Accendra Health Inc/Va/ Q3 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Owens & Minor Third Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. Operator instructions: Please be advised that today's conference is being recorded. Operator instructions: I would now like to hand the conference over to your first speaker today, Jackie Marcus, Investor Relations. Ms. Marcus, you may begin.

Thank you, Operator. Hello, everyone and welcome to Owens & Minor third quarter 2021 earnings call. Our comments on the call will be focused on financial results for the third quarter of 2021 and our outlook for 2021, both of which are included in today's press release. I'd also like to call your attention to supplemental slides related to our 2021 outlook posted on our website, in the Investor Relations section. 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 the 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 the 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 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, Jackie. Good morning, everyone, and thank you for taking the time to join us on the call today. I'm extremely excited to be here today to discuss our third quarter. And I'm pleased that, in the third quarter, we continued on our path to a record-setting year. Our performance reflects the results of consistently providing high-quality service and value to our customers, while strengthening the financial position of the company. As I reflect on the key drivers of the third quarter, as well as on our outlook, it is clear that our ability to deliver strong revenue growth across the entire business, combined with our focus on continuous improvement has enabled us to effectively navigate the rapidly changing markets that includes the COVID-19 pandemic, global supply chain crisis, inflation, and an acceleration in the shift of healthcare to the home or, as we talk about it internally, our new norm. I'll start with our Global Solutions segment, which I'm pleased to note delivered significant top-line growth, while nearly doubling operating margin year-over-year. As I continue to dig a little deeper into this segment, and more specifically into our medical distribution business, it is great to see that the hard work we did to enhance our service levels and support our customers at the highest level during the pandemic is paying off. Our competitive position has clearly improved, and we continue to win new customers, and consistently renew existing customer agreements. It is becoming clear that customers value our ability to provide scalable and flexible solutions due to our balance between technology and touch as we operate in these rapidly changing market conditions. Our medical distribution showed marked improvement, leading to higher revenue and meaningful operating income improvement. The business line is really starting to hit on all cylinders, and this is being recognized by customers as we solidify meaningful wins again this quarter. And finally in our Global Solutions segment, our Patient Direct business, already a leader in the space, once again posted growth rates ahead of the market. Patient Direct remained rock solid, and we continue to see strong underlying growth in the home health market as home treatments are becoming increasingly more commonplace. Next, in our Global Products segment, we showed solid growth in total. But I want to focus you on the fact that when you strip out the price increase related to the glove cost pass-through, we delivered 8% volume growth. As we have stated in the past, the strong sales are a result of increased output of our previously added capacity to fulfill continued high PPE utilization due to the adoption of healthcare infection prevention protocols, share gained during the pandemic, and increased elective procedures. In both our segments, it is clear that our customer wins and our strong overall growth have been facilitated by our business blueprint. Our business blueprint is focused on our culture, our continuous improvement base Owens & Minor business system, and our disciplined strategic investments, which ultimately drive an enhanced customer experience, while also improving our financial performance. Our business blueprint continues to pay off, and provides us with the confidence of delivering long-term profitable growth. Moving on to our balance sheet, while Andy will have more to share on this in his remarks, I'm pleased to report that we reduced our net debt by $42 million, down to $921 million, taking our net leverage to 1.7 times. Just to put this into context, the last time our net leverage was this low was Q4 of 2016. Our balance sheet strength gives us the opportunity to make strategic investments that will drive continued long-term profitable growth across our business. Looking ahead, like many businesses, we are monitoring the increasing inflationary environment, and have begun to take steps to mitigate this impact. But as I think to the balance of the year, and into 2022, I'm excited about the many prospects we've had. These prospects include, one, the implementation of our new wins and the still large opportunity pipeline in medical distribution; two, the continued expansion of new and future proprietary products through our existing customers, new wins, and channel expansion; three, the continued strength of our Patient Direct business; four, our disciplined approach to capital deployments; and lastly, our never-ending commitment towards operational excellence and continuous improvements. So, as we look at the third quarter and full-year, 2021 is shaping up largely as we previously indicated. The first half was very strong, and the back half of the year, albeit lower and facing tough comparisons, will still demonstrate that we're operating at a very high level. Andy will elaborate on these in a few minutes. But before I turn the call over to Andy, I'd like to emphasize that the strength of our year-to-date results and our continued execution of our long-term strategy gives us the confidence to narrow our range in 2021 guidance for both adjusted EPS and adjusted EBITDA, as well as reaffirm our previously issued full-year guidance for 2022. As I've said before, it is our focus on our customers, our culture, our business system, and our investments that allow us to build the Owens & Minor of today. Everything we do at Owens & Minor is tied to our mission of serving our customers so that they are empowered to advance healthcare. Thank you. And now, I'll turn the call over to Andy for a discussion of our financial results. Andy?

Thank you, Ed, and good morning, everyone. Today, I'll review our financial results for the third quarter and the key drivers for our performance, and then I'll discuss our expectations and assumptions for the balance of the year. Let's begin with the results for the third quarter, starting with the top line. Revenue for the third quarter was $2.5 billion, compared to $2.2 billion for the prior year. This represents over 14% growth compared to this time last year, with both segments, once again, contributing to the improvement. Our growth in the third quarter was driven by share gains, the ongoing recovery of elective procedures and other strong performance from our Patient Direct business, the pass-through of elevated glove costs and higher usage of PPE. Excluding the pass-through glove costs, our top line growth was 7%. Gross margin in the third quarter was 13.1%, which was lower than the prior year mainly due to three drivers. The timing of our glove cost pass-through was discussed last quarter and increasing inflationary pressures, which were partially offset by positive operating leverage on higher volumes. Distribution, selling and administrative expenses of $262 million were essentially flat compared to the prior year. This was primarily a result of higher variable spending due to volume, inflationary pressures and investments in growth, which were offset by productivity initiatives. The adjusted operating income for the quarter of $79 million and adjusted EBITDA of $92 million were $13 million and $12 million lower respectively than our record-setting third quarter in 2020. Interest expense of $12 million in the third quarter was down 45% or $9 million year-over-year, which was driven by lower debt levels and effective interest rates. The adjusted effective tax rate of 16.3% compared favorably to 13.9% in Q3 of 2020. On a GAAP basis, income from continuing operations for the quarter was $44 million, or $0.58 a share. Adjusted net income for the third quarter was $56 million, which yielded an adjusted EPS for the quarter of $0.74, which was $0.07 lower than Q3 of last year. It's important to note that the average diluted shares outstanding of 76 million were 25% or 15 million higher during the quarter versus Q3 of last year, which resulted in year-over-year reduction of $0.19. The year-over-year foreign currency impact in the quarter was unfavorable by $0.06. Let's turn to our quarterly performance in each of the segments. Global Solutions revenue of $2.02 billion represents $158 million or 8.5% growth over the year ago quarter. The continued growth was largely driven by ongoing improvements in our medical distribution business and continued momentum in our Patient Direct business. Contributing to this growth was the ongoing recovery in volumes associated with elective procedures, which continue to trend at pre-pandemic levels. I am also excited that we saw attractive sequential growth, which includes the contributions noted above as well as recent customer wins. Global Solutions operating income was $20 million, which was $9 million or 86% higher than the prior year, primarily driven by an improvement in our medical distribution business. We experienced higher volumes coupled with productivity and efficiency gains in the quarter, which led to our strong results. In addition, we saw margin expansion year-over-year and sequentially. In our Global Products segment revenue in the third quarter was $679 million compared to $474 million last year, an increase of $205 million, or 43%. Revenue grew by 8% excluding the $170 million impact of passing through higher glove costs. Volume growth was led by higher S&IP usage, including PPE volume as we continued to benefit from our previous investments to expand capacity, meeting the requirements for stockpile fulfillment and the increase in elective procedure volumes. Sequentially, the segment grew in the low single digits, excluding the impact of glove costs pass-through as demand for S&IP products remain strong compared to Q2. Operating income for the Global Products segment was $51 million versus a difficult comp of $90 million in the third quarter of last year. The adverse impact was a result of the timing of glove cost pass-through, higher commodity prices and higher transportation costs, which we were able to partially offset through volume growth and productivity initiatives. As a reminder, we experienced a net benefit to operating income from the timing of glove cost pass-through during the first half of 2021. FX unfavorably impacted operating income by $6 million as compared to the prior year. Turning to our balance sheet and cash flow statements, year-to-date cash flow from operations was $74 million of which $61 million was generated in the third quarter. This result was driven in part due to improved working capital management, such as improved payment terms with glove manufacturers. This performance is in line with our previously communicated expectations. At the end of the third quarter, total net debt was $921 million, a reduction of $330 million compared to last year and down $42 million sequentially. Total net leverage is now at 1.7 times trailing 12 months adjusted EBITDA. Our net leverage is now at the lowest point in nearly five years. I want to emphasize that over the last two years, we've deployed capital to invest in infrastructure, technology, and working capital to support customer service levels, while driving down our leverage profile to below two times adjusted EBITDA. Our enhanced capital structure provides us with operational flexibility, and we're very well positioned to implement our growth strategy. Finally, turning to the outlook, we are narrowing the range of our full-year expectation for adjusted EPS, and adjusted EBITDA in 2021. We now expect adjusted EPS to be in a range of $3.90 to $4.10, and adjusted EBITDA in the range of $475 million to $500 million. Our guidance for adjusted EPS is based on 76 million weighted average shares outstanding. Additionally, we're reaffirming our previously announced guidance for 2022. I'd like to spend a few minutes walking through the rationale for our guidance. And we'd like to point out that these key modeling assumptions for full-year 2021 can be found in supplemental slides that were filed with the SEC on Form 8-K earlier today, and have been posted to the investor relations section of our website. We expect full-year revenue to be in the range of $9.6 billion to $9.8 billion. Key assumptions supporting this include glove cost pass-through in the range of $650 million to $700 million, of which approximately $530 million has been realized year-to-date; elective procedures remaining flat to Q3 at near pre-pandemic levels, and a normal flu season. Note that Q4 will have two fewer selling days than in Q3, and one fewer day than in Q4 of last year, which is the main driver of an expected sequential decline in revenue versus Q3. We expect sequential margin expansion in the business with both segments contributing to this expansion in the fourth quarter. Specifically in Q3, Global Products saw better than expected margins due to the timing of higher glove costs moving from Q3 to Q4. We expect to see the delayed impact of the glove cost pass-through to hit in Q4. Even with this shift, we still expect sequential margin expansion in Q4. This timing issue does not change our outlook for the segment. Finally, regarding the balance sheet and cash flow, we anticipate carrying higher inventory levels throughout the rest of the year to support typical seasonal activity and the onboarding of new customers. This will be partially offset by lower inventory in our Product segment as glove inventory levels continue to decline. We also expect the fourth quarter to have a higher level of CapEx spending compared to earlier in the year as we continue to invest in our business for the long-term profitable growth. In conclusion, I'm delighted with our performance in the third quarter. We were able to show year-over-year and sequential growth in both of our segments after normalizing for glove cost pricing. We've delivered another quarter with margin expansion in our Global Solutions segment. And our team continues to execute superbly in the face of challenging market dynamics. And despite a higher number of shares outstanding and accelerating headwinds due to inflation year-over-year, we've been able to find ways to hold adjusted EPS flat on an FX neutral basis by expanding customer relationships to drive profitable growth while utilizing our business system to become more efficient in how we operate on a daily basis. It's incredibly exciting to see the significant progress we're making against our long-term strategic goals. At this point, I'll turn the call back over to the operator to begin the Q&A session.

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

Hi, good morning. This is Allen in for Mike. You mentioned market share gains and then followed up with talking about new customer wins. Can you talk about why you're winning in the market, and with that 8% growth, can you talk about how much some of these new wins are contributing to top-line growth?

Sure. Good morning, Allen, and thanks for the question. First, historically, I've talked about net new wins. And look, I don't want to get into a report or doing a tally sheet of what we have. But since you're asking, let me go into a little more detail. As I sit here today, I look back in the last several months, we've won between $300 million and $400 million of incremental business. And that's new wins. When you look at that, you ask why. And it's clear from our conversations with customers they like what we're doing; they like our operating model. We've proven that operating model out even in the height of the pandemic. So, they really like what we were able to provide. They like the value we can provide also. When I think about the operating model, what they really are excited about is our ability to be flexible and scale very quickly, as well as the investments we made to have the right level of technology that's out there, balanced with our ability to have the right human touch. If I think about those wins and I share where we are today, it's also now moved on to some larger wins. It's not just small or medium; it's now more medium and large wins to get to those numbers that we're starting to see. And then I'll make two other comments around that. When we win a customer, I've talked in the past; it could take up to three, six, or nine months to implement. We had one of our major wins just recently challenge us and say, "Hey, we want to do this in 45 days." This customer is going to go live within the next week. So, from, call it, 35 to 40 days ago, the customer signed with us, we leveraged our Owens & Minor business system to be able to put together this implementation very fast. The expectation is the implementation will be executed flawlessly. Then the other last thing I'll talk about within the implementation and the new wins, and some of the things that ties us all together, is we talked about our net debt ratio, the 1.7. What that does is it enables us to make the right investments in advance in working capital and inventory to make sure that we can have a flawless execution. So, a lot of great stuff going on in our medical distribution business. I'm extremely excited about where we are from that standpoint. Let me add another comment. A lot of times we get questions about our GPO renewals. I want to note that, just recently, we renewed with Premier for a five-year deal. We reworked that contract where there's opportunity to provide more value for Premier as well as significant more value for Owens & Minor. When Premier looked at it, they liked what they see in our operating model, they like our ability to help serve our joint customers, they like that ability for us to be flexible and scale quickly regardless of the circumstances in the market. If you consider the quickly-changing market we have today, that's critical. That's really because of both the operating and capital investments we made around both the technology and touch. So, Allen, hopefully that helps frame it to answer your question.

Yes, that's really helpful. And then, last quarter, you mentioned that elective procedures were effectively back to pre-pandemic levels, and you saw that continuing for the remainder of the year. Can you just give us an update on what you are seeing there? And what are your early thoughts into 2022 on that?

Yes, so I'll start, and if Andy wants to add more color. The clear answer is, yes, we've absolutely seen elective procedures come back to pre-pandemic levels. If I look at it at a macro across the United States in the third quarter, we did see some spots where there were COVID spikes, where it constricted a little bit. But the reality is, in aggregate, across the U.S., we have seen elective procedures come back to pre-pandemic levels. What we continue to do is make sure that we're prepared in advance with working capital investments, as well as having our teammates ready to quickly adjust if that moves. We see that back to where it was, and there's an expectation that that continues well into 2022.

Yes, and Allen, just to add a little more color there. In our Q3 results, we did see a slight sequential improvement in elective procedures. Not material, but it was a slight improvement, and we are back to where we believe pre-pandemic levels are. Our Q4 forecast assumes that that's going to continue at that level. We don't assume a change up or down. So, should elective procedures spike up in Q4, we would be ready for that, based on our inventory levels, and that would be upside to our forecast. We continue to play that into 2022, maintaining at pre-pandemic levels with those same dynamics; it could provide upside to 2022 as a result.

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

Thank you, and good morning, everyone. Can you flesh out a little bit more on the accelerating inflationary pressure? You called out inflation in terms of the magnitude; where are you seeing that inflationary pressure across your business? And what are you assuming for the remainder of 2021, and as well as next year? I understand that it lightly pressures gross margin, but I'm sure there must be some impact on SG&A too. How do I reconcile that with the sequential decline of $30 million in SG&A expense in the quarter?

Yes, Jailendra, you're absolutely right. Let's just look at inflation in the third quarter first. We saw inflation ramp as the quarter progressed. But I will tell you, our team did an incredible job in the third quarter. We leveraged both productivity and incremental volume and fixed cost leverage to offset or virtually neutralize the impact of inflation in the third quarter. So, the team did a really good job around that. Prospectively, going into the fourth quarter, and frankly when we looked at the full year, we looked at the impact really out of an abundance of caution. We wanted to make sure we focused on that. Had we not seen inflation in the third quarter and the expectation to continue into the fourth quarter, we would have raised our guidance. In the fourth quarter, the expectation is our team knows the levers. We're going to continue to drive productivity. That productivity is both in margin as well as in SG&A. We will continue to pull those productivity levers. We'll also continue to look at volume to help offset that. Volume can drive additional fixed cost leverage. And then lastly, where appropriate, we will look at price as needed and appropriate, from a short-term standpoint, to continue to mitigate the risk of inflation. Prospectively into 2022, the expectation is that that inflation continues into 2022. The positive is we have time between now and 2022 to continue to look at broader-scale ways to drive productivity and further integrate our business. That's what is in process today.

Jailendra, the only thing I would add is that at the end of your question you did talk about the Q2 to Q3 sequential decline in SG&A. I would say, clearly, there were drivers pushing SG&A up due to volumes and whatnot, but we continue to drive efficiencies in productivity. Some of that decline sequentially is also just the lumpiness or timing of investments in the business.

Got it. And then a quick follow-up: you called out both sequential and year-over-year volume growth in PPE products. Can you help us understand the mix of that growth in terms of growth coming from expanding the number of customers, category expansion, and how much might be triggered by hospitals preparing for the winter months? Any color you can provide there?

At a macro level, we saw it pretty much across our entire base of customers. One, the protocols are in place, and the customers are continuing to use PPE. The elimination of some emergency use authorizations has customers buying medical-grade PPE. What makes us different is that we are a broad manufacturer of PPE across all categories — masks, respirators, N95s, isolation gowns, surgical gowns, drapes, wrap — the broad base. We do it at scale. We sell high-grade medical PPE products. We make a significant portion in the Americas with much of the fabric coming from our facility in Lexington, North Carolina. We make the bulk of our PPE in our factories, which reduces some supply chain exposure others may be having right now. That's another reason we expect this to continue to grow. If I think about seasonality, there may be some of that, but most customers have been prepared and continue to build the right level of stockpiles. So it's the value that makes us different: our manufacturing footprint, our vertical integration from raw material to finished goods, the broad portfolio, the ability to make at scale, where we make, and our ability to deliver, coupled with market factors that are helping us.

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

Thanks very much. Good morning. I wanted to dig in on the gloves a little bit. I apologize; I missed a couple of minutes of the call. Did you say specifically what the glove revenue was in Q3 for pass-through revenue, and then what the EBIT impact in Q3 was at this point?

Good morning, Eric. Regarding gloves, we revised our full-year guidance on the expectation of pass-through; we're now at $650 million to $700 million. In terms of the quarterly impact, we saw about $170 million on the top line in Q2, bringing the year-to-date total to about $530 million of total glove cost impact on the top line through three quarters. What I talked about on the bottom line is really just the shift in margins based on glove cost shifting from Q3 to Q4. The reason is there's variability in the time it takes to get gloves from our manufacturing, through congestion in the ports and into our distribution centers to be sold. Some of the higher-cost gloves that we expected to hit the P&L in Q3 we believe will slip into Q4 based on transportation delays. Overall, I view it as right pocket, left pocket and net some zero for the year. Importantly, we still expect sequential margin expansion into Q4 for Global Products.

Thanks, Andy, for all the detail. For the quarter itself on gloves, was the contribution positive, neutral, or slightly negative? What was the quarterly impact on EBIT?

So if you recall the cadence: Q1 was our strongest quarter where pricing was put into place before costs caught up. Q2 was where cost caught up to pricing. Q3 was the offset to the strong Q1. So Q3 was our most difficult quarter in terms of margins in the Global Products segment, largely driven by that cost dynamic in gloves.

Performance versus plan was actually favorable to our plan in the quarter but unfavorable to the prior year.

Got it. And then on direct-to-patient, you talked about continued above-market growth. There's debate about what the market is actually growing. In the past you've said you may be growing at double the market. Can you give more detail on where you see the market growing and what kind of outperformance you're seeing for direct-to-patient versus that market view?

We use a couple different proxies for the market: supplier feedback, customer feedback, and what we observe from competitors. We know our growth rates are greater than what we've seen historically and what we're hearing from those data points. Some of our major categories, like diabetes, are growing faster than the general home health market. Diabetes is a large category for us. Ostomy and wound care are other categories that are performing well. As elective procedures ramp, we also see downstream benefits when patients go home and require additional lines of care. That's why we continue to see growth better than the general market based on the data points we have today.

Just to add, we have invested in the business — technology, expanding the sales force, moving into new geographies where we may not occupy currently — and we're seeing growth as a result of those investments.

If I could ask one more: there have been negative headlines on some competitors in Asia about working conditions, quality, and recently about used gloves being recycled and sold as new. What kind of impact is that having on spot pricing in the marketplace? And would that help a company like Owens & Minor where people can have higher trust in quality and be confident in the product, potentially driving share as you roll out new capacity?

Absolutely. All those factors are helping. Customers value that we make a good percentage of our gloves in our own facilities, which provides more operating control compared with sourcing from manufacturers overseas. We're adding capacity — on the order of a billion to a billion-and-a-half incremental gloves a year — which gives us more control. We have a rigorous and disciplined process to validate suppliers for any gloves we source externally, and there are many manufacturers we will not do business with regardless of pricing. Regarding pricing, we haven't seen drastic market pricing changes yet. But because of the volume coming from Asia and shipping delays, there are supply chain issues for others. Our products are made in different locations; some materials are sourced and made in Thailand and the Americas, which changes the shipping dynamic and helps us. By making our own product and having manufacturing capacity, we can be selective and maintain quality, which customers appreciate.

Thanks very much, guys.

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

Thanks for taking the question and congrats on another strong quarter here. It's great that you renewed that Premier contract, which comes on the heels of the Vizient renewal earlier this year. I think before you mentioned that the other big GPO outstanding would be HealthTrust in terms of a renewal. Can you provide any update on that one, and if there are any other large re-procurements upcoming for the next year or so?

Yes. HealthTrust — we're actively working with them. We have a great relationship and that relationship expanded during the pandemic. It's going through a normal process similar to Vizient and Premier where there are open, transparent dialogues to find ways that are beneficial to both. That's really the last major one outstanding.

Got it. You're throwing off a fair amount of free cash flow now, and your leverage ratio is pretty healthy. Can you rank your capital deployment priorities for the next year: investments in the business, an increased dividend, share repurchases, continued debt paydown?

The team has done an excellent job paying down debt, but over the last two years we haven't just paid down debt; we've also invested in the business — operating sites, infrastructure, technology — to drive efficiency. Going forward, we'll look at capital deployment in a fungible way: what provides the best long-term ability to deliver profitable growth to shareholders. That could be organic investments, inorganic investments, or continued operational investments. Right now we see significant opportunities to reinvest in the business for long-term profitable growth versus prioritizing buybacks or dividends, but we'll be disciplined.

Daniel, to add, in recognition of our lower debt levels, we recently received another upgrade from the rating agencies — Moody's upgraded us a couple of weeks ago — and I just wanted to mention that.

Thank you. Our next question comes from the line of Michael Minchak from JPMorgan. Please go ahead.

Good morning. As we think about your Global Products business, the margin profile has bounced around this year, obviously with gloves and pricing dynamics and some other unique drivers in 2020. How should we think about the baseline margin profile for that business if we normalize for some of the various puts and takes experienced over the past 18 months?

Michael, you're absolutely right; there's been a lot of movement. The cadence of 2020 and 2021 has been disrupted compared to typical seasonality. No single quarter in 2021 is a good baseline to annualize due to distortion caused by glove cost pricing. Back in Q2, we planned to exit 2021 with glove costs normalizing and Q4 being relatively clean. With the shift of cost moving from Q3 into Q4 due to transportation delays, Q4 is not as clean as we once thought. We view that slippage as contained to 2021 and it doesn't impact our total outlook for the year. We still expect sequential margin expansion from Q3 to Q4 in Global Products, but Q4 is not a level I'd want to annualize into 2022.

Got it. Appreciate the color on that. Previously you talked about the opportunity to sell S&IP products into newer verticals both within healthcare — nursing homes, dental — and outside healthcare, in clean room, consumer retail, international markets. Any update on the progress around those efforts?

Yes. Those are all factors driving continued growth of our Global Products segment when you exclude glove cost pass-through. Launching products into retail and other ancillary healthcare markets, as well as global expansion, is another factor driving growth.

Thank you. This concludes our Q&A session at this time. I'd like to turn the call back over to Mr. Ed Pesicka for closing comments. Please go ahead.

Thanks everyone for joining me. I'll just close with this. I'm extremely pleased with how we've performed in the third quarter, and this is a continuation of our path to a record-setting year for the company from a profit standpoint. Our performance in the quarter was exceptional and it's really our business model that customers appreciate — a focus on high-quality service while still providing value and the vertical integration to ensure continuity of supply. We continue to strengthen our financial position, which gives us tremendous flexibility going forward. I look forward to the conversation after the end of the fourth quarter, and at that call sharing a lot more insight into 2022. Thank you everyone.

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