Owens & Minor, Inc. (OMI) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the Owens & Minor Second Quarter 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today to Chandrika Nigam, Director Investor Relations. Ms. Nigam you may begin. Chandrika Nigam: Thank you, operator. Hello everyone, and welcome to Owens & Minor's second quarter 2021 earnings call. Our comments on the call will be focused on financial results for the second quarter of 2021 and our outlook for 2021 and 2022 all of which are included in today's press release. I'd also like to call your attention to supplemental slides related to our 2021 outlook posted on our website in the Investor Relations section. Ed Pesicka: Thank you Chandrika. Good morning everyone, and thank you for taking the time to join us on the call today. I would like to start with a high-level recap of the strategic priorities that the Owens & Minor leadership team and I outlined during our Investor Day meeting in late May. I spoke about our transformation based on our business blueprint that focused on; one, our culture, a culture that is based on hard work, stellar execution and an unrelenting focus on our customer, while being anchored by our mission and our ideal values. Next our discipline, which is based upon the Owens & Minor business system that is laser focused on continuous improvement. And third, our investments, our investments that are implemented in a disciplined manner enabling us to achieve our strategic priorities. Andy Long: Thank you, Ed and good morning everyone. Today I'll review our financial results for the second quarter and the key drivers for our quarterly performance. And then, I'll discuss our expectations and assumptions for the balance of the year. I'd like to start by saying that, we're delighted to report a record second quarter with solid growth in revenue, EBITDA and earnings per share. We're maintaining our expectations for adjusted EPS in 2021 to be in a range of $3.75 to $4.25 and adjusted EBITDA in the range of $450 million to $500 million. Also we are affirming our previously announced guidance for 2022. I'll provide additional color on this later in my remarks. Let's begin with the results for the second quarter. Starting with the top line, revenue for the second quarter was $2.5 billion, compared to $1.8 billion for the prior year. This represents 38% growth with strong performance in both of our segments. Top line growth in the quarter was driven by ongoing recovery of elective procedures glove cost pass-through and higher levels of PPE. Gross margin in the second quarter was 16.1%, an improvement of 117 basis points over prior year due to revenue mix from higher margin sales in the Global Products segment and patient direct business, timing of the pass-through of glove costs and improved operating efficiency. These were partially offset by higher commodity prices in Global Products and transportation costs across the business. Operator: Thank you, sir. I show our first question comes from the line of Michael Cherny from Bank of America. Please go ahead. Michael Cherny: Good morning, and thanks for all the colors so far. First, just a quick housekeeping question. I want to make sure I heard that correctly regarding the 3Q trajectory. The sequential decline that you're expecting on a year-over-year in terms of revenue, correct? Ed Pesicka: Can you repeat the question? You broke up. Sorry, Michael. Michael Cherny: Sorry. The comment you just made about the 3Q revenue trajectory that's a sequential decline you're expecting not year-over-year. So I'm not sure, I heard that correctly. Andy Long: Yes. Mike, this is Andy. That's correct. In terms of just trying to help you look at the back half of the year in terms of our guidance just trying to help you understand, because again this year has been very atypical in terms of seasonality, but you're absolutely correct. On the top line, we expect that to be a slight decline Q2 to Q3 sequentially. Michael Cherny: Okay. That makes sense. I appreciate that. And so you're taking a bigger picture approach when you think about moving pieces of your business against the backdrop of an uncertain delta variant rollout. Clearly, there could be some potential pressures on electives if we do go back to some level of increased hospitalizations, but I would assume I would think that would be offset by another potential spike in PPE demand as people worry about infection. Are there any local pockets where you're seeing any of those trends where there is an increased Delta variant approach? And how do you think about the variability in your guidance against the backdrop of that? Ed Pesicka: Michael, this is Ed. I'll take that one and then Andy can add some color afterwards if necessary. So we have seen pockets of it. So in Florida, we've seen some pockets of that, where we have seen a drastic increase in demand for PPE from us even from levels that were already elevated. In addition, to that we have seen some tightening on the electric procedures there. But here's the other thing we saw. So during the pandemic, we worked with our customers for some unique solutions. And we have subscription-based models, where customers have access to product as they need it. So we can -- since we're producing it ourselves, we're producing stuff like N95s in Texas as well as in Lexington, North Carolina. They've called in on their subscription model and said "We need a triple of what our use is" for example and we've been able to fulfill that. So you're absolutely right. Delta variant does increase and actual hospitalizations increase, which is what we're seeing. We are seeing that increase in demand for that PPE. But again, what makes us unique Michael, versus others is we're making the fabric in the United States. We're finishing PPE all relatively speaking close where it can be delivered by a truck all of the fabric-based stuff. So we have been able to flex very quickly as this delta variant has hit and at certain locations in the United States have needed the product. Andy Long: And then Mike, it's Andy. Just to take the second part of your question on the implications for the full-year forecast regarding elective procedures. So we did see elective procedures get back to near pre-pandemic levels in Q2 as we expected. And the balance of the year contemplates really staying at that level of near pandemic levels. We do not have an anticipation -- or we've not built into the forecast any downside due to the delta variant in terms of elective procedures. But on the other hand on the other side of PPE, we have not built in a significant spike in demand. So should those occur we would see those adjust accordingly in our forecast. But we pretty much assume pandemic -- or elective procedures at pre-pandemic levels and no spike in PPE. Michael Cherny: And then one more just quick housekeeping question. Can you remind us, what your share count guidance was before? It looks like it went higher despite EPS not moving. So just curious what it was prior to today. Andy Long: Yes, Mike. So the last guidance we gave was 71 million shares and the current guidance is 75.5 million shares. And again that's really -- the increase is really due to the result of the treatment of restricted shares as well as the issuance of some additional restricted share grants. Ed Pesicka: Performing shares. Andy Long: Performing shares. Michael Cherny: Now, helpful to understand against the maintaining of EPS guidance. So thanks so much. Operator: Thank you. I show our next question comes from the line of Daniel Grosslight from Citi. Please go ahead. Daniel Grosslight: Hi, guys. Thanks for taking my question. I was hoping you could put a finer point on the quarterly cadence of the glove pass-through and the relative benefit in the first half of this year versus the second half. I think you mentioned, $200 million of top line benefit this quarter and you're still seeing some positive timing benefit to the EBIT line. Can you help quantify, the EBIT benefit this quarter and your quarterly expectations for the remainder of the year? And if you still expect a net neutral impact from that pass-through for the full-year? Andy Long: Sure, Daniel. This is Andy. Happy to take that question. So just to ground you -- you can just make sure we're at a level set on what we know at this point. So we did change our full-year top line revenue guidance. It used to be $700 million to $800 million. We've now fine-tuned that to about $675 million to $725 million. And we've done that as a result of seeing some cost pressures starting to ease in the marketplace. And in the quarter, we recognized about $200 million of higher cost pass-through on the top line. And as a reminder in Q1, that equivalent number was about $160 million. So year-to-date we've seen about $360 million on the top line. So roughly halfway through the year, we're roughly at the midpoint of our full-year guidance. And in terms of the impact on the bottom line, so you're right, in Q1 we did see a favorable impact. As I talked about, how the price impact of raising prices is realized sooner than the cost impact as costs have to work their way through inventory. And again as we discussed on the Q1 call, we set the expectation that in Q2 those costs would catch up would begin to catch up and we did see that in Q2. And albeit we still had some favorability in the quarter but it was at a much lower rates right with much -- much a lower level. And you could see the 300 basis point decline sequentially in our gross margins. And then, going forward into our forecast, I would say, Q3 would be the most significant impact of cost. So I would expect gross margins and adjusted operating income margins to decline further in Q3. You'll see that in the Global Products segment. And then, as we get to Q4, I would expect a slight improvement. And really, by the end of the year, we expect to be pretty well -- worked through the issue of the cost/price dynamics. That would be our expectation. Daniel Grosslight: Thanks. Very helpful. And as you have new glove capacity come on line in the first quarter of 2022 can you help us think about what the margin profile of those gloves will be relative to your overall products margin profile? Andy Long: So, again, we don't really give guidance and specific margins by product, but what I will say is that, as we make that investment to expand gloves, we've done that within the four walls of our existing facility. And so, again, like the capacity that we've added during the course of 2020 to expand PPE production in our Americas-based facilities. The capacity we're bringing on with gloves should benefit from some fixed cost leverage, again, because we're not adding additional square footage to produce those gloves. Ed Pesicka: Dan, this is Ed. I think two things -- I'll add on to that two things. One, Andy covered, you're right. Absolutely, we're going to get fixed cost leverage on that, because we’re able to put it in our existing facilities. But second, we have -- we'll have the capability to make a more technical glove there, whether that's surgery, whether that's chemo-rated and other aspects of the glove that, inherently, within those gloves also have a different margin profile versus just your standard glove. Daniel Grosslight: Got it. Very helpful. Thanks for all the color, guys. Operator: Thank you. I show our next question comes from the line of Eric Coldwell from Baird. Please go ahead. Eric Coldwell: Thanks. Thanks very much. Sticking with the gloves question, $200 million in revenue this quarter, $160 million last. You said it was still positive on profit, but less so than first quarter. I think what we're probably going to get the most questions on today is the operating margin in Global Products, 25% last quarter, 14% this quarter. What -- can you give us any sense what the underlying base might have been, absent the gloves? And then, I guess, when I think about the margin being down 11 points quarter-over-quarter, how much of that was related to the cost pass-through or the cost increase, I mean to say, in commodity costs, transportation costs versus mix shift in your product lines or changes in the glove pass-through impact? And then, I have one more follow-up. Thanks. Andy Long: Yes. Eric, this is Andy. So I'll try to address that. So, yes, you're right. Sequentially, as expected, with that increase of costs being recognized, we did see about an 11 percentage point drop sequentially in the Global Products segment. And I still expect Q3 to see an even greater impact due to the higher cost in gloves as those work their way through and we try to normalize throughout the year. So I would expect margins to drop further in Q3 from where we are in Q4. And then, as we go into Q4, I would expect that to rebound slightly and start to stabilize. So while we're not giving exact guidance on quarterly margin rates, but I would say that that will largely be working its way through the system and hopefully going into 2022, as I said, not talking about glove pass-through timing issues. Eric Coldwell: So could you give us a sense on the impact of the commodity cost increases and transportation cost increases that you mentioned on the call? Andy Long: Sure. Yes. So again, when we talk commodity cost increases, we're specifically referring to the polypropylene. And again, polypropylene is what’s used in the manufacturing of our key -- some of our key products and masks. And as we started to see some of that impact, Eric, in the first quarter towards the end, but by the time we got to the end of the second quarter we had seen prices of this commodity almost double. And we expect that to continue into the third quarter and start to see some easing as we go into the fourth quarter. But it's big enough to call out, Eric. We don't quantify that but it was -- I think, it was worth mentioning. But I think the important thing to note is that, overall, with the inflationary items that we did experience in freight and commodities as well as the share count change that we are able to maintain our full year guidance for adjusted EPS in 2022 guidance, given the strength in other areas of the business. Eric Coldwell: My other question is a bit off the quarter, but you had your IR Day in late May. And then, in early June, your closest market peer Medline received investment by a consortium of really highly respected PE firms, valuing that company at $34 billion. That's eight times your enterprise value. I'm 100% certain Medline isn’t eight times larger than you. I'm probably 99% certain they're not eight times more profitable. I know they don't rank eight times better in our survey work. So I'm just hopeful you could do a compare and contrast of your offering versus that close competitor. It's sort of a quiet company. People don't know much about them. I'm wondering if you could provide any thoughts on the impact of that deal to you, whether that might be fundamental, if you see any fundamental impact or regarding your thoughts on maximizing shareholder value. I mean, it's such a stunning comparison to how the market values OMI. I'd love to get your insights if possible. Ed Pesicka: Sure. So I'll take that one. So let me talk about I think what makes us unique and what makes us different versus them. And I think, the pandemic has proven that out. So, Eric, the last month I spent a tremendous amount of time back on the road, because been able to go visit customers, have been out in our distribution centers. And here's what's made us different, which I think is unique and I think is extremely valuable to our customers and then extremely valuable to the shareholders. So it's really our vertical integration from manufacturing all the way to delivery of the product and then even on to the home. And that's a little bit different. I think others in the market talk about themselves being manufacturing. They manufacture, but the reality is, primarily most of their products are made overseas and then their labels are put on them, versus you take our PPE. The bulk of our PPE, we're making it ourselves in our factories and with our products, with our raw materials, with our quality control, with our regulatory affairs, with our teammates. So that way, we have great control over it. It's reduced substantially recalls. It's created our ability to service the customers with a greater -- at a greater level. So we’ve had several customers over the last month. And here's what they were surprised at and they told me is that, our service level for core products was at 99.8% on average last year during the pandemic. Again, during the pandemic we were able to get the customers what they needed, when they need it, on-time delivery 99.9%, our accuracy 99.8% to 99.9%. So that's really what's made us different. And full transparency here, we weren't that way in 2017 and 2018 and 2016. We changed the business in 2019 with this tremendous focus around continuous improvement with our blueprint to improve the way we operate. And that's been a result of all of that hard work and then capitalizing on our strengths during the pandemic. That has created goodwill. You've seen -- you see in this quarter, the improvement of our Global Solutions business. From a profitability standpoint, a 29% growth, a 28% growth year-over-year. That's both in medical distribution and in our patient direct business. So all of that has really changed the trajectory of where we're going. And look, they got -- their valuation is what their valuation is. I think, from our standpoint and our company, what we do is unique, what we do is different. We operate with great values and a clear mission of how we're going to do it. So those are some of the differentiators is really, we're a manufacturer. We're a distributor. We have this great home health business and -- versus really just primarily being more sourcing company. We do sourcing. We do that to mitigate risk and reduce some of that risk. But in the same sense, it played out. Our service levels were significantly stronger than most during the pandemic. So I'm not an investment banker. I'm not somebody who's making those decisions on what multiple to pay for a company. But I think our company is extremely valuable. And we talked about this in Investor Day. We put those pieces together, as well as the bright future we have, there's tremendous opportunities for us to continue to grow. So you'd probably heard my voice. I get excited about what we do. I'm passionate about it. Our team’s passionate about it. And these are -- those are the reasons why I think we are tremendously valuable, not just today, but for the long term. Eric Coldwell: Thanks, Ed. Operator: Thank you. I show our next question comes from the line of Jailendra Singh from Credit Suisse. Please, go ahead. Jailendra Singh: Yes. Thank you. Just trying to better understand your comments around second half outlook versus first half reported numbers. Are you implying that trends you saw in revenue and margins in Global Solutions business in first half continue in second half, but majority of the decline you're expecting on revenue and margins or profitability in second half versus first half is in Global Products business? I want to make sure, I understand the comment. Andy Long: Good morning, Jailendra. It's Andy. I'll take that question. So in Global Solutions, you saw significant growth year-over-year about a 28% increase. And as you recall last quarter when I talked to you that second quarter of last year is when elective procedures dropped significantly. And we talked about a $300 million estimated decline as a result of that. So, with almost $430 million increase year-over-year, happy to say that we've made up for that shortfall and really continue to grow on top of that. So, real strong performance on the top line. So that -- certainly, we're not going to grow 30% continue, because our comps obviously get tougher in the second half of the year, but I would expect that to level off. But you're absolutely correct. In terms of Global Products in the second half of the year profitability, yes. So our profit is going to be more weighted towards the first half of the year, which is very atypical with the seasonality of this business, but it's been largely driven by the fact that the timing of the glove cost pass-through with the favorability being recognized more in Q1 in particular, a little bit in Q2 and then the unwinding of that in Q3 and Q4. So, you can expect the low point of the margins for the business, which is driven by global products to occur in Q3. Jailendra Singh: Okay. And then, going back to the delta variant impact, I understand you're not having anything in the numbers right now. But are you seeing any implications on your customers or potential customers in terms of their willingness to come out with RFPs with respect to your Global Solutions business right now? Andy Long: No, we have not seen the delta variant impact that at all. Jailendra Singh: Okay. And then, one last one on the Byram business, I mean can you provide any color like was that a significant contributor to the margin trend in the quarter? And what are your expectations there for the second half? Ed Pesicka: Yes. I'd say our patient direct business continues to be strong. I made the comment earlier. I think from Eric's question is, we saw the Global Solutions segment grow at 28%, a very strong segment. The bulk of that growth came from Global Solutions, but another significant portion of very, very, very strong growth also came from our patient direct business. So you don't post up a 28% growth in the segment without both of those businesses performing extremely well. That business continues to perform well. They've expanded the relationships, better relationships with other suppliers as well as we continue to win new business in that patient direct business. So frankly, I believe they're growing at rates well above what the market rate is growing today in that space. So, really excited about the future of that business too. Jailendra Singh: Great. Thanks a lot. Operator: Thank you. I show our next question comes from the line of Kevin Caliendo from UBS. Please go ahead. Kevin Caliendo: Thanks. Can you talk a little bit -- you mentioned it briefly in your prepared remarks about net customer wins in Global Solutions. Is that showing up in 2021? And what do you anticipate for 2022? At this point, I'm guessing most of the RFP activity is probably completed. Ed Pesicka: Yes. So, to that Kevin, I think a couple of things. It is starting to show up in 2021. This was some business we actually won during the pandemic where customers were looking at their options and saying, hey, you guys have the ability to support us. Let's move the business. So, there were several customers you could add up that we won late last year that started into this year. The expectation is those continue, and then actually more momentum into 2022, because as I've talked in the past, we've streamlined down our ability to onboard customers for less than 90 days. Probably depending on the size and complexity, we've seen that as much as a year down to I think, where we come in and be able to do it in 90 days. So, we're already starting to see that. We expect to see that as we continue through the year. Kevin Caliendo: Okay. Thank you. Also, in terms of your capacity, excluding the incremental glove capacity, which you talked about already, when we talk about the manufacturing increases and getting into some higher specialty products and the like that you talked about in your opening remarks, can you go a little deeper and help us understand sort of what that means, the potential for that? My guess is, 2022 it's not going to be incredibly meaningful. But help us understand sort of the opportunity set the TAM, how big in terms of revenue potential this could be and how we should think about it when modeling. Ed Pesicka: From a model example let me just first go back to where it is. So, we talked a little about it in the speech and I talked about it in the Investor Day. It's a mix of two things on this Kevin. One it's a mix of existing products we have today with some unique packaging to go into other markets and other industries. We talked about the consumer or the retail market. We just launched our Safeskin Pop-N-Go gloves. That is a different margin profile than what we provide into the acute care space and it's actually from a positive standpoint from a margin standpoint. That opportunity is going to continue to grow. We also have the ability with that for in the retailer consumer market to also private label it for big boxes and brands which we're in process with today. And in addition to that it's other new products that we've launched, not just wound care and incontinence but additional products within our own manufacturers like gloves where we have as I mentioned earlier whether it's a chemo-rated glove a surgeon's glove other unique gloves that we have the ability to go out and launch. And we continue to do that. We haven't sized it for the market yet. We haven't gone out publicly with that yet. So from a modeling standpoint, I think the way to just think about it is, those are incremental dollars at much higher pull-through than what we have today. Kevin Caliendo: Great. Thank you very much. Ed Pesicka: I'll add one last thing as I think about a little bit further to is really think about 2026. That's kind of -- when we gave the targets for '26 that's a good view of where our margin profile would be as these become involved or developed and included more broadly into our overall revenue targets. Operator: 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 for closing comments. Please go ahead. Ed Pesicka: Thank you. Let me just first discuss one thing and then I'll close this. I know we spent a lot of time today talking about glove cost pass-through. I think the way to really think about that is at the highest macro level is, first half of the year we had favorability in that from both a revenue and a pull-through. The back half of the year that will be primarily offset, even in light of that positive in the first half negative in the second half and all balancing out kind of on a go-forward basis, we're still generating between $3.75 and $4.25 earnings -- adjusted earnings per share. So I think thinking of that in the context is yes sequentially there will be an impact on it. But overall, even with that netting out in essence over time this year we're still at the $3.75 to $4.25 and in addition also to the share count still at the $3.75 to $4.25 which is really where I would close on is, this is why I look at the robust performance. I look at the strength that we've shown in Global Solutions and sequential growth. I look at overall revenue and the operational efficiencies, driven in our Global Products business and our patient direct business, as well as our Global Solutions medical distribution business. That's why I can't -- I am so excited about where we are what's ahead this year and even beyond this year. I had the opportunity to talk a little bit about it with the question from Eric. We believe and we've proven that we have one of the strongest value chains in the health care solutions market. Not only, we have a strong value chain right now we have the ability to flex and scale very quickly because we still have a quickly changing marketplace. And then finally what we haven't had and we have now is the financial flexibility. We're down at a 1.8x debt-to-EBITDA ratio which enables us to continue to invest in our business and invest wisely and diligently to provide that long-term growth. At Investor Day we talked about 2026. I'm excited to get there. I don't want to live my life and pass it over very quickly. But I'm excited of where we are and where we're going. So that's what really gives us the excitement about what we have into the future. So, I appreciate the time from everybody today. I look forward to talking to you over the next few months and for sure in the next quarter at the earnings call. So thank you everyone. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Good day.OMI Ratings Summary
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Owens & Minor, Inc. (NYSE:OMI) Earnings Preview: A Mixed Outlook
Owens & Minor, Inc. (NYSE:OMI) is a healthcare logistics company that provides supply chain services to healthcare providers and manufacturers. The company is set to release its quarterly earnings on February 28, 2025.
Wall Street estimates the earnings per share to be $0.53, with projected revenue of approximately $2.68 billion. According to Zacks Investment Research, OMI is expected to surpass these earnings estimates. Despite this optimism, the market anticipates a year-over-year decline in earnings, even though revenues are expected to be higher for the quarter ending December 2024.
This mixed outlook could influence the stock price significantly. OMI's financial metrics reveal some challenges. The company has a negative price-to-earnings (P/E) ratio of -10.90, indicating current losses. The price-to-sales ratio is low at 0.05, suggesting the stock is valued at a fraction of its sales. These figures highlight the company's current financial difficulties.
The enterprise value to sales ratio is 0.25, reflecting OMI's valuation relative to its revenue. Additionally, the enterprise value to operating cash flow ratio is 13.15, providing insight into the company's cash flow generation. The negative earnings yield of -9.17% further underscores the financial challenges OMI faces.
OMI's debt-to-equity ratio stands at 2.48, indicating a higher level of debt compared to equity. However, the current ratio of 1.09 suggests that the company has slightly more current assets than current liabilities, offering some short-term financial stability. The upcoming earnings call will be crucial in assessing the sustainability of any immediate price changes and future earnings expectations.
Owens & Minor, Inc. (NYSE:OMI) Earnings Preview: A Mixed Outlook
Owens & Minor, Inc. (NYSE:OMI) is a healthcare logistics company that provides supply chain services to healthcare providers and manufacturers. The company is set to release its quarterly earnings on February 28, 2025.
Wall Street estimates the earnings per share to be $0.53, with projected revenue of approximately $2.68 billion. According to Zacks Investment Research, OMI is expected to surpass these earnings estimates. Despite this optimism, the market anticipates a year-over-year decline in earnings, even though revenues are expected to be higher for the quarter ending December 2024.
This mixed outlook could influence the stock price significantly. OMI's financial metrics reveal some challenges. The company has a negative price-to-earnings (P/E) ratio of -10.90, indicating current losses. The price-to-sales ratio is low at 0.05, suggesting the stock is valued at a fraction of its sales. These figures highlight the company's current financial difficulties.
The enterprise value to sales ratio is 0.25, reflecting OMI's valuation relative to its revenue. Additionally, the enterprise value to operating cash flow ratio is 13.15, providing insight into the company's cash flow generation. The negative earnings yield of -9.17% further underscores the financial challenges OMI faces.
OMI's debt-to-equity ratio stands at 2.48, indicating a higher level of debt compared to equity. However, the current ratio of 1.09 suggests that the company has slightly more current assets than current liabilities, offering some short-term financial stability. The upcoming earnings call will be crucial in assessing the sustainability of any immediate price changes and future earnings expectations.
