Owens & Minor, Inc.(NYSE:OMI) Q2 2020 Earnings Conference Call August 4, 2020 4:30 PM ET
Chuck Graves – Investor Relations
Ed Pesicka – President and Chief Executive Officer
Andy Long – Executive Vice President and Chief Financial Officer
Conference Call Participants
Michael Cherny – Bank of America
Eric Coldwell – Baird
Kevin Caliendo – UBS
Jailendra Singh – Credit Suisse
Robert Jones – Goldman Sachs
Good morning, everyone, and welcome to Owens & Minor Second Quarter 2020 Financial Results Conference Call. My name is Joel and I will be your operator for today. At this time all participants are in listen-only mode. We will be facilitating the question-and-answer session towards the end of this conference call. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes.
I will now like to turn the presentation over to your host for today’s call Mr. Chuck Graves. Please proceed Mr. Graves.
Thank you, Joel. Good afternoon everyone, and welcome to the Owens & Minor Second Quarter 2020 Earnings Call. I’m Chuck Graves, and on behalf of the team, I’d like to read a Safe Harbor statement before we begin. Our comments on the call today will be focused on financial results for the second quarter of 2020, for ongoing response to the COVID-19 pandemic and our outlook for the remainder of the year, all of which are included in today’s press release.
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 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 its SEC filings, including in the Risk Factors section of its Annual Report on 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 are included in our press release, in our quarterly report on Form 10-Q.
Today I am joined by Ed Pesicka, our President and Chief Executive Officer, who will provide commentary on the second quarter and an update on our ongoing efforts to help those on the frontlines of the COVID-19 pandemic. And Andy Long, our Executive Vice President and Chief Financial Officer, who will discuss our financial results for the quarter and provide additional insight into our outlook for the remainder of the year.
Now I would like to turn the call over to Ed, who will start things off. Ed?
Thank you, Chuck. Good afternoon, everyone, and thank you for joining us on the call today. Before I get into my prepared remarks I would like to start by thanking the clinicians, caregivers and frankly everyone else on the frontline for their tireless efforts in this battle against COVID-19. I would also like to thank our Owens & Minor teammates for their focus and intensity in their flawless operating executions during the first half of 2020. This enabled us to deliver on our humble mission to empower our customers to advance healthcare.
Before I review our progress related to our 2020 focus areas let me provide you with a quick summary of what we accomplished. First, we’ve delivered over 5 billion units of PPE to our customers since February. Next, we increased our intensity around productivity and operational improvements allowing us to one, significantly increase our America’s base PPE output enabling us to better serve our customers, although demand continues to outpace supply and two, continue to reduce operating expenses while maintaining service levels and these improvements will continue to provide value into the future.
Next, we made the proper investments to provide flexibility and product assurance to quickly adjust as home healthcare demand strengthened and as elective procedures ramped up faster than expected and finally, we closed the sale of our Movianto business for $133 million delivering on an important part of our strategy and allowing us to focus on our three strategic pillars; distribution, products and services.
The previous items are just a few examples of the accomplishments in the second quarter as well as year-to-date. These accomplishments helped us fuel the improved financial performance highlighted by the following; one, we doubled our adjusted net income per share compared to the second quarter of 2019. Two, we expanded our second quarter operating margin by 68 basis points when compared to prior year and three, we significantly paid down debts.
This improved financial performance is not new and not just one quarter. This is the third consecutive quarter of year-over-year adjusted earnings per share growth. It is the fifth consecutive quarter of year-over-year gross margin expansion. It is also the fifth consecutive quarter of generating positive operating cash flow. In addition, we increased our sequential adjusted earnings per share by five times compared to Q1 and today we are reconfirming our expectation of double-digit adjusted EPS growth in 2021 above the revised full year 2020 guidance.
I will now review a little more detail of our 2020 focus areas consistent with our previous two earnings calls. The focus areas are as follows; financial performance for Q2 and outlook, continued operational improvements and disciplined reinvestment in our business to further strengthen our foundation for long-term profitable growth. Let me start off with financial performance for the quarter and factors that will impact the rest of the year and into 2021. Andy will provide a detailed look at the improved numbers during his prepared remarks but now I will provide some color on what drove the current improvement along with the opportunity for future performance.
Starting with PPE. Demand for PPE remains at unprecedented levels and demand continues to exceed supply. In order to address this issue we immediately took aggressive actions to optimize production output in Q2 resulting in record levels of PPE produced. We expect to realize a full quarter’s worth of these improvements in Q3 and Q4 raising our PPE output to new record levels. However, we expect that the gap will still exist between supply and demand. This increased output has helped us to begin fulfilling our commitment to the federal government while maintaining customer unit volume fulfillment above pre-COVID levels for America’s based manufacturing PPE.
Next, in the second quarter we saw improvement in elective procedures compared to our previous forecast as many states opened up. We were prepared for this quick change and we were able to capitalize on it because we leveraged our investments in inventory, our teammates and our processes that provide flexibility and product assurance. Finally, improved operating efficiencies continue to provide benefits to the income statement and balance sheet. This focus has enabled us to deliver improved cash flow to strengthen our balance sheet by paying down debts as well as make investments in infrastructure, technology and service.
Based on our strategy, preparation and continued operational execution we are in position to double our full year 2020 adjusted EPS guidance range and today we are able to reconfirm our expectation of double-digit adjusted EPS growth in 2021. We have established a positive track record of financial performance and we will maintain a high level of continued improvement going forward. Again Andy will provide additional financial data in his prepared comments.
Now let me move on from the financials to discuss our second topic; operational improvements. Operational excellence delivers more than just financial benefits as previously discussed. Operational excellence enables us to deliver an enhanced customer experience and builds trust. I continue to be impressed with the way our teams have performed in consideration of the unprecedented and ever-changing challenges we have faced this year. Our controllable service metrics remain high and continue to run consistently at or above pre-COVID levels.
Our customers have recognized our efforts and flexibility in finding solutions during these challenging times. Two examples of our ability to provide critical and flexible solutions to our customers include, the creation of quick kidding services for COVID testing within our Byram Home Healthcare business and securing pandemic storage sub-supplies for our hospital customers across our network.
Now let me move on to our final topic and discuss some of the recent investments we’ve made. One, we continue to invest in expanding manufacturing capabilities at our North Carolina location to produce non-woven laminated fabric used in products such as surgical gowns, masks and N95s. The vertical integration enhances our America’s base manufacturing and our control over the supply chain of critical fabric needed to produce
Second, we are retooling our existing production lines for N95s and surgical mask to increase the output of each line. Third, we continue to install new N95 production lines in our North Carolina and Texas facility and I am pleased to say that as of today we have begun to see product roll off of these lines. Fourth, we are adding capacity in America’s base gown production and finally we continue to solidify our investment in commercial and operational support resources to better serve our customers.
So we expect 2020 to continue to be a very dynamic year but we intend to maintain our intense focus on our mission to support our customers in hospitals, home healthcare and other healthcare related markets. We will accomplish this with increased production and flexible solutions to address the challenges our customers are facing. Additionally, we believe the heightened demand for PPE will be a key element of the new normal in the future of healthcare.
The reasons for this belief include our customers protocols and new regulations are calling for increased use of PPE. We are seeing increased compliance to these protocols. Our customers have made it clear to us that they have a long-term preference for medical grade PPE. We expect demand to stockpile PPE will continue to grow and finally we have identified new channels for PPE in healthcare, non-healthcare and international markets.
With the continued execution of our strategy relating to operating efficiency, increased outputs and investment for long-term profitable growth we are ready to capture this demand by continuing to add incremental production lines for incremental output to address the demand supply imbalance, optimize these new production lines to the existing production line output levels, continue process improvement to increase output of all production lines, ramp up our new non-woven fabric machinery and expand our customer relationships as our COVID performance has built the foundation of trust and capability.
Our confidence is reflected in our significant adjusted EPS guidance increase to a $1.0 to $1.20 per share for 2020 and are reconfirming our expectation of double-digit adjusted EPS growth in 2021.
Thank you and now we’ll turn the call over to Andy for a discussion of our financial results. Andy?
Thank you Ed and good afternoon everyone. Today I will review our second quarter financial results and the key drivers for our better than expected quarterly performance and then I will discuss our expectations and assumptions for the rest of 2020. As we mentioned on our July 21 pre-announcement press release we increased our full-year guidance range for adjusted net income from $0.50 to $0.60 per share to $1.0 to $1.20 per share.
I will spend time discussing the primary factors we considered in raising our guidance later in my remarks. First, we are very pleased to have closed the Movianto sale in mid-June delivering on another key part of our strategy. As a reminder the former Movianto business unit has been treated as discontinued operations through the June 18th closed date in our quarterly and year-to-date financial results. My comments today unless otherwise indicated will be on a continuing operations basis.
Starting with the top line, net revenue in the second quarter was $1.8 billion compared to $2.4 billion for the prior year. This change was primarily driven by the impact of the COVID-19 pandemic on elective procedures and account non-renewals dating back to 2019, partially offset by greater sales of personal protective equipment or PPE coupled with revenue growth in our home healthcare business line within global solutions. Although the virus had a negative impact on revenue the severity of the impact was less than projected as elective procedures began to return earlier than we had previously expected.
Gross margin in the second quarter was 14.9% an improvement of 284 basis points over prior year as a greater portion of sales came from the higher margin global products segment and is a testament to the increasing level of operating efficiencies and productivity gains we’ve achieved.
Distribution, selling and administrative expense of $242 million in the quarter represents a $23 million decrease compared to the second quarter of 2019 primarily as a result of operating efficiencies, lower volumes partially offset by continued investment in the business. Interest expense in the quarter was $4.4 million lower than the prior year due to less debt, lower base rates and the utilization of our accounts receivable securitization program.
Income from continuing operations for the quarter was $161,000 and adjusted net income for the quarter was $12.5 million or $0.20 per share. The impact of foreign currency was minimal having a $0.01 headwind in the quarter. We knew that second quarter results would be highly dependent on two key variables; elective procedures and demand for PPE.
As mentioned above revenue reflected earlier than expected increase in elective procedures which began in mid-Q2 and we have continued to see those procedures increase into the third quarter albeit at a slower rate. Second, the quarterly results reflected our response to the unprecedented demand for PPE products including productivity improvements and operating efficiencies yielding a significant increase in the output of PPE by our America’s based manufacturing plants.
Now I will discuss our results by segment for the second quarter. Starting with global solutions revenue was $1.5 billion compared to $2.1 billion in the prior year. The change comes from a decline in our medical distribution business due to the previously mentioned impact of the COVID-19 pandemic on elective procedures and passed customer non-renewals partially offset by another quarter of solid growth in the home healthcare business. Sequentially global solutions revenue declined by $300 million which was almost entirely related to COVID-19. Global solutions posted an operating loss for the second quarter of $10 million compared to income of $18 million last year. The pandemic’s impact on segment revenue was the primary driver of the quarterly operating loss.
Now turning to the global product segment. Net revenue was $370 million compared to $364 million in last year’s second quarter. The increase was driven by growth in PPE sales partially offset by the impact of the reduction in elective procedures. Net revenue for the quarter experienced a small sequential decline due to the impact of lower elective procedures on non-PPE products partially offset by increased sales of PPE. This segment is expected to show sequential growth starting in the third quarter.
Operating income of $52 million increased by $34 million over the last year. The increase in operating income was driven by product mix, increased revenue from PPE, productivity and efficiency gains, fixed cost leverage, operating expense discipline and continuing favorability in commodity price trends with a small offset caused by the impact of foreign currency of approximately $1 million. These factors should continue for the rest of 2020 and are reflected in our projections for the year.
Now looking at our cash flow, the balance sheet and debt profile. We generated operating cash flow of $57 million in the quarter and $150 million year-to-date on a consolidated basis, driven primarily by improved profitability and further working capital gains as we effectively managed inventory to align with our sales level and medical distribution and accounts receivable collections remain strong during the quarter.
Total debt came in just under $1.4 billion at June 30 representing a sequential reduction of $137 million compared to the first quarter and a $332 million decline over the last five quarters. This represents nearly a 20% reduction in debt over that time period. We used the proceeds from the Movianto sale to retire a portion of our 2021 notes and set aside the remaining $79 million as restricted cash for future debt reduction. With this quarter’s debt reduction we continue to make excellent progress towards our commitment to strengthen the balance sheet which will help enable us to execute our growth strategy and invest across our business.
Now turning to our outlook for the remainder of 2020. Given the momentum we built in Q2 we are comfortable raising our annual adjusted EPS guidance from a range of $0.50 to $0.60 to a $1.0 to $1.20 per share. It is important to understand the factors and assumptions that we considered when developing this guidance.
We expect demand for PPE products to remain very strong and that our America’s based manufacturing capacity expansion programs will remain on schedule for the rest of the year. We also expect strong performance in Byram. our home healthcare business to continue.
Finally, the impact of COVID-19 on elective procedures is expected to continue to have a negative impact on revenue for the remainder of the year; whereas our previous forecast assumed a full recovery in the second half of the year our current thinking is that elective procedures will remain at approximately 90% of pre-COVID levels for the rest of the year. This will affect both reporting segments but the impact will be greatest in our medical distribution business within the global solutions segment. Key modeling assumptions have been updated on supplemental slides filed with the SEC on form 8-K earlier today and posted to the investor relations section of our website.
In closing, we feel very good about the operational and financial improvements we’ve achieved and our strategy for investing in the future of the business. As a result we’ve continued to expect double-digit earnings growth in 2021 relative to the revised EPS guidance for 2020.
Thank you and with that I will turn the call back over to the operator to begin the Q&A session. Operator?
Thank you. [Operator Instructions] Our first question comes from Michael Cherny with Bank of America. Your line is now open.
Good afternoon. Congratulations on a nice quarter, the nice result that you’ve delivered so far. When you think forward as you think about some of the commentary you made regarding PPE right now as you said demand outstrip supply. At some point supply will outstrip demand and so can you maybe talk a little bit more about some of the alternative channels you’re looking at in a world where virtually anywhere you look even outside the medical environment you’re going to need more PPE than you did previously?
Sure Mike. First, thanks for the comments up front and I will address that. So there’s a couple of things. Let me talk about it both in a short midterm and then long term. Obviously in the short midterm, we think it’s going to continue that where demand’s going to significantly outpace supply. I talked about some of things and I spend a lot of time with customers and some of the things we’ve heard from them why we think it’s going to continue going forward for the midterm I would say, is it’s the protocols that have changed. It’s regulation requiring. It’s the fact that more people in the healthcare world are used to wearing masks and changing masks more often.
So that we believe is just going to continue. You look outside of it kind of the non-traditional channels that didn’t use some of the PPE whether that’s nursing, whether that’s the dental field. You look at the academic settings which is outside of healthcare that being university, schools, just general population we think there’s a tremendous demand for that frankly we haven’t tapped into because we have been focusing on delivering to our customers that we’ve been committed to in the past and honoring those commitments.
And I think the other aspect of this Mike is international and obviously we’ve redirected our products all for the U.S. markets to make sure we can serve those. So I think that also provides us the ability to grow beyond that and then I can take it even a step further Mike. As you’re right at some point in time whether that’s in 2022 or some other point in time we start to get that supply demand balance or the other way around one of the things that we see is different is the fact that we believe you also have significant stockpiles with product in there that’s you know may not be medical grade that may be approved in the temporary for temporary, maybe non-traditional products and brands that people use. So we believe that’s going to be another opportunity going forward as people start to want to rotate product out of their stockpile and replace it with great high quality product that we make in the United States or we manufacture the material in the U.S. and make throughout the rest of the Americas we think there’s going to be an opportunity for that going forward too.
So that’s the way we’re looking at. The other aspect of this is this is what we do. We actually manufacture. We make the products in our process so we can control a good aspect of that. So those are some of the reasons why we see short midterm that supply and demand imbalance consisting. When it starts to balance out we think there’s going to be opportunities to replenish stockpiles where there’s non-traditional products in there and then additional markets that we think will open up over a longer period of time and so that’s why we’re pretty bullish on the future of the PPE products.
And as you think about some of the operational efficiencies you’ve taken and some of which I think have been almost forced upon you or at least having to be accelerated are there any other areas as you think about the multi-year strategy that Ed now that you’ve been there for a little bit that you think about that have been unlocked because of COVID that could create further levers for margin expansion on a multi-year go forward basis?
Let me just talk about it again obviously shorter, midterm and longer term is one of the things I will say our teammates did a great job on was two aspects. In a medical distribution continuing to drive waste out of the organization, continuing to drive operating efficiencies on our manufacturing product side, we ramped up production to levels we’ve never been at before and I think what that has helped us is continue to look at and change mindset that how do we do things differently to drive more production to get more fixed cost leverage?
In addition to that how do we leverage our manufacturing experience and knowledge and broaden some of those PPE categories beyond what we’re just making today. So that’s some of the things that I would say pandemic helped us with but in the same sense it’s no different than the way we’ve been running the business for the last 18 months focused on the customer, focused on operating efficiencies and continue to drive it. I think what pandemic did it just elevated that and raised our organization to do it much faster as well as really challenge how can we do things better.
Great. Thank you.
Thank you. Our next question comes from Eric Coldwell with Baird. Your line is now open.
Thanks very much. Good evening. So quite a few questions here. I’ll try to go quickly. I was hoping we could get some sense. You talk a lot about elective procedure rebound later in the quarter and the guidance reliant on similar levels for the rest of the year. Could you give us a sense on exactly what those levels were in terms of percent decline year-over-year or what the improvements look like as you went from April until June?
Sure Eric. Yes. This is Andy. I’m happy to take that question. So as we look at the impact that COVID had on our business so originally our thought when we entered the quarter was that we would be operating at about 70% of pre-COVID levels and I think we even quantified that at about a $480 million impact on global solutions in Q2 sequentially and so as we move through Q2 April tracked very much in line with that expectation and through the early parts of May that prediction was really on track but around mid-May I would say things started to turn and the situation increased in terms of output and we were probably 85% or so by May and we exited the quarter in June in the low 90s in terms of pre-COVID levels.
And that’s pretty much where we remain today and that’s really formed the basis of our guidance for the balance of the year is to be in that 90% of pre-COVID and as you recall back last time we spoke the anticipation for the second half of the year was that in the second half we would be not only recovered but potentially even making up for some of the, recovering some of those lost surgeries and procedures that did not take place in Q2 and again we really revisited that assumption now so that we believe on a full year basis that COVID will have a negative impact on revenue primarily affecting the global solutions business.
Eric this is Ed. I think the other thing to think about as Andy talked about that 90% range expecting in the Q3 and Q4, at some point in time whether that’s in Q3 and Q4 or even into next year there are elective procedures that will be pent up demand and eventually at some point in time some of those would happen. So but the way we’ve modeled it right now is at roughly 90% of pre-COVID levels for the back half of the year.
That’s really helpful and then on the PPE I know historically PPE was for at least for traditional solutions, for traditional distributor PPE is typically kind of low to mid single digit percent of total revenue. Can you give us a sense on where you were say starting February and then how that’s changed as a percent of your total mix as you — whether it’s a 2Q average or maybe here in July where PPE is a percent of total revenue is today?
Yes. So this is Andy again Eric. So I would say that obviously PPE continues to ramp up as we move through the year. I’m sorry Eric as we move through the year and but as a total percentage of our business, I don’t believe that’s something that we have disclosed at this point.
Andy, could you give us a growth rate perhaps if you don’t want to quantify the dollar size? Could you maybe give us a sense on growth or alternatively you still talk about demand being significantly greater than capacity maybe give us a sense on what those ratios might look like today?
Yes. Really we probably don’t get into that level of detail into our specific product lines within the business.
Let me try one more this one should be easy.
There you go.
Tax rate of 40% in the quarter, if I’m looking at an updated model which I think I am guidance 27% to 29%, how does that play out over the next three quarters?
Yes. So we will issue full year guidance on the effective tax rate in the range of 27% to 29%. So that’s really our full year guidance. I know that our GAAP effective tax rate is somewhat skewed in the quarter just a combination of net operating loss utilization and you put that in perspective of our net income. It’s just the denominator is low. So it kind of skews the percentage but overall I think if you work with full year ETR guidance of 27 to 29% you should be okay.
Thank you. I’m just — I’m trying to figure out if we should use the math to get us to that level and have it flat line through the three quarters or if there could be some volatility in the individual quarters that we should be paying attention to?
Yes. I think the Q2 number that you have feels a little bit high.
Yes. I’m sorry I was I was brain lapse end of a long day 26.5% is what we’re showing but I believe but 40% in first quarter I think I said that wrong but I’m just curious if we should be using the something more similar to 2Q linearly through the year or if there’s volatility in 3Q and 4Q?
I think we’re probably in the low 30s for Q2 and so modeling that out for a full year at again in that 28% -29% range I think is [indiscernible].
All right. We’ll follow up offline thanks very much for that.
Thank you. Our next question comes from Kevin Caliendo with UBS. Your line is now open.
Hi. Thanks. Thanks for taking my call. So I want to talk a little bit about PPE and sort of understand the trend. You said it specs to ramp and yet you’re sort of at capacity to a certain extent, so is there added capacity coming in PPE like do you need to do that in any way shape or form and then secondly I guess what percentage of your PPE is currently source versus manufacture that’s the start anyway.
Sure Kevin. This is Ed I will take that one. So here’s the way we’re going to, here’s what you think about PPE and let me just maybe share a little bit more detail on this. So in the second quarter we knew that we had demand far exceeding supply. So we took our machines for N95s, for isolation gowns, for surgical gowns, for masks and perfect example N95s we went through and through our internal organization along with external support we ran a process initiative on each machine in each line and we looked at every single bottleneck and we were able to get 10%, 20%, 30%, 40% increases on those machines by identifying bottlenecks, fixing those bottlenecks and increasing production.
So that would be an example on N95s what we did on that. We increased during the quarter also production of isolation gowns. So in the quarter we actually retooled some machines that weren’t being used before have those up and running in the U.S. producing isolation gowns and then we use our process improvement to continue to drive more output on all those machines.
We’re added additional non-woven fabric machine to be able to produce the raw material. When I say the raw material the fabric that’s used in masks, gowns and N95s. So that’s one aspect of it is really getting the output higher on those existing machines. Then through a grant received from the U.S. government we’re adding five additional machines plus additional other ones, five additional machines with the government grants in our Texas facility and here’s what I’m impressed with our team on is the fact that those machines we got the order in April, it’s supposed to take six months to get those machines up and running.
As of today we already have product coming off of one or two of those lines already. So those are production lines that are coming into place. Once those get into place it’s then how do we increase product coming off of those going forward by optimizing the production output consistent with the machines we’ve been running for years. That’s the next way we get demand up. So you think about all that increased demand that’s what partially that happened in the second quarter by optimizing it. We’ll get a full impact of the optimizing of the existing machines in Q3 and Q4 having new machines come in now and then continuing to optimize those to get a full impact of those as the second half of the year continues on.
So that’s just one thing to think about. In addition to that we’re putting in a new lamination or non-woven fabric machine in North Carolina to make sure we don’t have any material outages. We have the ability to make that material. So that’s the way we’re thinking about it. We’re working 24/ 7. We’re adding productivity, increasing output, adding new machines and it’s helping us continue to maintain pre-COVID level delivery to our customers as well as honor the commitment we have from the U.S. government on our HHS order that will continue on.
So that’s the way to really think about that PPE production and what we’re doing to, how we’ve ramped, how that ramp will continue through productivity as well as additional equipments.
Okay. That’s helpful. So five lines and then two woven lines that are sort of being added and how many, what would that do to total capacity like how many lines did you have running prior? I know you’re also increasing the capacity of the existing lines now you’re adding five more lines. Is this doubling the capacity? Is it increasing it by 50%? Is there any certain?
I’ll just say it’s a significant increase. We haven’t gone into whether it goes from X number lines to Y-number of production lines because we’re continuing assessing that and continuing to add based on the demand and based on long-term purchase commitment orders too.
The U.S. government, the HHS contract if I remember correctly that was through the end of the year. Is there an understanding that that’s going to continue as well into 2021?
Yes. Actually it’s through approximately a little after, it’s through the second quarter of actually I’m sorry I’m wrong it goes into the third quarter of 2021. My apologies third quarter 2021.
Okay. Great. That’s helpful and okay that’s very-very helpful. So when we think about this and just looking at the guidance increase your expectation around procedures is a little bit worse, right?
Than it was before in the second half get your guidance is up materially, should we say I guess Byram is maybe doing better as well but if we think about the increase in guidance. Is it almost all from PPE or is there other aspects, higher revenues and there’s a cost leverage as well but how much of this would you say is from PPE versus where you were before or is it just better cost management? Maybe help us out a little bit in terms of thinking about the basic doubling of guidance.
Yes. So a portion of it is, a good portion of it is from the PPE increase in the fixed cost leverage but then a good portion of it is a portion of it is also from our operating efficiencies in all of our businesses. Again a lot of those products we manufacture those and then we still distribute them through ours and other channels but we have gotten much more efficient at managing inventory within our distribution, managing the delivery of those products and we continue to see that same focus in our home healthcare. So a significant portion of it is in PPE but yet we continue to see operating improvement across the other businesses, although as Andy talked earlier there was significant revenue impact because of lack of elective procedures in our medical distribution business.
Sure. Listen this has been very helpful. Congrats on all the successes.
Thank you. Our next question comes from Jailendra Singh with Credit Suisse. Your line is now open.
Thanks and good quarter. Congrats. Just following up on Kevin’s question here, it seems the margin trends in the global products business did benefit from operational efficiencies and improved productivity, etc. I know you’re giving full year gross margin guidance but what are your underlying assumptions with respect to the EBITDA margin trends in global products business, just wondering how much of this 2Q margin out performance in the segment is sustainable on a recurring business in the second half at least?
Yes. So Jailendra this is Andy. I am happy to take that question. So as we move through the year and efficiencies as Ed talked about and operational efficiencies and productivity increases, as volume increases in PPE we continue to see the favorable utilization of our fixed cost base and of our footprint and that’s certainly driving per unit basis costs down and that’s going to translate to higher gross margins and EBITDA margins as we move through the year and continue to ramp up production.
So I think that’s the right trend to be thinking about but again we haven’t commented specifically on any specific range of gross margins on a business unit level. We have however provided guidance for gross margin at the total company level again that you can find posted in the supplemental schedules on our website and that’s the 14.1% to 14.4% range for the year.
Okay and then I mean with many more manufacturers and distributors entering the market in PPE how should we think about any market share shift as well as any pricing pressure as more competition arrives? What are you thinking about that in short term as well as long term?
Yes. I think obviously when that comes into play even more is when you start to get to the equilibrium of supply and demand. I think right now it’s really we’re going to drive that based on our ability to create product and put it out into the marketplace to our customers and I think the benefit we get by being able to ramp up production substantially we get more and more customers that can become customary to use our product and our product becomes prevalent.
We think that could have some level of stickiness. I think the other thing you got to think about is yes there will be significant number of players in the market but as you get to that equilibrium or even the other side of it where actually demand is less than supply we’re built and we’re structured to be able to produce products at pre-COVID pricing and pre-COVID style.
That’s what makes us very, very different than others. I will share something that I’m extremely proud of is in the second quarter with our Americas base manufactured PPE product we honored our pricing commitments to our customers through the entire quarter.
We did have some products that we manufacture that had price increases. We held those but as we go forward there may be certain items where we’ve had we have to go out and adjust pricing a good example of that is gloves. We’ve seen a large demand increase for gloves. We’ve seen constraint of the product.
The products we manufacture our facilities we’ve been able to hold extremely strong on our pricing but those that we have to acquire the places at times we’ve had to push on price but I think what we look at is our PPE manufactured in our facilities and our controlled operations we’ve been able to continue to take those products entirely through the second quarter even in light of everything going on and maintain our pricing which shows you we have the ability to operate in the market that may happen years from now again.
And one last one if I can, what are you seeing in terms of RFPs and progress being made in the current selling season? I know last time when you spoke you guys talked about some active RFPs getting delayed in light of COVID. Any update there? Are you seeing those activities come back?
We are. We are starting to not necessarily in the second quarter. We had several that were out that were that the customers paused on and I get that. It makes a lot of sense but now as customers are getting, I don’t say used to the current environment because I don’t know if we’ll ever use to this type of environment but have the ability to step back and reassess we’re starting to see some level of increase in RFPs that are in the market.
Okay. Thanks a lot.
Thank you. Our next question comes from Steven Valiquette with Barclays. Your line is now open.
Thanks it’s Jonathan for Steve, just in relation to the global solutions business that was obviously down pretty materially in the quarter. I guess how are you thinking about that kind of moving forward because with obviously global products outperforming and expected to continue to outperform just wondering if global solutions swings back to profitability or is it still going to be challenged just because of the revenue headwinds there?
Yes. This is Andy. Happy to take that question. So thinking about it sequentially as I mentioned in my prepared remarks Q1 to Q2 looking at about a $300 million headwind reduction sequentially and then as I talked about the ramp as we saw coming up through the quarter primarily with that inflection point in the middle of May ramping up through June and ending the quarter spot the low 90% of three COVID levels and then our expectation to continue forward at those same levels.
So sequentially between Q2 and Q3 we do expect to see a revenue increase although sequentially but not quite to pre-COVID levels. In terms of how that affects the margins, so I kind of like to think of global solutions not individually but holistically as part of the entire company. And certainly the volume increase sequentially will help the margins but you have to realize that global solutions is really an integrated player with our overall global products business and using those channel relationships to drive global products revenue and product revenue that is the margins recognized in our global products business are really only recognized at kind of that arm’s length transaction price in the solution business. So thinking about margins holistically I think we have to incorporate global products into that thinking.
Okay. Great. And then just some on your commentary regarding gloves and the pricing there, have you seen other players come back into the market kind of given some of the glove issues out there and how long do you kind of expect this pricing capability for you guys to take price to kind of persist as we move into 2021? Thanks.
Yes. On the new players in the gloves, I think that it’s a really tough category as you really start to understand gloves as owners of mine are owning manufacturing facilities of gloves. That’s not something you just turn on overnight. Just if you’ve ever been in one of those facilities and that’s something that takes years to get up and running. So we don’t think there is going to be in the short term significant number of new players per se in gloves. I think we are very diligent to continue to drive more product out of our facilities so we can continue to provide those products but we do see some level of cost pressure I’ll call it on gloves and we’ve been open and transparent with our customer base on those products on where we’re seeing that and helping them find alternatives where possible.
Thank you. Our next question comes from Robert Jones with Goldman Sachs. Your line is now open.
Great. Thanks for the questions, I guess maybe just to follow-up on global solutions, it looks like clearly I guess highlighted sales were down things like 30% year-over-year mid-teens sequentially. Profits fell obviously a lot more than that. Could you just maybe go back and talk a little bit more about the disparity you’re seeing there? Is it volumes driven? Is it mix driven? Any kind of any color around the order of magnitude and what’s driving that disparity between the top line and profit and then I guess more importantly what level of a recovery do you need to see in your mind over what time frame to kind of see this segment return closer to producing profit growth in the future?
Sure. Sure this is Andy. Great question. So in terms of the overall profitability of the business think about the decline in revenue and the disproportionate change on the bottom line. In fact, the way I think about that is that, we knew that that at some point in time procedures were going to come back. So we did not take the position of taking out a lot of costs. They could potentially jeopardize our response and our ability to service customers on the rebound.
So there was a significant amount of deleverage as we lost volume in the second quarter. However, since those costs are already in place as the volume returns I think we can return with that revenue pulling through with some higher pull through rates as well on the upside.
So I think that’s kind of a key driver and as I mentioned on an earlier question again when you think about what does it take to return to profitability again I do look at global solutions as being in the medical distribution products in particular as being more holistically integrated into our global products business and looking at that more holistically but absolutely as the volume returns the profitability will follow up.
And then I know you’re not giving segment guidance, obvious certainly not now or for 2021 but just underlying that assumption of double digit EPS growth feel, can you maybe just directionally talk about what’s assumed in distribution solutions specifically as it relates to that 2021 expectation?
Yes. So I think one of the key drivers going forward into 2021 for medical distribution is the return of volumes post-COVID pandemic impact. So we lost $300 million of revenue alone in just Q2 and we’ll lose additional revenue in the second half of the year only operating at 90% of pre-COVID levels and not only do we expect that volume to return at some point but as I had mentioned there’s going to be some pent-up demand for recruitment or makeup of lost surgeries from 2020. So I think volume will be a key driver in the return to profitability of that business.
That makes sense and I guess just one last one I know we talked about the impact on PPE from COVID but I was curious about testing. Is this an area? I know you mentioned some kidding and I think in the in the prepared remarks but could you maybe just help us think about how important or what size opportunity the COVID testing could be and then maybe how those economics would play out relative to the rest of the enterprise?
Yes. So on the testing aspect we don’t actually play in that testing market. What we are doing is for customers is actually creating all the supplies needed for the clinicians and/or the patient so that way they can administer the test. So a little bit differentiation I think it’s the nuance there that we’re not actually distributing tests today. we’re actually creating the kits so that way a test can be delivered and it protects the patient and the clinician.
Okay. Got it. That’s a helpful distinction. Thank you.
Thank you. Our next question comes from Lisa Gill with J.P. Morgan. Your line is now open.
Thanks it’s actually Mike on for Lisa today. Just two quick ones here. So first following up on the global solutions business, you talked about customer non-renewals and medical distribution as being a headwind of the year-over-year revenue growth in the second quarter. Can you remind us the magnitude of that headwind or when you cycle that impact?
Yes. I will start this is, Ed. We’ll talk about the cycling on that. So we talked last year it took it takes six months to nine months plus from a customer making their decision until it gets out. That’s going to cycle through the end of this year at a minimum through the end of this year and then there’s still is a little bit of that tail that will continue to impact us into the beginning of next year but the bulk of it will be behind us by the time we get to the end of this year.
Got it. And then second you used the proceeds from the Movianto sale to repay debt and talked about an additional $79 million, you’d set aside for future debt reduction. Just wondering if you could talk about where leverage currently stands and your longer term target there?
Yes. Overall we’ve been able to reduce debt significantly and over 130 million in the quarter and 332 million or so over the last five quarters. So debt now stands and totaled just under 1.4 billion and again we see, like you correctly mentioned we’ve got another $79 million that has been set aside as restricted cash to be used primarily for the 2021 paydown.
Got it. Appreciate comments.
Thank you. There are no further questions at this time. I will now turn the call back over to Mr. Pesicka for his closing remarks.
So first of all let me thank everyone for joining on the call today. I also as I opened up I talked a little bit about the clinicians and those on the frontline and wholeheartedly I want to thank them because they have been working tirelessly to fight this battle against COVID-19.
I also want to thank our teammates. Our teammates that they can to live by our mission and really support those who are serving the patients. These teammates help us to drive and it drove that strong operational execution which really fueled our strong financial performance in this quarter. This financial quarter as well as the previous really has enabled us to establish a consistent and strong financial record.
As I look into the future I really believe that market demand for our unique offering is really it’s expected to remain at a very high level going into the future and then finally we’re going to make sure we can accomplish that and capture that by investing in different things to best serve our customers and also provide long-term profitable growth. So with that let me thank everyone on the call and look forward to talking to everyone in the next quarter. Thank you.
Thank you for your participation in today’s conference. This concludes the call. You may now disconnect.