Good day and thank you for standing by. Welcome to the Owens & Minor Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [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 Mr. Alex Jost of Investor Relations. You may begin.

Thank you, Operator. Hello, everyone and welcome to Owens & Minor fourth quarter and full year 2021 earnings call. Our comments on the call will be focused on the financial results for the fourth quarter of 2021 and the full year 2021, as well as our outlook for 2022, all of which are included in today’s press release. The press release along with the supplemental slides are posted on the Investor Relations section of our website. Please note during this call we will make forward-looking statements. The matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings for a full description of these risks and uncertainties including the risk factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q. 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 on our annual report on Form 10-K. Today, I’m joined by Ed Pesicka, our President and Chief Executive Officer and Andy Long, our Executive Vice President and Chief Financial Officer. It’s my pleasure to now turn the call over to Ed. Ed?

Thank you, Alex. Good morning, everyone. And thank you for joining us on the call today. I’d like to start with a high level recap of Owens & Minor’s exceptional performance in 2021. 2021 was a record setting year for our company. And it all starts with our teammates. Our teammates have continued to leverage our Owens & Minor business blueprint, a blueprint which starts with our culture that is based on our humble mission to empower our customers to advance healthcare, along with the guiding principles of our ideal values. This is then combined with our Owens & Minor business system of continuous improvement and our investment strategy that is disciplined and focused on making the right investments to provide long-term profitable growth. The execution of the Owens & Minor business blueprint has resulted in another successful quarter, the close out to a record year, and furthering positioning our company for long-term profitable growth. So to our teammates, congratulations and thank you for a job well done. If you recall at our Investor Day in May, we presented our long-term strategy to drive sustainable and profitable growth. We presented the strength of Owens & Minor as an integrated healthcare solutions company with a scalable value chain that starts with our Americas based manufacturing from raw materials all the way to finished goods. It then moves to our distribution channel that provides flexibility based on the right balance between technology and touch, and finishes with our broad-based patient direct business to serve the patient in the home. Overall, this provides Owens & Minor with the ability to serve our customers through the hospital and into the home. Based on this, we believe that our scalable value chain strategically positions us to drive robust, long-term profitable growth. 2021 is a great…

Thank you Ed and good morning, everyone. Today I’ll review our financial results and key drivers for our performance in the fourth quarter and for the full year. And then I’ll discuss our expectations and assumptions for 2022. As Ed mentioned, our team works tirelessly to continue executing on our overall business strategy despite the broader macro issues. I am pleased that we were able to deliver on our guidance for the year, both in terms of results and quarterly cadence. As we entered the fourth quarter, we knew we were facing a very tough compass Q4 of 2020 was the strongest quarter of last year. But I’m very happy we were able to deliver a record setting year while generating great momentum as we enter 2022. Let’s start by reviewing our financial performance. Our total fourth quarter revenue was $2.5 billion compared to $2.4 billion or 4.5% growth versus the prior year. This positive trend resulted from our ability to overcome the continued challenges that COVID has placed on our healthcare system and supply chain. It was driven by continuing strength in our patient direct business and the pass-through of elevated glove costs. It’s important to note that Q4 of this year had one fewer selling date of last year, which had an approximately 1.5% negative impact on growth. Sequentially, revenue was down as previously indicated due to two fewer selling days and a reduction in glove costs pass-through for a combined headwind of approximately $100 million versus the third quarter. However, good business performance led to fourth quarter revenue only being down $35 million sequentially. For the full year, total revenue was up 15.4% to $9.8 billion, compared to $8.5 billion in 2020. From a gross margin perspective, the calendarzation played out as we expect it related to…

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

Good morning. Congratulations on a strong into the year and obviously the reiterate guidance. I want to dive in a little bit on how to think through not only 2022, but beyond especially given the long-term trajectory that you have. And you mentioned 15% gross margins are baked into this year’s guidance as we think through whatever the future is in a post-COVID world new normal and PPE, is this a gross margin level that’s sustainable?

Good morning, Mike. Yes. This is Andy. So to address that, it’s great to be able to reaffirm 2022 guidance that we established in early 2021. And I think the margin assumptions really reflect two things. One is not just the absolute value of 15%. But we’re moving past the quarterly volatility that we had in 2021. So it’s nice to have that volatility behind us due to glove costs pass-through, I think the 13.8% gets us in the right trajectory from where we were in Q3. So we’re moving forward in Q4, and not just in total company, but specifically with overall products, the increase in margins in that segment. And I think we’ve got really strong momentum as we go into 2022. And I do think that 15%, you’ll see less volatility quarter-by-quarter in 2022 and I think that is a much more reasonable kind of long-term rate going forward.

Got it. And then just it guess diving into that a bit further, and especially given the complexity and moving pieces you had around the glove pass-through this year. Two part question, I guess. One, are you done on the glove pass-through side and two, when should we start to see what your normalized product margins will be like, based on the moving pieces you had in 2021 time that glove pass-through?

Yes, so Mike part one of that question is, I think the very volatile quarterly swings that we saw in 2021 will be behind us. So, I do not expect a very large quarter-to-quarter swing. So I think that’s that is behind us. It’s another way of saying that price movements and cost movements will largely be more closely joined than they were in 2021.

Got it. Thank you.

Thank you. I see our next question comes from the line of Kevin Caliendo from UBS. Please go ahead.

Thank you. Just to expand on that on Michael’s question a little bit. How should we think about the cadence for the year then? Should it look more like a traditional normal cadence first half growing into second half in terms of EBIT and revenues, just an outline of how you think 2022 progresses and is that the sort of new guideline for 2023 and beyond in terms of cadence you’re talking about a more normal quarterly progression.

Good morning, Kevin. It’s Andy again. So I’ll start on this one and just say, I don’t think 2022 is going to have the typical cadence that we experienced pre-pandemic. So historically, first quarter was our weakest quarter and then we ended with the fourth quarter really on a high note, typically based on end of the year flu and as elective procedures peaked in the fourth quarter. So I don’t see that typical seasonality playing out for 2022 and specifically, I see the very strong momentum that we have exiting the fourth quarter carrying into the first quarter. And I do see a strong first half for the year which is very unusual for this business. Again unusual being compared to pre-pandemic cadence. So I do see the first half being strong.

The other thing I’ll add to that on the first half is, we still see a buildup of elective procedures. And we’re starting to see that here in February come through. So our elective procedures in February are starting to ramp up. I know from talking to a lot of the customers, they do have pent up demand. And some of that will flush through earlier in the year versus like Andy said, a traditional year where you have less than the beginning of the year and more in the back half year, that’s going to be another impact in 2022.

Alright, that’s helpful. I guess the question that a lot of investors have is, how much visibility do you have on the product side? We see the macro slowdown in mask usage. We hear some manufacturing peers say that demand is off 50%. I know yours is much more customer specific and contract specific. But how much visibility do you have into demand on the product side going forward? Is it 6 months, 9 months, 12 months, 2 years? Any color on what I think would be helpful?

Yes. We do have long term visibility on and that’s for a lot of reasons. I think first and foremost during the pandemic, and even into this year, we continue to sign long-term contracts, committed contracts with many, many of our customers. In addition to that, I think if you just look at our performance in the fourth quarter relative to potentially others, where we actually saw strong performance in our product sales, and partially it really comes down to what we’ve been able to do during the pandemic, it comes down to the fact that we still see protocols at much higher levels than what they were pre-pandemic. We continue to see customers looking to get rid of products that are in their emergency use authorization, quality products, for medical grade quality products. For all those reasons, we see that continuing out there. The other thing, I want to focus a little bit on some of the expansion we did over the last year by taking those PPE products and putting them into new markets. So a great example of that is our retail pop and go gloves, or taking the same gloves that we’re making on our factories, putting them in different packaging, focusing on the retail market. We think about the long-term growth, we’re seeing the ability for us to start to grow internationally, again, when in the height of the pandemic in 2020 and even into 2021, we were focused on serving the US customers, specifically when we weren’t allowed to export product made in the US. So we’re seeing that as a growth opportunity in our products business. In addition to that, taking products and using it our specialty gloves and specialty products that we’ve expanded into. So we have a lot of different factors impacting why we continue to see strength in our product. It comes down to higher than past protocols. It comes down to the agreements and contracts we have with many of our customers. It comes down to expansion of those products into new categories, into new markets, as well as the continued high demand for it. In addition to that, I think in our products, what we try to model in is the fact that elective procedures, many of those same S&IP products that were used as part of the PPE and pandemic are also used in needed elective procedures. In addition to that the raw material we use, and we make that is used either for wrap, drapes, or traditional PPE, some of that’s going to be redirected into wraps and drapes and other things as elective procedures accelerate. So we have visibility out longer term into that and it’s also those are a lot of reasons why we have such a strong fourth quarter relative to maybe others in the market or market conditions. And why we’re continuing to see the strength going in through 2022.

And Kevin, this is Andy, just to one further point on it was just looking at the global products revenue performance sequentially, Q3 to Q4 again keep in mind. So what we’re reporting is actually a decline in revenue. But again, don’t forget to adjust for two fewer selling days in global products each day is worth about $10 million. And again, the global cost pass-through in Q3 was 170 million. The glove costs pass-through in Q4 was 130 million. So you’ve got those two sequential headwinds to adjust to get to a true underlying rate there and growth and the underlying great rate when you pull this out as around 2% for the fourth quarter.

That’s all really, really helpful info. Thanks guys.

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

Thank you. And good morning, everyone. Actually, I want to get some clarification gloves cost pass-through. You had $660 million impact in revenue in 2021. Want to make sure that was it still net neutral to profitability as you expected for the year? And then for 2022 guidance when you include $235 million revenue impact I know you said that it’s kind of match with cost. So no EBIT impact, but how should we think about the like cadence throughout the year? Should we expect that Q1, Q2, Q3, Q4 very similar impact from revenue point of view?

Sure Jailendra. It’s Andy. So in terms of the glove cost pass-through, you’re absolutely right. Top line impact of $660 million in 2021 year-over-year. I would say the margin impact as we ended the year was probably just slightly favorable. And again, that’s a timing issue between 2021 and 2022. But again, the timing issue is small enough that it’s not going to throw off our guidance for the year. I don’t think it’s going to have a material impact on the quarterly cadence, but just so you’ve got that as a data point. And again in terms of how I see the cadence of the calenderization as we move into 2022, I think the very strong momentum that we have, particularly in global products right from 7.6% margin in Q3 to 9.8% margin improving in Q4. And I see that momentum continuing into Q1 of next year. And that momentum far overshadowing any of the timing effects that I talked about on the glove cost pass-through. So relatively more stable margins quarterly in 2022 than what we saw in 2021.

And then my two part question on your 2022 outlook, which is unchanged on what you shared at your investor day last year. Andy you mentioned this about that some assumptions might have changed underlying maybe flash out a little bit like, what were those expectations, what individual items change in terms of redemptions for 2022? Was the year back? And the second part is that if you can give some color around what is reflected near the lower end of your guidance, rain versus higher end, just trying to understand the swing practice captured in some of the items there.

Yes Jailendra happy to take that. So just maybe a quick refresher on what has gone into our 2022 guidance, and what’s the same and what’s changed. So just real quickly ticking through the revenue drivers. It’s portfolio expansion. And that includes the debt, for example, it’s the glove capacity that comes online at the end of Q1. So that’s continued to be unchanged. It’s our expansion into adjacent markets like industrial and retail with gloves its expansion and continued growth internationally on the top line, filling top line growth, its continued growth in patient direct, immediate strong growth of patient direct. In terms of electives, we’ve assumed electives are flat year-over-year and that’s in line with where we’ve been in the second half of 2021. We continue, our assumption was that N95, the Federal stockpile program would come to an end and it did come to an end in December. We’ve assumed that does not continue and as I said, in my prepared remarks that we’ve assumed in easing of PPE volumes. In terms of swing factors those last three assumptions on revenue, experiences I talked about some pent up demand in elective procedures, if that were to come through that would be upside. If we were to win new government contracts, supply PPE that could be upside. And again, if PPE volumes hold steady, that could also be upside. In terms of margins that’s where we see a little bit of a change from where we were in May because, again, when we announced the 2022 guidance back in our Investor Day that was largely before we had anyone was starting to experience the inflationary pressures. So we have baked in an element of inflation. And the key drivers here are transportation inflation, we assume that’s going to remain high. Labor inflation, we assume that’s not going to worsen. And overall, we’ve put in actions to mitigate these as well in order to hold our guidance. So we’ve got proactive actions like pricing, freight and transportation pass-through, identifying alternate sources for commodity sourcing, and continued strength in our continuous improvements in efficiency efforts to help mitigate those headwinds.

Right. Great. Thanks a lot.

Thank you. [Operator Instructions] I see our next question comes from the line of Eric Coldwell from Baird. Please go ahead.

Thank you. Good morning. I was hoping to get a little bit of color on the legacy core acute distribution business, you seem to have done a better job with customer retention and share capture last year. I know you had a few accounts coming online this year. You gave some numbers around net wins. I was hoping we could get an update on that what you’re seeing in the current environment? And then I have a follow up. Thank you.

Sure, Eric, let me talk first about customer retention. And the reality is we had a really strong year in customer retentions in 2021. We’re pleased with the high rate of customer retention we had. And the reality is, we had no what I would call regrettable churn in 2021. Think about wins. We did have a strong year also in wins. Our pipeline continues to be strong. We continue to focus on high quality customers. We continue to focus on customers that value, what we can provide in our value chain. And I think a great example of that is the most recent announcement we had with West Virginia University, where we did a public announcement. We signed a long-term deal to support University of West Virginia, as well as the rest of the state and others in that vicinity. We’re going to add a new facility or a new center there that can provide a lot of different offerings besides distribution. So that it’s our ability to look at that entire value chain and continue to work closely with customers. I think those are a couple great examples of where we are. But I think in the same sense, Eric, we’re going to be extremely disciplined we’re going to make sure, we have to make sure we get a return on accounts and accounts that are higher cost to serve we’re going to continue to look of how we can drive efficiencies to serve those customers and be responsible as we do that. But overall, I would say the full year 2021 was successful related to that. And WD was just the most recent example of a new win and expansion.

Ed any updated color comments on the RFP environment, the pipeline?

Yes. The pipeline, is still strong, Eric. The RFP environment is different. You have obviously, in our industry, in any industry, you have different types of customers looking for different things. I think our team has done much better at honing in on those customers that value what we provide. And that’s become critical. I think it’s been important that we’ve also seen in the RFP process, continuity of supply and supply chain resiliency is becoming more and more and more important. And our ability to provide that in those products that we manufacture we don’t source has been strong and has gotten great receptivity. I think our transparency has been has been helpful. I talked a little bit about the smartcard, which is a value add that we give just to our customers that is open and transparent about market dynamics, our customers can make decisions quicker to better serve their constituents. Those are what we’re seeing in the marketplace today.

Last one, for me. The new glove manufacturing capacity, any additional updates on the facility, I know, you said late Q1 timing. I’m curious if your production will be at full scale coming out of the gates, or will it ramp through the year and any thoughts on impact in 2Q in particular, if how that might impact the model if it could at all in the second quarter?

Eric, what we have planned just like any new facility expansion, and that new facility, and each facility expansion, we have it ramped through -- starting production at the end of the first quarter ramping through the second and end of the third quarter. And it’s like anything. It’s no different than when we added the new additional lines to make N95. You put the lines in, you get them producing, and then you have to fine tune them over time to continue to get to the optimal output on those. So we’ll get product off the line and the end of Q1 that will ramp during Q2 and into Q3.

Thanks guys. Good job. Congrats on the outlook.

Thank you.

Thank you. I’m showing no further questions in the queue. At this time, I’d like to turn the call back over to Mr. Ed Pesicka, President and CEO for closing remarks.

So first of all, thanks everyone for joining on the call today. I’m extremely pleased with the progress that we made in 2021. But while I’m pleased with that progress that we made in 2021, I’m even more excited about the healthy momentum that we’re bringing into 2022. The team has done an exceptional job and we continue to strengthen our value chain along with our future, what we’re going to continue to do once we close on the pending acquisition of Apria, continued growth in that home healthcare or as we like to look at it really the patient direct space. We’re making the right financial decisions as a company to drive long-term profitable growth. And again, I can’t thank the great teammates we have at Owens & Minor for all their effort in 2021, as well as the great work they’ve already accomplished as we’re nearly two months into 2022. I’d also like to thank our customers for all the support that they provided us over the last several years and our commitment to them to continue to support them as we go forward into the future. Everyone on this call I look forward to updating on the progress later in the spring and thank you everyone.

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