Accendra Health, Inc. (ACH) Q3 2020 Earnings Report, Transcript and Summary

Good day ladies and gentlemen. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this call may be recorded. I would now like to introduce your host of today's conference, Miss. Chandrika Nigam, Director, Investor Relations. Miss. Nigam, you may begin.

Thank you, operator. Hello everyone, and welcome to the Owens & Minor Third Quarter 2020 Earnings Call. Our comments on the call today will be focused on financial results for the third quarter of 2020, our 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 report 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 third 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. I would now like to turn the call over to Ed, who will start things off. Ed?

Thank you, Chandrika. Good evening, everyone. And thank you for joining us on the call today. I'm extremely pleased to be here today and report another strong quarter. The strength of this quarter has been driven by our exceptional operating performance supported by our dedicated teammates. It is our ability to support the complete value chain which makes us different. The value chain starts with our America's owned and operated manufacturing facilities combined with our broad external supplier base, and finally integrated with our robust distribution network. This approach allows us to operate at the highest levels of performance and provide an enhanced customer experience, enabling us to best serve our customers and fulfill our mission to empower our customers to advance healthcare. While the performance in the third quarter was strong, it doesn't stand alone. In the past 18 months, we have significantly repositioned our organization by focusing on the customer, investing in the business and delivering on productivity and operational improvements. This strategy has delivered compelling results for the third quarter as well as accelerating performance during the past year plus. Let me start by sharing a few examples from Q3 that demonstrate the strong performance. First, we achieved an increase of more than 250% in adjusted net income per share compared to the third quarter in 2019. Two, we expanded adjusted operating margin by 240 basis points versus prior year. Three, we generated operating cash flow 118 million as a result of increased earnings and working capital improvements. Fourth, we continue to make investments in infrastructure, service and technology. Fifth, we reduced total debt by 70 million in the quarter. And six, we launched the $200 million follow-on equity offering, which has since closed. Specifically related to the global solutions segment, we grew revenue 317 million sequentially from Q2 to Q3. The segment returned to profitability and we maintained our industry leading service levels. Next, related to our global products segment, we achieved record profit levels, and we manufacture record levels of PPE. And finally, we reached a milestone in the COVID fight, with nearly 11 billion units of PPE delivered of which approximately 4 billion units were produced with materials manufactured in our American factories or Owens & Minor owned facilities, all of that being done since the beginning of this year. While the third quarter was strong, this is just a continuation of our demonstrated track record of strong performance. Here are a few examples of our consistency. One, we achieve year-over-year gross margin expansion for the sixth consecutive quarter. Two, we generated positive operating cash flow again for the sixth consecutive quarter. We paid down debt by $231 million year-to-date and by $402 million in the last six quarters. In addition to that, we have another $130 million in cash on hand that is specifically earmarked to pay down additional debts. Next, we delivered a fourth consecutive quarter of year-over-year adjusted EPS growth on a constant currency basis. And finally, today we are pleased to raise our 2020 full year adjusted EPS guidance to a range of $1.90 to $2. And we are reconfirming double digit adjusted EPS growth in 2021. It is clear that a robust operational execution combined with strategic investments have fueled increased output and improved efficiency across the entire business, thus enabling us to better serve our customers. Continuing with this approach as a foundation of our strategy, we are well positioned to address the current and future needs of healthcare. I will now talk about our focus areas that will shape the remainder of 2020 and the future of Owens & Minor. These areas of focus are investments, operational improvements, and continued financial strengths. Andy will provide additional financial color in his prepared remarks. Let's begin with our investments. Our disciplined investment strategy has been and will continue to focus on infrastructure, technology and operational effectiveness into the future. Let me start with investments in our global products segments. During the third quarter, we continue to expand our manufacturing output through capital investments, operational improvements, and long-term partnerships with our customers. Here are just a few examples of these investments. One, we completed the installation of new N95 production line in our US based manufacturing facilities. Next, we continue to invest in nonwoven fabric manufacturing in our Lexington, North Carolina facility. And we continue to expand our isolation and surgical gown production capacity. These investments in our America's based locations enable us to continue to be a leader in the manufacturing of PPE across the broad continuum of PPE products. It should be noted that we also expect the PPE supply demand imbalance to continue into the future. Moving now to investments in our global solutions segment, where we expanded our low unit of measure warehouse infrastructure system. We improved our inventory planning process and algorithms. We enhanced our data management services offering through myOM and QSight's and improved our B2B and B2C offerings in our home healthcare business. These investments differentiate Owens & Minor in supporting our customers across the value chain. Again, this starts with products, products that are manufactured in our factories, most of which are in the America's, with our teammates, with our technology, with our patents, with our processes, with our quality control, with our regulatory affair. I think you get the picture. We know how to manufacture products and seamlessly get them into the hands of the health care providers through our distribution channels. As you can tell, we are in a strong position to meet the demands of the changing landscape in the healthcare industry, as regulations and protocols call for increased usage of PPE and as more patients return to care and also as more patients rely on home healthcare. Let me now discuss operational improvements. In the past several quarters, we have significantly transformed the operational landscape to deliver and improve customer experience and do it more efficiently. We are doing this by focusing on operational effectiveness and continuous improvement. Let me give you a few examples. One, we invested in technological process improvements to increase accuracies within our distribution centers. Next, we continue to partner with our suppliers using data to better manage demand planning and supply chain efficiency. While doing these, we continue to emphasize on the safety of our teammates so we can retain our skilled workforce. Finally, we are enhancing our business system approach to ensure that continuous improvement will be at the core of our organizational culture. All of these will allow us to remain at the forefront with our industry leading service levels. Finally, let's talk about our financial position. As noted in the beginning of my comments today, our financial profile is strong. We are deleveraging the balance sheet and investing in our future. Based on the achievements I've walked you through, we have created a track record of delivering on our commitments. The midpoint of our guidance represents a threefold increased improvement over 2019 results, and we continue to expect double digit EPS growth in 2021. The long-term outlook is based on our improved companywide operating performance from operating efficiency initiatives combined with investment. Here are a few reasons for the expected continued positive momentum. First, we expect the demand for PPE to continue to remain high. With changes in healthcare protocols, stockpiling requirements, new win markets we believe higher demand for PPE is here to stay. As a result we continue to invest and ramp up our production to help service this demand. Secondly, as elective procedures continue to recover towards pre-pandemic levels, we are able to leverage our distribution infrastructure to service our customers. And finally, our home health care business continues to see an increase in demand in one of the fastest growing healthcare markets. As I just discussed, we had a solid third quarter. And I'm immensely proud of our accomplishments over the past several quarters. But we recognize we're not done yet. Thank you. And now I'll turn the call over to Andy for discussion of our financial results. Andy?

Thank you, Ed. And good evening everyone. Today I'll review our third quarter financial results and the key drivers of our better than expected quarterly performance. And then I'll discuss our expectations and assumptions for the rest of 2020. We are pleased to report a strong third quarter. And we're excited about our recent equity issuance and continued deleveraging of the balance sheet. Our Q3 performance is a testament to our ability to adapt and execute during challenging times. Over the last several quarters, we have demonstrated our ability to consistently deliver improved financial results and enhance our financial position despite the challenging business environment. Earlier today, we announced our revised full year adjusted net income guidance, which has been increased to $1.90 to $2 per share with a continued expectation of double digit growth in 2021. Later in my remarks, I'll cover the details of the factors that gave us confidence in raising our guidance. Let's start with the highlights of our Q3 performance beginning with the top line. Net revenue in the third quarter was $2.2 billion, compared to $2.3 billion for the prior year. This change was primarily driven by the impact of past account non-renewals from 2019 and to a lesser extent by the COVID-19 pandemic related reductions in elective procedures. This was partially offset by greater sales of PPE coupled with growth in sales from existing customers in our home healthcare business lines within global solutions. Although the revenue impact of elective procedures was better than expected, we continue to trail pre-pandemic levels. Gross Margin in the third quarter was 15.7%, an improvement of 350 basis points over prior year, as a greater portion of sales came from the higher margin global products segment and is evidenced of the increasing level of operating efficiencies, productivity and fixed cost leverage we've achieved. This represents the sixth consecutive quarter of year-over-year gross margin expansion, illustrating our improving performance. Distribution, selling and administrative expense of 263 million in the quarter increased 14 million compared to the third quarter of 2019 primarily as a result of continued investments in the business partially offset by ongoing productivity gains. Interest expense of $21 million in the third quarter was $3 million lower than the prior year as a result of lower debt levels due to improved operating cash flows, and working capital. In addition, lower base rates and utilization of our accounts receivable securitization program have contributed to the reduction in interest expense. The combined impact and strong operational performance and execution resulted in income from continuing operations for the quarter of $46 million and improvements of $43 million compared to prior year. GAAP income from continuing operations per share for the quarter was $0.76, an increase of $0.70 versus the same period last year. The resulting adjusted EPS for the quarter was $0.81, which represents a year-over-year increase of over 250% and a fourfold improvement sequentially versus Q2. The foreign currency impact in the quarter was $0.06 favorable. Now, let me review results by segment for the third quarter. Revenue for the global solutions segment was 1.9 billion, compared to 2 billion for the same period in the prior year. The change comes from a decline in our medical distribution business due to the previously mentioned impact of customer non-renewals from 2019 and the impact that the COVID-19 pandemic has had on elective procedures, partially offset by another quarter of solid growth in the home healthcare business. Relative to the second quarter global solutions revenue grew by $317 million attributable to the increase in elective procedures. To help put this in perspective, revenue improved from about 80% of pre-COVID levels in Q2 to the mid 90s in Q3. Global solutions posted operating income of $11 million for the third quarter compared to income of $25 million last year, driven by lower volume. Sequentially, global solutions operating income increased by $21 million or 7% of incremental revenue as volumes improved against our largely stable cost base. Now turning to the global products segment, revenue was 474 million compared to 360 million in the third quarter of last year, driven by growth and PPE sales net of the impact of lower elective procedures. Sequentially, global products revenue increased by $103 million. As new America's based PPE production capacity expanded, and elective procedures began to ramp up. Global products reported operating income of $90 million, which increased by $73 million over last year. The increase is attributable to higher revenue of PPE products, favorable product mix, productivity initiatives, improved cost, leverage, operating expense, discipline, and favorable foreign exchange. We continue to operate at very high levels of efficiency, and these factors should continue for the remainder of 2020 and are reflected in our revised projections for the year. Let's turn our focus to cash flow, the balance sheet and capital structure. In the third quarter, we generated operating cash flow of 118 million and 268 million year-to-date on a consolidated basis as a result of improved profitability and stringent working capital management. Looking ahead to Q4 we expect a number of factors to weigh on cash flow. First, we anticipate carrying higher levels of inventory in preparation for the traditional flu and holiday seasons, and an expectation of a slight increase in elective procedures above our previous forecast. These inventory changes will help ensure that we are prepared to meet customer requirements in a very dynamic environment. Also, the fourth quarter will experience a higher level of CapEx spend compared to earlier in the year. These actions demonstrate our continued commitment to invest in the business to help ensure long term profitable growth and to provide customers with the highest level of service. Total debt was $1.3 billion at September 30, representing a sequential reduction of $70 million since the second quarter, and $231 billion declines this year-end. Recently, we executed the next step in our financial strategy to further strengthen our balance sheet with a successful equity raise netting $190 million, closing on October 6. This offering resulted in the issuance of 9.7 million additional shares, which is expected to negatively impact EPS by $0.05 for 2020. The impact of dilution is reflected on our revised annual guidance. We've already used the net proceeds from our equity offering to reduce debt early in the fourth quarter. In addition, we have recently issued a redemption notice for our outstanding 2021 notes to be completed by the end of the year. We plan to utilize $134 million held as restricted cash end of September, plus other available funds to retire these notes. Our leverage profile is well enhanced. And as we continue to strengthen our balance sheet, we are very well positioned financially to execute our growth strategy by continuing to invest across our businesses. Finally, let me provide some color on our outlook for the remainder of 2020. As I mentioned earlier in my remarks, we revised our full year adjusted net income guidance upwards to a range of $1.90 to $2 per share, inclusive of the dilution from our recent equity raise. The midpoint of our current guidance represents a threefold improvement over 2019 results, and we continue to expect double digit EPS growth in 2021. Let me walk through the assumptions that went into developing the revised guidance. First of all, we expect the demand for PPE products to remain strong. And our America's based manufacturing capacity expansion programs will remain on schedule for the rest of the year and into 2021. We also expect strong performance environment in our home healthcare business to continue. The level of elective procedures across the nation continues to influence our performance. In Q3, we experienced a faster than expected recovery in this area contributing to our over performance in both segments in the quarter. Q3 revenue associated with elective procedures increased to the mid 90% of pre-COVID levels. And our expectation for the fourth quarter is that these volumes will remain at Q3 levels. We do not expect to see elective procedures returned to pre-COVID levels until the middle of 2021 at the earliest. Furthermore, our outlook on the strong demand for PPE going forward, along with our ability to leverage our captive North American centric supply chain for raw material input through distribution gives us confidence in achieving double digit earnings growth in 2021. We are seeing increasingly strong indications of sustainable PPE demand for the many reasons we have previously cited. Please note that key modeling assumptions for the full year 2020 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. We are moving forward with sustainable operational and financial improvements that will provide the roadmap for years to come. While improving Owens & Minor's financial profile remains a top priority, our core focus continues to be on our customers. We put our commitment to serving clinicians and caregivers at the center of everything we do. Thank you. And with that, I'll turn the call back over to the operator to begin the Q&A session. Operator?

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

Good evening, and thanks for the color and congratulations on another nice results. I want to dig in - you just made a comment about sustained signs of demand within PPE. Can you just go a little further into what are those signs that you're seeing? And if possible, how you're thinking about the expansion beyond your traditional markets, in the event that there does become a catch up in overall supply versus demand for your legacy customers?

Sure. I think there's a couple different ways we look at this is, one, we continue to see that our orders or the demand still exceeds what we can supply today for our own manufacturing. And at times, we have actually helped customers through spot buys with additional product. So we do continue to see that supply demand and balance and it varies by the different PPE categories. I think what's causing that to be maintained is a couple of different things. One is I think the new protocols that are in place, as well as the adherence of those new protocols are continuing to maintain that separation. In addition to that, we're starting to see additional demand for stockpiling and safety stock, whether it's at our healthcare networks are whether it's through state or local requirements, we're continuing to see that. We're also seeing if I think about it more longer term, we're having conversations with customers that may have purchased some PPE during the height of pandemic, that's not necessarily traditional medical grade, that now they want to have that medical grade product start to replace what's out there. And then obviously there's an expiry of these products that eventually whether its two years down the road will have to start to be replaced out of the stockpile. I think to the second part of your question is where are there other opportunities? There's other markets for us to continue to go into with to expand our PPE outside of our traditional acute care space. In addition to that there's international markets where frankly we have not pressed hard on because we were really focused on trying to close the gap in the US. So that's why - that's what we're seeing today and why we expect that to continue into the future. And then as that shifts our ability to continue to adjust and shift with that.

Thanks. And then Ed I guess one other question I would love to dive into. You spent a lot of time rightfully so talking about the operational enhancements you're seeing across the business. When do customers really start to feel that? And I guess, more importantly, when can prospects start to get a full understanding of some of the operational improvements that the organization's undertaken?

Yeah, so I think when I talk about operation improvements, we talk about it in multiple ways. So one, we're institutionalizing it now within the organization. For the last year and a half, we've been doing it, I would say more ad hoc. I think with the operational effectiveness, there's a couple different ways we think about it. One is on production output, so traditional manufacturing. How do you get additional product offer the same number of lines with the same amount of fixed cost? And we've seen tremendous improvement of operational effectiveness and output. And that's your classic manufacturing, fixed costs leverage of the facilities and/or the equipment. And we've done that while bringing on additional headcount, significant number of headcount, to increase our output and increase our output for our facilities. If you look at our on our channel businesses specifically in our medical distribution, business, and even in our home healthcare business, it's a lot of the same story, it's really understanding and identifying, how do you get additional throughput through your operations? How do you - as you grow your business, and increase the amount of products or picks going out the door, how do you do that more efficiently? The reality is in the in the med distribution business, it's the opportunity to get that fixed cost leverage, which really drives operational improvement. So that's the way we've thought about it both in the manufacturing, as well as in your classic distribution, whether that's home healthcare, or whether that's in our medical distribution. And then lastly, on effectiveness is back office work continuing to drive efficiency within our back office at the same time.

Perfect, thanks.

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

Hi, thanks for taking my call. Can you talk a little bit about your PPE capacity, sort of where it is today versus where it was at the beginning of the year and where it might be a year from now? You talked about the number of units, the billions of pieces shipped, I'm just wondering sort of how we should think about that capacity going forward? Like how to model it, or how to think about it?

Yeah, I think well, we haven't openly talked about whether we went from X to Y, or what we've gone from. What we have done is we've added substantial amount of capacity. So really there's been several things we've done. One, first thing we did was took the existing capacity and added people or teammates, so that way we could run 24x7. Then we've aggressively tuned all of our lines to optimize production. And we saw, as I've talked in the past 40%, 50%, 60% increases, and in the different tranches of work we've done on those equipment, and then we've added substantial amount of lines in our existing facilities. And while doing that we've added capacity within the fabric or SMS or nonwoven fabric, I should say, to be able to feel those types of PPE products. So we have had substantial increases in production and output. We haven't disclosed what that number is. I think the way you could think about that is in Q2 was kind of the first step of the ramp up, Q3 was the second step of the ramp up and Q4 is kind of the continuation of that additional lines as well as additional productivity. So while it's not the answer, I know you're looking for a specific number. We haven't disclosed that number, but I think you can expect what we've been able to do with kind of the big jump in Q2 to Q3 here and in Q4 the continuation of that and that continuing into early 2021 also.

Well, I guess the question that we all have is not necessarily sustainability of demand, but where the margin - the sustainability of the margins or the direction of the margins going forward, because the ramp on there has surprised even the most bullish investors and analysts, I think. So I mean, what are the factors there is it the spot pricing, your end user pricing, is it the customer mix, government versus traditional customer, is it the amount of capacity that you have that you can keep going to fill more of the demand yourself. And where do you think to print all of those? Where do you think these margins can really go? I mean, if you're thinking optimally in a year or two years, it sounds like expansion is still possible from where we are today.

That's right. And there is that opportunity to continue to expand. But one of the things we're doing is we're doing it pretty disciplined. Don't get me wrong, we're aggressive on our expansion, but we're doing it disciplined because a portion of the margin isn't necessarily because of market price, our ability to have raw material plus our teammates, plus the technology in our factories, it's also running your factories extremely efficiently to get that fixed cost leverage to take and make it almost a small variable cost on addition of more output. And what you have to balance on that when you're running a strong manufacturing business really is adding the capacity quickly so you can fill the needs, working with customers because we believe and they believe there's a long-term need for this to have commitments longer term. So that way if it does get very competitive, which eventually it may get competitive again, we don't think the levels will ever come back to pre-COVID levels. But making sure that you're positioned that you have high level of output, you have - you're able to leverage that fixed cost, to continue to be competitive. So a good portion of the growth is really by running our business extremely effectively, getting that fixed costs leverage. So that way we're positioned for the long term. So that's how we've thought about it. And again, to the first part is coming in, I think that demand continues, and the ability for us to continue to increase our output continues to happen with expansion, as well as I don't believe we're done fine tuning our operations to get additional output out of the same machinery and equipment and labor hours that we have today.

Thanks.

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

Thank you. Good evening. I have three I'll do them one at a time. First one should be simple. Can you tell me again the timing of the 134 million of cash on hand to pay down the '21 notes?

Yes. So this is this is Andy, Eric. So thanks for the question. Yeah, so as we exited Q3, you're exactly right, we have $134 million of cash held, use restricted cash. And you'll see that on the balance sheet in our other current assets. And that is what's left over from the Movianto proceeds that we received on Q2, as well as some additional operating cash that we've generated through the business, then you can expect that cash to be applied towards future debt production. I'll say, Kevin, just to add on to that, too again, with our successful equity offering, we did receive 190 million net proceeds in settling on October 6, so that cash has already been applied to debt reduction.

I'm sorry, just to be clear. So in the press release, you talk about the 402 pay down over six quarters. It sounds like you've already done the 190 from the equity offering. So that's 4Q add on. And then there's another 134 for those.

Yes, correct. Yeah. So yes, between, it's almost $3.25 million. But yeah, we had available to us, as of that first week in October.

And the 190 has been used the 134 - the 190 has been used in fourth quarter. And then the 130 Plus is remainder, which is additional to go to future debt paid down.

Okay, good. Second one, customer conversations and global solutions, I know, kind of goal one for the company is to rebuild its core distribution customer base, and you've been working through some inherited attrition this year. What are the early signs in customer conversations when you think about new business development?

Sure and this is Ed, I'll pick that one. So I think the first thing it's been, is really, our drastic improvement in service starting last year, six quarters ago and continuing to build was the first step in this process. Second of all continuing to drive operating efficiencies, so that way we can be competitive as well as continue to now take service to a new level has helped. And here's what ultimately really focused that conversation. It's that during the pandemic, where customers used our products and our distribution network, we were able to maintain and continue to be able to maintain delivering products well above historical levels. So that has opened up conversation, but it really comes back to the very first thing and the basics of what we talked about when I joined, which is, if you don't have great service to the customer, you don't even get to that point with the conversation. So we continue to have conversations. We saw strong growth in this quarter in the global solutions that was driven by growing our ability of shared existing customers, as well as growing businesses at newer customers. Now, all of that, combined with a slight increase than what we expected in elective procedures as well as our home healthcare business performing well, all of those things are our data points that helped to validate our service as well as what we've been able to do with our customers during the pandemic. So we have a robust pipeline, we have - we're having great conversations right now with existing customers, as well as potential customers.

Great. Last one, there is a global nitrile exam glove shortage, I am curious how you are positioned for that? How it might impact you? And I'll leave it at that.

So here's the way we're positioned for that. We have a good portion of our common - our gloves that we manufacture in our factories. They are our own factories in Southeast Asia, again, with our people, with our process, with our technology. So portion of that we have strong, strong control over, I'll use that phrase. A portion of ours, we do buy from third parties, but we do have long-term commitments with those third parties. And again, they're using our process and our technology to make those gloves. There is a shortfall in the market. And the unique thing about - whether it's unique or not about gloves, is the time for expansion could take 18 to 24 months, just because of the nature of the way a manufacturing of glove works with the dipping process. So we're position a little bit different than others, because we do own our own factories with our people that make a good portion of the gloves for ourselves that we end up selling and providing to our customers.

We've heard a lot about price increases in that marketplace. Is that a market where if - where you have relationships with third parties, especially those that might need to be renewed or where you might face cost increases, are you comfortable passing some of that increase on to the customer.

We are comfortable passing that on. It's never an easy conversation. But I think that the approach we've taken on that is if we have to pass on cost - if we do get cost increases, and we have to pass them on, we are just passing on that cost increase. We are not using it as an opportunity to gouge our customers or to try to expand significant profit on that. We've taken a pretty transparent approach with our customers of cares the cost increase and here is how it translates to them.

Very good. Congrats on a good report. Thanks, guys.

Thank you.

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

Hi, thanks everyone. So with respect to your comment around your outlook, assuming that electric procedures in Q4 remain flat compared to Q3 levels. Is that based on what you guys have seen thus far in Q4? And I mean cases have been driving across the country, so I was trying to understand the sensitivity to elective procedures. I mean, if we indeed see any pressure on electives, do you think that any pressure on your global solutions will be offset by positive impact in global products business? Trying to understand, like, all these cases, writing how much comfort you have around those elective procedures assumption?

Yeah, go ahead. I'll let Andy start this and we'll cover the elective procedures, what we've seen and what we are seeing.

That's right, so to kind of summarize kind of where we've been, where we think we're going. So we came into the quarter or came out of Q2 in the low 90s in terms of a percentage of elective procedures compared to pre-COVID levels. As we move through Q3, we did see improvement in that and we did finish the quarter in the mid 90s. And that was part of the reason for the overachievement in the quarter. And as you look forward to as you said to Q4, we do expect - our best estimate at this point is to say that those levels will remain flat and potentially even into early 2021 before we see maybe a return to historical levels if the mid-year point is 2021. You're absolutely correct in terms of the segment performance that will most notably affect our global solution segments, but also keep in mind that we do have global products that has a portion of their product portfolio that is also tied to elective procedures. So any movement up or down in elective procedures will affect both product lines, but more pronounced in the global solution segment.

And the only other thing I'll add is with elective procedures, part of it depends on the geography. We have seen some parts of the US where elective procedures have tightened up and been reduced. And we've seen other parts of the US where there may be a less impact of COVID right now, where it has actually increased. And I think the one factor that's difficult to forecast is what happens should COVID spikes continue or the second wave happen and that's a broad sense. What would that have an impact? That's the thing that is difficult to forecast.

Okay, and then the follow up on your competitive landscape comments earlier. Have you seen other vendors trying to sell PPE products to your existing customer? Just wondering if there's any change in the competitive landscape and what is assumed in your double digit EPS growth outlook, are you assuming that there's an increased competition from other PPE vendors?

Again, PPE is a portion of our business, but just like anything, we're competing every day with competitors across the US, so whether it's other distributors, other manufacturers, we have to compete every day. So we continue to see competition. I think there's things that make us substantially different, which has enabled us to provide a great value to our customer and a great service for our customer. And I think that's been one thing that's created differentiation for us.

All right, thanks.

Thank you. Our next question comes from the line of Steven Valiquette from Barclays. Please go ahead.

Great, thanks. Good afternoon, everyone. Let me offer my congrats on the results as well. So I guess as we're all trying to piece together the current state of the PPE market, there seems to be some mixed data points in the marketplace regarding PPE, where some healthcare providers are talking about prices coming down, some distributors are actually taking inventory write downs because of this. But others are still talking about overall prevalence of imbalances in PPE prices staying pretty elevated. So I guess I'm curious, just within overall PPE are able to discuss just maybe any notable private areas where maybe supply demand imbalance has come down a little bit. And the other areas where they're now perhaps you're seeing a new shortages that are occurring only recently, where prices are still going up? That sort of keeps the overall PPE basket staying in this state of imbalance that you're talking about? Any color on that would be helpful. Thanks.

Sure. I think it's a couple of part question. So let me try to take the different parts. So I think that in healthcare, what we've seen in the areas that we service, which is primarily acute care, the home healthcare, some of the ambulatory surgery centers. More on a broader sense, we really haven't seen a slowdown in demand from us, from our customers to us. We talk a little about pricing. We have seen market or spot buys, I'll call them related to N95s come down. And I say that because there was spot buys out there in the early summer that were five, six, seven times our sale price. At times we've even seen them higher than 10 times our historical price. So that goes back to my comment earlier, as we're built as a business to be able to produce, sell and be profitable at pre-pandemic pricing levels. So while others have said they've seen pricing come down, take N95s, I think that's a good example, where pre-pandemic it was 10 plus times the –during the height of the pandemic, and even in through the summer and into the early fall, we were still seeing prices at 10x, spot by prices at 10x of our historical market price. So if it has come down it's still substantially above those legacy prices, I would say. So that's where you may be hearing that and that's where that disconnect may be. And then as I answered early part, I think it depends on what segment of the broad healthcare market you talked about. There may be some getting close to equilibrium, potentially in physician's office or other spaces. We haven't seen that in the broad acute care as well as in the government that are still trying to buy for usage as well as buy for stockpile or safety stock.

Okay, got it.

I think. Hopefully that helps.

Yeah, definitely. One other quick follow up here, just a question on the equity offerings since this is your first public appearance since you announced that deal about a month ago. Just curious if you can maybe just give us a little more color on how you chose the size of that offering relative to the amount of debt on the balance sheet, et cetera. Just curious to hear more about that, as you were thinking about the size of deal you wanted to do. Thanks.

Sure. I'll let Andy to start off and address it.

Yeah. Steve, happy to address that. So as you recall, probably, in the June timeframe, we put up a $300 million equity shelf, just in preparation, knowing that we had plans to strengthen the balance sheet and wanted to keep our options open. And when the decision was made to go forward with the equity offering, the initial sizing of that was about $150 million, which based on our market capitalization and trading volumes and whatnot that seemed like an appropriate size. But as we went in and launched the equity offering, there was just a great response. And we were multiple times oversubscribed. And as a result, we made a game time decision to not only upsize that 150, but to also exercise the green shoe, so worked out very nice to raise $200 million gross and 190 million net out of that transaction.

Okay, got it. Okay. Thank you.

Thank you. Our next question comes from the line of Robert Jones from Goldman Sachs. Please go ahead.

Great. Yeah. Thanks for the questions. And then just to go back to the pricing comment Ed, I think there's been a lot of focus there. And you mentioned that in some cases spot pricing can still be quite elevated relative to the pre-pandemic levels. I'm just curious, what do you think that means for OMI as you think about the pricing dynamics across the PPE portfolio going forward? I think there's a view that as some of these imbalances normalize naturally pricing would come down, but it sounds like you might actually have some headroom around pricing. So just curious if you can maybe help us level set on how you're thinking about pricing across the PPE portfolio, as you look out to not just next quarter, but next year.

Yeah, I think probably the way to describe our approaches we wanted to treat our customers fairly. We wanted to make sure that we weren't going to –we were not going to really adjust our pricing based on spot market pricing, we were going to adjust our pricing and provide product pricing as long as we possibly could at historical pricing. We were going to continue to provide - because of the importance of serving our customer in the relationship. So that's what makes us, I think, different also. I think the other thing that makes us different is the fact that you take masks, the material for those masks a good portion of that is made in Lexington, North Carolina, in our factories with our machinery. So we also have some level of control over the raw material also. And so all of those factors together is why we think about this going into 2021, and even into the future we've continued to have disciplined in pricing and didn't necessarily look at spot markets of how much can you get versus treating our customers fairly.

No, that that's helpful. I guess, maybe just looking out to next year, I know you're not giving official '21 guidance other than the double digit EPS growth. Anything you'd be willing to share just as far as how you're thinking about the cadence of that EPS growth as we think about next year? Obviously, this year, for obvious reasons, it's been a bit uneven. Just curious how you're seeing '21 set up as far as EAPS across the four quarters?

So I'll let Andy maybe cover a little bit just upfront and then I'll ask the comments.

Yeah, I think there's a couple of factors that - as you think about how we would move across 2021. And I think first of all, is this general seasonality of the business. Historically, the first quarter has been the softest. Just look back to our results in 2021, even 2019. You see that seasonal softness. And then historically, the fourth quarter has been the strongest quarter in terms of seasonality as you've got flu as well as potential end of year elective procedures. Of course, that may not apply to this year, but 2021 certainly. And I think the other thing to take into consideration is us entering 2021 much stronger in terms of our PPE production capacity, stronger than where we were at the comparable quarter in 2020. And then I would say the constant Q2 of 2021 assuming a non-repeat of the shutdown that we saw in Q2. So I think those are some of the main drivers of what you can expect in terms of earnings cadence next year.

Okay, great. Appreciate that. Thank you.

Thank you. I show our next question comes from the line of Michael Minchak from JP Morgan. Please go ahead.

Great. Thanks for taking the questions and congratulations on the results. Maybe just following up on a couple of the previous questions that relates to the debt paid down. So using the proceeds from the equity offering and what you've set aside from Movianto, leverage will be done substantially versus the beginning of the year. Just wondering if you talk about the sort of your longer-term targets there in terms of leverage? When do you expect to get there and then maybe discuss your priorities for capital allocation once you do get to that target leverage ratio?

Yeah, absolutely, Mike so happy to take that. This is Andy. Yeah. So as I mentioned, at the end of Q3, we were at about $1.3 billion in debt. And post equity offering again, that's not a Q3 event, that's really a Q4 event. But the net proceeds from the equity plus what we've had left over from the Movianto sale on operating profit, that's another 325 million or so as of the first week, not including any additional operating earnings that we may generate in the fourth quarter, right. So we've certainly got well in excess of 300 million to apply towards debt reduction. In terms of looking longer term what is that target leverage ratio or range? I would say that three to four times leverage would be a good range for us. I would prefer to be in the lower end of that range. And I certainly think that's achievable given the debt paid down and the increased earnings prospects. And then I guess the last part of your question is capital allocation. And I think that we've got a very robust process to look at capital allocation. And that will go towards investments in the business to grow - to develop opportunities for long-term profitable growth. And we'll evaluate whether there's additional debt paid down opportunities at that point.

Mike, this is Ed. I'll add one thing, one additional thing and that is, as we think about debt pay down, we are making sure that we are investing for the long-term profitable growth. We are investing also to continue to service our customers. And I know, the previous question was asked a little about you looking into 2021. And this actually ties to that, and in the fact that in the fourth quarter, we are going to continue to do our year-end inventory buys to make sure we have the proper level of inventory. So that way, when we start out in 2021, we have what the products necessary to serve our customers. So we're going to invest and use some of the cash in Q4 to pre-invest in inventory outside of PPE to make sure that when elective procedures continue to increase and as customer demands come out of - if it comes out of the gate fast in 2021, we are well positioned to service them.

Got it that's really helpful. And maybe just I'll wrap up with one more quick one here with potential COVID-19 vaccines coming to market. I know the cold chain vaccine distribution is not really an area where everyone's mind dissipates. But do you see any potential opportunity to benefit in other areas whether the incremental sales of ancillary products or PP&E?

Yeah, like I said, I mean, there's call it 350 million people in the US, if it's going to be a dual dose treatment. It'd be a lot of gloves, a lot of mask and a lot of other PPE that's going to be needed for those - for the vaccines. So while we don't do cold storage, I think there are - there's going to be a tremendous demand for ancillary products above what's currently being used today.

Got it, appreciate the color.

Thank you. This concludes our Q&A session for today. At this time, I'd like to turn the call back over to Mr. Ed Pesicka, President and CEO for closing remarks.

Thank you. Well, thank you everyone for joining us on the call. And I'm extremely pleased of the strong third quarter we had. None of that could have been accomplished without our teammates focusing on our mission to enable our customers, so that way they can advance healthcare. And I think it's clear that we have strong momentum, the expectations will continue to act going forward and I look forward to talking to everyone at the end of the next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.