and the fact that this is a continuation of our path onto really a record setting year for the company from a profit standpoint. And if I think about our performance in the quarter, it was exceptional and it's really our business model that the customers appreciate and the customers are looking for that focus on high quality service while still providing value and 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 at that call sharing a lot more insight into 2022. So, thank you everyone.

Thank you. This concludes today conference call. Thank you for participating. You may now disconnect.