Accendra Health Inc/Va/ Q1 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Owens & Minor First Quarter 2021 Earnings Conference Call. Operator instructions were given. I would now like to hand the conference over to your first speaker today, Chandrika Nigam, Director, Investor Relations. Ms. Nigam, you may begin.

Thank you, operator. Hello, everyone, and welcome to Owens & Minor's first quarter 2021 earnings call. Our comments on the call will be focused on financial results for the first quarter of 2021, our ongoing response to the COVID-19 pandemic and our outlook for 2021, all of which are included in today’s press release. I would also like to call your attention to supplemental slides related to our 2021 outlook posted on our website in the Investor Relations section. Please note that certain statements made on this call are forward-looking statements, which are subject to risks and uncertainties. These forward-looking statements are intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today other than statements of historical facts are forward-looking statements and include statements regarding our anticipated financial and operational performance. Forward-looking statements made on this call represent management’s current expectations and are based on 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 the Risk Factors section of its Annual Report on Form 10-K and quarterly reports on Form 10-Q. Except as guided by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements. Additionally, in our discussion today, we will reference certain non-GAAP financial measures and information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release and our Annual Report on Form 10-K. Today, I am joined by Ed Pesicka, our President and Chief Executive Officer, and Andy Long, our Executive Vice President and Chief Financial Officer. I would now like to turn the call over to Ed, who will start things off. Ed?

Thank you, Chandrika. Good morning, everyone. I appreciate you taking the time to join us on the call today. As I reflect back on the call from a year ago, we were still unsure of what the COVID-19 pandemic had in store for us. But here we are today continuing to battle the impact of COVID-19. At Owens & Minor, we are incredibly proud of the small role that we have played and that we will continue to play in this battle. It is our hope that it will soon be behind us so that we can serve our customers beyond their pandemic needs. However, in the meantime, I would again like to thank all the Owens & Minor teammates, along with all the frontline workers for their dedication, sacrifice and commitment to winning this battle. From a business perspective, the Owens & Minor team certainly stepped up in 2020. I am also very pleased with our continuation of the momentum and the utilization of our solid foundation built in 2020, which has enabled us to deliver a strong start to 2021. This strong start includes a record first quarter, along with our raised guidance for the full year. And while it may be some time until we return to a more normal earnings pattern, it should be clear that we deliver on what we say we are going to do. In fact, delivering on our commitments is ingrained in our values and core to everything we do, whether working with customers, suppliers, teammates or shareholders. And we have the Owens & Minor business blueprint as the foundation to continue to perform at the highest level and sustained success. The blueprint consists of our culture, our business discipline and our investments, all of which are designed to provide long-term profitable growth. The investments in the business, our constant drive for operational excellence and our customer-centric culture continues to pay off. And as I have said in the past, we will focus on the long-term. You should expect a regular cadence of the following: infrastructure investments across all business lines to stay ahead of the customer requirements and the nonstop pursuit of operational excellence with the expectations that we get better every day. Although it’s still early in the year, we are well underway with reinvesting in the business. Here are just a few examples. One, we are developing a broader product portfolio and leveraging our manufacturing strength and brand equity. Two, we are expanding into new verticals to sell more products into different end markets. Three, we are selling across our businesses as one Owens & Minor. Four, we have begun to expand our own manufacturing capability for nitrile gloves in our existing factory allowing us to have greater control and improved cost structure and, as a result, relying less on external manufacturing partners. Fifth, we continue to invest in technology like QSight and myOM to ensure our offerings are among the best. Our technologies provide our customers with important data that is usable, timely and reliable, while assisting our customers in managing their supply chain. And finally, we are also investing to provide customers with the best blend of both technology and touch across our distribution network. We do this so that we are able to meet our customers’ particular needs with the ability to be flexible, while scaling quickly rather than forcing them into a cookie-cutter and unscalable solution. We will be sharing more examples throughout the year, but again we are committed to reinvesting in the business for long-term profitable growth. Now, let me dive a bit into the first quarter. During the fourth quarter earnings call, we told you that the momentum of 2020 would carry into 2021 and the year would begin much like 2020 ended, and that is certainly playing out. It is great to see the strong start with the first quarter better than the prior year fourth quarter, which is rare. However, the strong first quarter is a result of all of our businesses continuing to operate at a very high level of efficiency. Starting with our Global Products segment, we continue to optimize our production to meet the ongoing elevated demand for PPE. This performance translated into very strong operating income and our Global Products business continues to hit on all cylinders. And within our Global Solutions segment, the medical distribution again shows operational excellence as we continue to provide best-in-class service and demonstrate the resilience that had been missing in recent years. With the outlook for elective procedures improving and our stable customer base, this business is expected to continue to improve. And once again, our Byram patient direct business continues to grow nicely as a result of strong operational execution, combined with growth investments into e-commerce and portfolio expansion. We continue to be excited due to this business being very well positioned and an extremely attractive part of healthcare. In addition to the operations, it’s important to note that we ended the quarter with a balance sheet that we are proud of and one that provides us flexibility to invest and grow. In the first quarter, we paid off another $44 million in debt, reducing our debt to below $1 billion, the lowest level since 2018. Our leverage is comfortably below 3x and our credit profile has significantly improved, which led to the recapitalization during the first quarter that gives us a financial platform for growth. Now, turning to the rest of the year, focusing on several key factors, including elective procedures, PPE demand, opportunity pipeline and expectations of our Byram patient direct business. Related to elective procedures, we had good line of sight a few months out and continue to believe elective procedures will gain traction towards pre-pandemic levels. This expectation is consistent with our customers’ outlook, but the timing and the extent of the return to normalcy remains less clear. However, as a data point, elective procedure activity continued to increase throughout the first quarter, with an acceleration in March, and we see this momentum continuing into Q2. Next, we continue to believe PPE demand will work its way back towards a new normal and pricing will moderate as the year goes on. Although today, demand remains strong. We still believe ultimately the long-term demand for PPE products will be below the peak levels, but well above the pre-pandemic levels. Also, we remain very engaged with government and industry to address the future of PPE manufacturing and supply. Our largely North American owned and operated manufacturing resources and capability will continue to be a distinct advantage for us. As we think about our medical distribution business, we like how we are positioned. Our pipeline of opportunity has never been larger and I regularly witness how well our value and breadth of offering resonates with current and prospective customers. And finally, I couldn’t be happier with the recent performance and outlook for our patient direct business. Within this faster-growing part of healthcare, our outlook for new patient capture, recurring revenue and stellar management of the reimbursement cycle will lead to another good year. The strong start to the year as a result of our strategy and operational execution resulted in a record first quarter. The continuation of our strategy and execution has allowed us to provide a new guidance range for adjusted earnings per share of $3.75 to $4.25 and an annual adjusted EBITDA range of $450 million to $500 million. As I have talked about before, everything we do is based on the Owens & Minor business blueprint focused on our culture, operational excellence based on the Owens & Minor business system, and strategic investment. This enables us to best serve and provide value for many years to come to all of our stakeholders, including customers, teammates, suppliers and shareholders. We will be shedding more light on all of this at our Investor Day later this month and I believe you will see why we are so excited about our future. Thank you. And now, I will turn the call over to Andy for a discussion of our financial results. Andy?

Thank you, Ed, and good morning everyone. Today, I will review our first quarter financial results and the key drivers for our quarterly performance and then I will discuss our expectations and assumptions for the rest of 2021. We are pleased to report a strong first quarter, with good growth in revenue and earnings per share. Earlier today, we announced our revised full year adjusted net income guidance, which has been increased to $3.75 to $4.25 per share and our full year adjusted EBITDA projection of $450 million to $500 million based on our current outlook for the remainder of the year. I will elaborate on all of these in my remarks today. Beginning with the top line, revenue for the first quarter was $2.3 billion compared to $2.1 billion for the prior year. This represents 10% growth that primarily occurred in our Global Products segment as the momentum that we achieved as we exited Q4 carried into Q1. As we guided last quarter, we have experienced and will continue to see higher nitrile glove acquisition costs relative to last year. And as previously discussed, higher glove costs are being largely passed through, resulting in higher revenue. In Q1, there was a revenue lift of approximately $160 million due to this dynamic. Also, I want to remind you that the bottom line impact is expected to be minimal over time, but in any particular quarter, this could have a positive or negative impact on earnings due to the timing of when price and cost changes hit the P&L. We have raised the expected revenue impact of the pass-through of these cost increases to $700 million to $800 million for the year. Turning to gross margin, the first quarter was 19%, an improvement of 638 basis points over prior year due to strong revenue growth with favorable mix comprised of higher margin sales from the Global Products segment, favorable timing of the pass-through of glove costs as well as improved operating efficiency. Distribution, selling and administrative expense of $293 million in the current quarter was $39 million higher compared to the first quarter of 2020 to support top line growth and to fund ongoing investments across all business lines, net of productivity gains. Interest expense of $14 million in the first quarter was down over 41% or $10 million lower than the same period in the prior year. This improvement was due to continued debt reduction as a result of our disciplined approach to capital deployment, coupled with lower effective interest rates resulting from the improvements in our capital structure. I will elaborate on this later in my remarks. The combination of our strong execution across the business and strength in Global Products, coupled with productivity gains, resulted in adjusted operating income for the quarter of $163 million, a fivefold improvement of $135 million compared to prior year. Adjusted EBITDA for the first quarter was $176 million, which was $135 million or more than 3x higher year-over-year. On a GAAP basis, income from continuing operations for the quarter was $70 million or $0.98 a share. Adjusted net income in the first quarter was $111 million, which yielded adjusted EPS for the quarter of $1.57 and represents an almost forty-fold increase compared to Q1 of last year. The year-over-year foreign currency impact in the quarter was favorable by $0.06. Additionally, it’s important to remember that there were 10.4 million more shares in the first quarter 2021 EPS calculation than in the prior year as a result of the equity offering from the fourth quarter. Now I’ll review results by segment for the first quarter. Global Solutions revenue was essentially flat year-over-year at $1.85 billion. The segment saw continued top line growth in our patient direct business, along with higher sales of PPE through medical distribution. Revenue was negatively impacted year-over-year as a result of having one fewer selling day in the quarter. Additionally, volume associated with elective procedures began to improve as we exited the quarter. However, it was still slightly behind where we were in Q1 of last year. Global Solutions operating income was $8.9 million, an increase of 15.6% compared to $7.7 million in the first quarter of last year as a result of productivity and efficiency gains on the back of our largely stable cost base in our medical distribution business. Turning to our Global Products segment, net revenue in the first quarter was $659 million compared to $391 million last year, an increase of 68.4%, which was driven by significant growth in PPE, including the previously discussed impact of higher glove prices, slightly offset by the impact of lower elective procedures. Operating income for the Global Products segment was $164 million, nearly an eightfold increase versus $19 million in the prior year’s first quarter. The increase is attributable to higher revenue resulting from PPE capacity expansion, favorable timing of cost pass-through on gloves, productivity initiatives, favorable product mix, improved fixed cost leverage and operating expense discipline. Foreign currency impact was favorable on a year-over-year basis by $5 million. Now let’s turn our focus to cash flow, the balance sheet and capital structure. In the quarter, we generated $25 million of operating cash flow, which was $68 million lower than the same period last year, primarily due to higher levels of working capital to support growth in the business. During the quarter, we achieved another milestone in our financial strategy by successfully issuing $500 million of senior unsecured notes due in 2029 while entering into a new 5-year $300 million revolving credit facility and amending our 3-year $450 million accounts receivable securitization facility. These actions provide additional liquidity and lower cost financing that enhances our operational and strategic flexibility as well as extending our debt maturity profile with no maturities until 2024. Our continued focus on enhancing our capital structure has resulted in significantly improved credit ratings. We were upgraded by all three credit agencies during the first quarter and expect further upgrades during the year. Accordingly, total debt at the end of the first quarter was $982 million, a reduction of $44 million versus year end. I’d like to note that despite the working capital requirements associated with top line growth, we were able to lower the debt load and maintain our leverage profile well below 3x EBITDA. We are very well positioned financially to execute our growth strategy by continuing to invest across our businesses. Turning to guidance for the year, earlier this morning, we revised our guidance for 2021 upwards as our visibility into the third quarter improved. Our revised adjusted EPS guidance is now in the range of $3.75 to $4.25 per share, and adjusted EBITDA guidance is in the range of $450 million to $500 million. Let me walk you through the assumptions that went into developing our guidance. We now expect revenue to be in the range of $9.6 billion to $10 billion, which will be driven by several factors. We now have improved visibility of the PPE market into the third quarter. While the timing is uncertain, we continue to expect post-pandemic PPE volume to normalize at levels lower than what we experienced during the peak yet higher than pre-pandemic levels due to post-COVID changes in regulations, practices and protocols in the health care industry. Our recently installed PPE capacity is expected to achieve full utilization during the first half of the year, and our recently announced glove manufacturing capacity expansion should begin contributing to our financial results in early Q1 of next year. Continued strength in Byram, our patient direct business as a result of strong growth and the benefits of our investments to improve our B2B and B2C offerings, we continued to expect elective procedures to return to pre-pandemic levels during the second half of the year, and should pent-up demand for electives exceed pre-pandemic levels, there could be upside to our forecast. We expect further cost increases on the portion of our gloves that we source externally and have increased our expected pass-through of these costs in the range of $700 million to $800 million for the full year. Gross margin rate is now expected to be in the range of 15.4% to 15.7% in 2021. Fluidity and the timing of glove cost pass-through is expected to be a headwind on EPS in the second half. Sudden unexpected declines in the market price of gloves could result in downside to our adjusted EPS projection. Interest expense is expected to be between $45 million to $50 million for the year reflecting lower debt levels and the benefit from our recent debt refinancing. EPS guidance is based on 71 million shares outstanding. Starting this quarter, we will be providing guidance on adjusted EBITDA, and for the year, we expect it to be in the range of $450 million to $500 million. Finally, I would like to remind you about the calendarization of earnings in 2021. As previously guided, we don’t expect to see the typical seasonal pattern of earnings. Specifically, we expect adjusted EPS to be weighted towards the first half of the year. Please note that these key modeling assumptions for full year 2021 have been summarized on supplemental slides filed with the SEC on Form 8-K earlier today and have been posted to the Investor Relations section of our website. Over the last several quarters, we have demonstrated our ability to consistently deliver improved financial results and enhance our financial profile despite the challenging business environment. We continue to make progress on our strategic goals, and we are well positioned for growth in the future. Thank you. And with that, I will turn the call back over to the operator to begin the Q&A session.

Operator instructions were given. I show our first question comes from the line of Michael Cherny from Bank of America. Please go ahead.

Good morning and congratulations on another very solid quarter. I want to dive in on the commentary you have on PPE and as you think about the future. Many of the questions you and others are trying to answer are what does Owens & Minor look like in a post-COVID world, whatever that means? As you think about the conversations you are having with both customers and prospects now, what are they telling you in terms of how they foresee PPE being used — whether it’s gloves, masks, gowns or other products — in this future state that gets you comfortable with demand remaining well above pre-COVID levels?

Mike, thanks for the question and for joining today. We spend a significant amount of time listening to our customers. A couple of things we are hearing: they have proven during this pandemic that high utilization of PPE has drastically reduced infection spread, which is critical in hospitals. They also believe that the healthcare protocols they put in place have been in place now for a year, and they expect those protocols and the daily usage of PPE to remain significantly above where it was pre-pandemic. The number of PPE changes continues to be at a high level. Some customers said that while the shortage lasted, they were reusing certain aspects of PPE; now they are moving away from reuse and returning to more disposable products because they have the ability to get more of that. That’s why we believe demand will be drastically higher than pre-pandemic. It will be slightly lower than the peak, and we believe that because stockpiling is part of the reason why it was at the peak. But we still see customers continuing to build stockpiles or we are building stockpile for them or we are creating idle capacity in our production lines, so that should there be another pandemic, we have the ability to provide products. Beyond healthcare, there are opportunities for us in non-healthcare industries — retail, international and consumer markets. There will be opportunities once we get our customers completely satisfied with their PPE over the long-term. The combination of changed protocols, higher daily usage of PPE, reduced reuse and opportunities to expand into other markets is why we expect PPE demand to remain well above pre-pandemic levels.

And just along those lines, as you think about your Global Products business in particular, especially given the strong financial position the company is in at this point in time, how do you think about building out that portfolio? Given the window you have had into your clients’ infrastructure during COVID, how do you think about where the portfolio sits right now versus other opportunities that you could pursue to drive incremental value over time?

Michael, that’s exactly right and it’s a major focus for us. We will talk a lot about that on May 26 at our virtual Investor Day. Broadly, expanding the product portfolio using our brands — Halyard, MediChoice and others — will be a key driver to ignite growth. The ability to broaden that product portfolio with our brands will drive significant growth. Chris Lowery, who runs that business, will go into much greater detail at Investor Day. Please plan on joining us May 26.

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

Hi, guys. Thanks for taking the question and congrats on the continued momentum here. Product margins continued to come in much better than we and others were anticipating. It’s up around 750 basis points sequentially. You mentioned some drivers of that outperformance this quarter, but could you put a finer point on the particulars? How much of that margin outperformance was due to the glove price-cost mismatch this quarter? As we think about the rest of the year, should we think about run rate closer to where you ended last year in product margins?

Good morning, Daniel. Yes, a very strong quarter in terms of gross margin and bottom line performance. Sequentially, gross margins were up over 200 basis points from Q4. A lot of that is the continuation of momentum coming out of Q4 into Q1 as we approach full utilization of prior investments in PPE capacity expansion. We continue to get benefits from volume, fixed cost leverage and efficiencies in the quarter in the products business. Another dynamic is this is the first quarter where we’ve started to see the impact of the change in glove costs that are being passed through to us from manufacturers where we purchase gloves that we don’t manufacture internally. The dynamic is that market price changes can take effect quicker than cost changes because cost changes take time due to delivery times overseas and inventory. So there is a delayed effect. Those are the two key contributing factors to the sequential gross margin improvement. For the long-term, please refer to our full year guidance on gross margin in the mid-15% range, which reflects that the timing benefit of glove cost pass-through will even out in the second half. Sudden unexpected declines in glove market prices could result in downside to EPS in that period.

Daniel, thanks for joining as well. Andy’s comments are spot on. You have the timing on gloves balancing out through the year, and we have our margin projections for the full year. The other driver is continued fixed cost leverage and operating efficiencies. We leverage our Owens & Minor business system and continuous improvement every single day. With the additional products coming off our lines and increased volume, we continue to learn how to be more productive and efficient in PPE manufacturing, which also contributed to the first quarter performance.

Got it. Okay. And then on your capital deployment priorities, you mentioned that you are investing in the business in working capital and in inventory. Curious on your philosophy of continued debt pay-down versus share repurchase versus a dividend increase for this year and next. How are you thinking about those capital deployment priorities outside of investment in the business?

I want to cover investment in the business first. We are not going to be caught flat-footed as the market adjusts. We invested in operations and inventory because we anticipated elective procedures starting to ramp back up, which they did in March. We prioritized inventory and operational expertise to deliver on that, building customer trust and long-term profitable growth. On capital deployment overall, we will be disciplined and focus on opportunities to invest for long-term profitable growth within the business. Regarding dividends, we see tremendous opportunities to invest that we believe can provide long-term profitable growth at attractive returns, and that will be our primary focus. Andy can add a few comments on debt and leverage going forward.

Yes, absolutely. Our capital deployment process is disciplined. Priorities are reinvesting in the business, and that manifests itself on the P&L and in capital expenditures. We did increase our guidance on capital expenditures for the year. We plan to expand investments on both fronts. Looking long-term, the cash flow the business generates will fund those investments and still leave cash flow to continue improving the balance sheet. We are targeting to be in the 2x to 3x leverage range, and being at the lower end of that range is realistic in the short-term and long-term.

Got it. Thanks guys.

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

Thank you and good morning. Congrats on a good quarter. I want to better understand the Global Solutions revenue trends in the quarter coming in flat year-over-year, but down 5% sequentially. Can you provide some of the factors that drove the sequential decline in revenues in that business? Excluding the impact of glove cost pass-through, do you expect that business to sequentially grow for the rest of 2021?

Jailendra, thanks for joining. That business is really made up of two items: medical distribution and our Byram patient direct business. Both were negatively affected by one fewer billing day in Q1 this year versus Q1 last year, which reduces revenue. We expect the business to continue to grow. We have net new wins in medical distribution that we began to implement at the end of Q1. Elective procedures started to ramp in March and we expect that to continue through the year. Our pipeline of opportunity in medical distribution is greater than it has been in my two years here, and new wins typically take six to nine months to implement, so benefits from those would be later in the year. In Byram, we continue to grow existing customer relationships and broaden what we do for them, entering into new relationships in chronic conditions we support. We also invested in commercial resources in under-penetrated U.S. areas to capture share. Those are reasons we expect the segment to strengthen as the year progresses. The Q1 result was influenced by one fewer billing day year-over-year.

Can you be more specific about the Byram patient direct business? What are the key drivers of outperformance there and how much of that is sustainable? What initiatives are you focused on to further drive growth in that business?

A few specifics: we analyzed our commercial organization across the U.S. and found pockets where we were under-penetrated, and we invested in new commercial resources in those areas to capture share. We also brought on a new line in an existing chronic category which expanded product offerings and is driving significant growth. Our presence in diabetes, where we are strong, is one of the fastest-growing areas of healthcare and is driving growth. More broadly, the pandemic has accelerated home health adoption, which we expect to continue to grow rapidly. We can impact about 85% of insured Americans through our contracts and relationships, so as home health grows, we have the ability to grow as well.

One last quick question: with the sequential decline in EPS from the first half to the second half this year, which you indicated and the guidance implies, are you still comfortable with double-digit EPS growth in 2022? Double-digit growth next year would imply much higher growth compared to the second-half run rate. Any color?

We haven’t disclosed 2022 guidance yet; that will happen later in the year.

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

Good morning. Thanks for taking the question. Ed, just to go back to the rationale behind the guidance raise, it sounded like improved line of sight was part of that. Could you share more detail regarding how you’re expecting things to trend relative to the results you posted this quarter? Are we at peak levels today as you think about PPE for the balance of 2021?

I would say right now, excluding gloves, we are probably at peak levels. Our machines are running; we have strong demand, and we are one of the few companies that manufacture at scale across the entire PPE suite. That matters because a customer can come to one place to get everything they need, including N95s, rather than coordinating with many smaller manufacturers. That capability supports strong, extended demand. The one area where constraints remain is glove manufacturing. We are investing in expanding our glove capacity at our factory in Thailand and improving employee workspace, setting that up for growth in our own glove manufacturing. Gloves are still constrained relative to other PPE categories, so they are a different dynamic.

That’s fair. Looking forward to the Investor Day. Thanks, Ed.

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

Thanks. Good morning. I was hoping you could hit quickly on cash flow influences in the quarter and how you see cash flow phasing through the year? I have a couple of follow-ups. Thanks.

Good morning, Eric. In Q1 we generated about $25 million of operating cash flow, lower than last year primarily due to working capital investment. With growth in the business, we’re continuing to invest in working capital. Accounts receivable is performing as expected with days in line and a good aging profile. Inventory is up and consuming cash; that’s a purposeful investment so we can maintain service levels, put inventory in advance of new customer wins and be ready as elective procedures tick up. One dynamic affecting working capital is the impact of glove manufacturers in Asia: we’ve seen accelerated payments in some cases to glove manufacturers, while cycle times to get product into the U.S. have been delayed by port backups, causing a delay. The combination has led to a slightly longer cash cycle and a drain on working capital. Over time, we expect this to even out. Separately, we did increase our capital expenditure guidance for the year; capex is tail-end-loaded. Our guidance is $80 million to $90 million for the year and we spent less than $6 million or $7 million in Q1, so expect capex to be a greater cash use in the second half.

That’s helpful. One more: can you quantify the profit timing impact on nitrile gloves in the quarter? I know it’s expected to be net neutral over time, but it would help to understand the actual influence in Q1 in dollar terms or percent of operating margin increase in Global Products.

A couple of data points: in the quarter, there was a top-line impact of approximately $160 million and we’ve increased our expected full-year pass-through to $700 million to $800 million. We haven’t disclosed specific product line margin drivers, but another way to see it is look at the sequential profit change in the Global Products segment from Q4 to Q1 — a 75% pull-through sequentially — which was higher than normal and largely attributable to the timing dynamic we described. We expect that tailwind to become a headwind in the second half as cost catches up with the price increases and over the long term we expect these effects to be minimal overall.

And even with that balancing through the year, we remain extremely comfortable and confident in the updated guidance range we provided.

Thanks very much, guys. I appreciate it.

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

Thanks for taking my question. I wanted to talk about Solutions margin. Was there anything one-time in nature that affected margin this year other than volume? How should we think about the progression — should we expect similar year-over-year improvement on a quarter-by-quarter basis? Also, any color on modeling operating margin for that business going forward would help.

Kevin, looking at Global Solutions margins in Q1 sequentially from Q4, you saw a volume drop Q4 to Q1 driven by historical seasonality and a slight easing of pandemic volumes; that impacted margins. There is also seasonality in the patient direct Byram business driven by payer mix in Q1 — more consumer/direct transactions early in the year before deductibles are met, which affects collections and reserves; that mix normalizes as the year progresses. We continue to invest in the business and drive productivity. Longer term, Byram is performing very strongly and driving solid margins, and medical distribution should benefit from fixed cost leverage as volumes increase.

To add, we invest in inventory and working capital and also in operating expense for elective procedure ramp and for new wins. We sometimes put expense in advance of implementation to ensure flawless execution. In Q1 we did that for several implementations and the execution went very well — customers saw product show up on time and accurately picked. We make those investments in advance and did some of that in Q1.

That’s great. Quick follow-up on glove pull-through: if the pull-through was 75% this quarter, for the rest of the year does it normalize to breakeven, still positive, or is there a clear way to think about it? And longer term, would glove margins be similar to other PPE categories or higher or lower?

We haven’t specifically disclosed margin profiles for individual PPE categories. The pull-through sequentially Q4 to Q1 in Global Products was higher than normal, largely due to the timing dynamic. Look to the full year gross margin guidance, recognizing the biggest fluctuation will likely be in Global Products versus Global Solutions. Over long periods, these timing dynamics should even out.

And in light of that balancing, we’re still very comfortable with our guidance range.

Appreciate it. Thanks so much, guys.

Thank you. I show our last question comes from the line of Michael Minchak from JPMorgan. Please go ahead.

Good morning and thanks. Putting aside the unique dynamics for exam gloves, can you talk about current pricing trends in the spot market for other PPE categories? Are prices still elevated relative to historical levels, and once supply-demand normalizes, where could spot pricing go relative to pre-pandemic levels?

We see spot pricing as fluid. Spot prices have come down from the pandemic peak but are still above pre-pandemic levels in many categories. Contractual pricing with customers is generally below spot, and we honor contract pricing rather than adjusting to spot. Gloves remain an outlier with more volatility. We anticipate prices to continue to adjust as supply and demand normalize, but we believe PPE usage and demand will remain higher than before the pandemic. The business was profitable at pre-pandemic pricing and should remain profitable post-pandemic with higher demand allowing for throughput and manufacturing leverage in our facilities.

Got it. That’s helpful. Quick question on GPO contract renewals: how do you see those playing out and how does that impact your results relative to past renewals?

We recently renewed Vizient for two years. We are continuing to work with other key GPOs, including HealthTrust and Premier. We have strong relationships and during the pandemic we strengthened those relationships by supporting members. We expect to continue working with them moving forward.

Got it. Thanks for the comments.

Thank you. That concludes our Q&A session. At this time, I’ll turn the call back over to Mr. Ed Pesicka, President and CEO, for closing remarks.

Let me start by thanking everyone for joining us on the call today. I also want to thank all the Owens & Minor teammates who I have had the privilege to work with side-by-side over the last two years and the amount of effort they have put in to support the fight against COVID-19. I would be remiss not to thank the frontline workers who have done everything they possibly could over the last 14 to 15 months in this battle. I’m pleased with how Q1 started and the work we’ve done, but we still have a lot of year left and a lot of hard work ahead, which we expect to continue to be successful at as we move forward. We hope to see everyone virtually on May 26, when we will do a deeper dive into Owens & Minor and how we ignite growth into the future. So thank you.

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