Owens & Minor, inc (OMI) Q3 2021 Earnings Call Transcript

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Owens & Minor, inc (OMI 5.53%)
Q3 2021 Earnings Call
Nov 5, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by and welcome to the Owens & Minor Third Quarter 2021 Financial Results Conference Call. [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.

Jackie Marcus -- Investor Relations

Thank you, operator. Hello, everyone, and welcome to the 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 the 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 the Form 10-K and quarterly reports on Form 10-Q. Except as required by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements.

Additionally in our discussion today, we will reference certain non-GAAP financial measures and information about these measures and reconciliations to the most comparable GAAP financial measures, which are included in our press release and our annual report on Form 10-K. Today, I'm joined by at 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?

Edward A. Pesicka -- President and Chief Executive Officer

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 a rapidly changing market 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, one 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 operating 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 and also wonders 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 its space once again posted growth rates ahead of the market. Patient Direct remains 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 adequate capacity to fulfill continued high PPE utilization due to the adoption of healthcare infection prevention protocols, share gain 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 that is focused on our culture, our continuous improvement based 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 $921 million taking our net leverage to 1.7 times. Just to put this in the 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 there is 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 deployment; and lastly, our never-ending commitment toward 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 up 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 this call over to Andy for a discussion of our financial results. Andy?

Andy Long -- Executive Vice President and Chief Financial Officer

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 of glove cost, 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 as discussed last quarter, 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 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 30.9% 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 20% 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 a $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 continued to trend at pre-pandemic levels. I'm 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 continue 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 cost pass-through as demand for S&IP products remained 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 gross 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 the glove manufacturers. This performance was 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 2 times adjusted EBITDA. Our enhanced capital structure provides us with operational flexibility and we are 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 the range of $3.90 to $4.10 and adjusted EBITDA in the range of $475 to $500. Our guidance for adjusted EPS is based on 76 million weighted average shares outstanding. Additionally, we are reaffirming our previously announced guidance for 2022.

I'd like to spend a few minutes walking through the rationale for our guidance and would like to point out that these key modeling assumptions for full year 2021 can be found in the 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 the 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 a better than expected margins due to the timing of higher costs moving from Q3 to Q4. We expect to see the delayed impact of the glove cost pass-through tickets in Q4. Even with this shift, we still expect sequential margin expansion in Q4. This timing issue does not change our outlook for this 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 in the on-boarding 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 and how we operate on a daily basis. It's incredibly exciting to see the significant progress we are 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. Operator?

Questions and Answers:

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.

Allen Lutz -- Bank of America -- Analyst

Hi, good morning. This is Allen Lutz in for Mike. You mentioned market share gains in the PR 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 from these new wins are contributing to the top-line growth?

Edward A. Pesicka -- President and Chief Executive Officer

Sure. Good morning, Allen. Thanks for the question. First, historically, I've talked about net new wins, and look, I don't want to get into every quarter doing a tally sheet of what we have, but since you're asking, let me go in a little more detail. So as I sit here today, if 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. That's -- And you look at that you ask why. And it's clear from our conversation with the customers as well as 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 that ability for us to be able to be flexible and scale very quickly, as well as that's based upon the investments we made to have the right level of technology that's out there, but still balance that with the ability to have the right human touch.

If I think about those wins and as I share with them in this quarter here of where we are today is it's also we now move on to some larger wins. It's not just the smaller, 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 that it could take up to three months to six months to nine months to implement. We have one of our major wins just recently challenge us and say, "hey, we want to do this in 45 days," and this customer is going to go live within the next week. So from, call it, 35 days ago 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 and the expectation of the implementation will go over -- be executed flawlessly.

Another last thing I'll talk about within the implementation, the new wins and some of the things that makes it different and tie this all together, as we talked about our debt ratio, the 1.7, what that does is that also enables us to make the right investments we need 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 maybe add Allen another comment. So, a lot of times you didn't ask this question but a lot of times a good question about our GPO renewables and I want to note that just recently we renewed with Premier for five years -- in five-year deal. We've reworked that contract where there's opportunity to provide more value for Premier, as well as significant more value for Owens & Minor. So another reason why Premier looked at it, again they like 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 and that's really because of both the operating and capital investments we made for -- around both the technology and touch. So Allen, hopefully that helps frame it of -- to answer that question.

Allen Lutz -- Bank of America -- Analyst

Yes, that's really helpful. And then, last quarter you mentioned that elective procedures were effectively back to pre-pandemic levels and you kind of saw that continuing for the remainder of the year. I guess, can you just give us an update, what are you seeing there and what are your early thoughts into 2002 on that. Thanks.

Edward A. Pesicka -- President and Chief Executive Officer

Yeah. So I'll start and if Andy wants to add some more color, I mean I think the clear answer is yes. We've absolutely seen elective procedures come back to the pre-pandemic levels. If I look at it in a macro across the United States in the last quarter -- in the third quarter, we did see some spots where there were COVID spikes were constricted a little bit, but the reality is as an aggregate across the US, we have seen elective procedures come back to pre-pandemic level and what we continue to do is making sure that we're prepared in advance with working capital investments, as well as having our teammates ready to quickly adjust its best mode, but we see that back to where it was and there is an expectation that that continues well into 2022.

Andy Long -- Executive Vice President and Chief Financial Officer

Yeah, Allen. It's Andy, just to add a little more color there. So in our Q3 results, we did see a slight sequential improvement in elective procedures, not material, but it was a slight improvement. We are back to where we believe pre-pandemic levels are. Our Q4 forecast assumes that really that's going to continue at that level. We don't assume to change up or down in that in that level. So should electric procedure spike up in Q4, we would -- now we would be ready for that based on the comments I'd make on our inventory levels, but it would be upside to our forecast. And again, I think we continue to play that into 2022 maintaining at pre-pandemic levels with those same dynamics. If it does improve there would be upside to 2022 as a result.

Allen Lutz -- Bank of America -- Analyst

Great. Thank you.

Operator

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

Jailendra Singh -- Credit Suisse -- Analyst

Thank you and good morning. Good morning, everyone. Can you flush out a little bit on the accelerating inflationary pressure US called out multiple times in terms of the magnitude, where you are seeing that inflationary pressure across the business and what are you assuming for the remainder of '21 as well as like next year? And I understand that likely pressures gross margin, but I'm sure there must be some impact on SG&A too. So, how do I reconcile that with the sequential decline of $30 million in SG&A expense in the quarter?

Edward A. Pesicka -- President and Chief Executive Officer

Yes, so I'll cover it and Andy can add some color on it. So, Jailendra, you're absolutely right. So let's just look at inflation in the third quarter first of all. So, we saw inflation ramp as the quarter progressed. But I would tell you our team did an incredible job in the third quarter and really we leverage both productivity and that incremental volume and the fixed cost leverage on that to offset but virtually neutralize the impact of inflation in the third quarter. So the team did a really good job around that. If I think about it prospectively going into the fourth quarter and frankly we looked at the full year, we looked at the impact really on an abundance of caution, we wanted to make sure we focused on that. Because the reality is, had we not had installation in the third quarter and the expectation to continue in the fourth quarter, we would have raised our guidance, but again, in abundance of caution, we saw inflation in the third quarter, we see it in the fourth quarter.

Again in the fourth quarter, the expectation is our team knows the levers. We're going to continue to drive productivity and you're right that productivity is both in margin as well as in SG&A. We will continue to pull those productivity levels -- levers. We're also going to continue to look at the volume that helps offset that. In addition to the volume, that volume can also drive additional fixed cost leverage. And then lastly, we're appropriate -- we will look at price as needed and as appropriate from a short-term standpoint continue to -- continue to mitigate the risk of the inflation. If I look at it prospectively into 2022, the expectation is that that inflation continues in the 2022 and the positive is we have time to not just pulled the traditional levers, but given the time between now and 2022 -- and early to '22 to continue to look at maybe broader scale ways to drive productivity and further integrate our business. So that's what's in process today. So that's how we thought about inflation in Q3 as well as where we expect inflation to go and the levers we're going to pull in Q4 to mitigate that and the expectation of that continuing into 2022 in the broader levels -- levers we'll pull. So with that, Andy, if you want to add anything additional, please feel free.

Andy Long -- Executive Vice President and Chief Financial Officer

Yes, Jailendra. I think 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, and I would say, clearly there were drivers driving SG&A up their volumes and whatnot, but inflationary pressures as I'd mentioned, but again in the quarter, we continue to drive efficiencies and productivity -- and some productivity and some of that decline sequentially is also just seeking lumpiness or timing of investments in the business.

Jailendra Singh -- Credit Suisse -- Analyst

Got it. And then a quick follow-up, so you guys 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 of that might be triggered by like hospitals preparing for the winter months. Any color you can provide there.

Edward A. Pesicka -- President and Chief Executive Officer

Yeah, I guess to at a macro level, we saw pretty much across our entire base of customers. And again, this goes back to what we've talked about in the past is, one is the protocols are in place and the customers are continuing to use the PPE. The elimination of the emergency use authorization that has people coming back and buying the PPE associated with medical grade, and then really what makes us different is the other reason why we also continue to see that volume strength. One, we are the broad manufacturer of PPE across all the categories, everything from masks to respirators, N95s, to isolation gowns, surgical gowns, drapes, wrap, the broad base of PPE. And the next is we do it on scale. So that is something that's important. The next is that we sell grade -- high grade medical grade PPE products. And lastly, let's not forget this is we're making it in the Americas, with all the fabric or virtually most of the fabric coming from our facility in Lexington, North Carolina to make those products and then we make the bulk of that PPE in our factories so if you think about the supply chain impact that others may be having right now versus us that's another reason why we expect this to continue to grow.

And if I think about the seasonality, there may be some of that in there, but I think most customers really have been prepared as they continue to build the right level of stockpiles and those continue to grow. So I think it's all those factors Jailendra. It's the value that makes us different. It's our manufacturing footprint. It's the vertical integration and vertical integration, we have from raw material to finished goods. It's the broad portfolio, not just one category, all categories, ability to make it on scale, where we make it and our ability to deliver, as well as the market factors that are helping us to.

Jailendra Singh -- Credit Suisse -- Analyst

Great. Thanks, guys.

Operator

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

Eric Coldwell -- Baird -- Analyst

Thanks very much. Good morning. I wanted to dig in on the gloves a little bit, and I apologize I missed a couple of minutes of the call. Did you say specifically what the glove revenue was in 3Q, the pass-through revenue, and then what the EBIT impact in 3Q was at this point?

Andy Long -- Executive Vice President and Chief Financial Officer

It should -- Good morning, Eric. It's Andy. So, yeah. Regarding gloves, we -- just stepping back a little bit so we gave -- revised our full-year guidance on the expectation of glove pass-through. We're now at $650 million to $700 million, and in terms of the quarterly impact in Q2, we saw about $170 million on the top line and then bringing the year-to-date total to about $530 million of total of glove cost impact on the top line through three quarters. And then what I talked about on the bottom line is really just the shift in margins based on glove cost shifting from Q3 to Q4 and really the reason behind that, Eric, is that there is just -- there is a fair amount of variability in the time it takes to get gloves from our manufacturing through the congestion in the ports on the West Coast and into our distribution centers to be sold and some of the higher cost gloves that we expected to hit the P&L in Q3. We believe now will slip into Q4 based on those transportation delays that I think we're all aware of.

So overall if I view it as a right pocket -- left pocket net some zero for the year and I think the important thing is that we still have an expectation that sequentially from Q3 to Q4, our Global Products segment will continue to have margin -- we continue to believe that we'll have margin expansion sequentially into Q4.

Eric Coldwell -- Baird -- Analyst

Thanks, Andy, for all the detail. And then for the quarter itself, the one gloves was the contribution positive-neutral slightly negative, what was the quarterly impact on EBIT?

Andy Long -- Executive Vice President and Chief Financial Officer

Yes. So as you recall kind of the cadence of gloves, as you follow that the impact by quarter Q1 was our strongest quarter where pricing was put into place before cost caught up. Q2 was where cost caught up the pricing and then Q3, think of Q3 is that offset to the strong Q1. So for Q3 was our most difficult quarter in terms of margins in the glove -- in the Global Products segment largely driven by that cost dynamic in gloves. Anything about [Speech Overlap] plan -- it was actually favorable to our plan in the quarter but unfavorable to prior year.

Eric Coldwell -- Baird -- Analyst

Got it. And I don't suppose I could tempt you into quantifying that.

Andy Long -- Executive Vice President and Chief Financial Officer

That would be correct. Yeah.

Eric Coldwell -- Baird -- Analyst

Got to try. Byram or direct-to-patient talking about continued above market growth, but I think there's a lot of debate about what the market is actually growing and I think in the past you've talked about growth rates that at least in your view maybe doubled or better the market growth rate. So I was hoping to get a little more detail on where you see the market growing and what kind of outperformance you're seeing in direct-to-patient versus that market view.

Edward A. Pesicka -- President and Chief Executive Officer

Yeah. So from that standpoint I guess we use a couple different proxies on the market. We look at what we hear from our suppliers. We also look at what we hear from our customers. We also look at what we're seeing our some of our competitors in the market. And the reality is, we know our growth rates are greater -- much greater than what we've seen historically year-to-date and what we continue to hear in the market again from both our suppliers, our customers and what we see. And also got to remember too that some of the major categories in or some of the faster-growing categories like diabetes. That's one of our bigger categories. And it's -- it's that category alone has generally outpacing that the general market from home health then you've got ostomy and wound care and other things. And as elective procedures are ramping, we also are seeing that the downstream benefit of that of when the person goes home considering what type of surgery they have or what type of procedure, what type of doctor visits, we're now seeing additional volume with. So that's why we continue to see why that is as good or much I should say better than what we're seeing and what we're hearing from the data points we have today.

Andy Long -- Executive Vice President and Chief Financial Officer

And Eric, it's Andy, just to add a little color to that as well. Just -- We talk about organic investments in the business, reinvesting in the business. This is clearly an area where we put the investments in both the technology and in terms of expanding the sales force, moving into new geographies where we maybe don't occupy currently. So that's another just evidence of where we're investing and where we're seeing best growth as a result of those investments.

Eric Coldwell -- Baird -- Analyst

If I could ask for just one more back to the glove topic. There has been incredible indicative headlines on some of your competition from -- from Asia in terms of working conditions, labor issues, quality, and now more recently, there's headlines of effectively criminal organizations that are taking used gloves and recycling them and trying to paying them off as new, what kind of an impact is that having on, one, spot pricing in the marketplace, and then two, on my assumption would be that it would actually help a company like Owens & Minor where people can have higher trust and quality and be confident in the product that would actually seem to be a long-term driver of not only goodwill but significant share win in that marketplace as you rollout new capacity, but I'd love to give you -- get your thoughts on that.

Edward A. Pesicka -- President and Chief Executive Officer

Sure. I think absolutely all those factors we see and what gives the customer confidence is that we're different and we are making a good percentage of our gloves in our own facilities. So that level of operating control is vastly different and going and sourcing a glove from some company in China. So that's the first and foremost. Second of all, we talked about in the past, we're in process continuing to put -- add capacity that will add between 1 billion and 1 billion of incremental gloves a year, which gives us more control over that. And then next, Eric, is really we have a very rigorous and disciplined process that when we do source gloves that validate our suppliers that have provide incremental gloves beyond we're making the factory. So and there's a lot of suppliers frankly or manufacturers that we just won't do business with regardless of what they're offering or what's out there and I think that has been translate and that has been recognized and seen both from our customers because of what they're seeing in the market.

Regarding pricing, we haven't seen it drastically change, the market pricing yet. But the other aspect that what we're seeing is because of the amount of product that is coming from China and the shipping delays, it is creating a bit of a supply chain issue and products and ours [Phonetic] are made not in China, we make ours in Thailand. So a different -- a little bit of a different shipping route for us, which has helped us too. But you're absolutely right, we've all read the articles about the labor issues. We've all recently saw the articles about used gloves that are being repacked and sold. Again when you make them yourself, you can control a good, a good portion of that and just by having that manufacturing capacity also gives you a different leverage against the other manufacturers, whereas you can be -- we can be much more selective than others. So that's why I think our strategy is the right strategy and we're actually seeing benefit from that.

Eric Coldwell -- Baird -- Analyst

Thanks very much guys.

Operator

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

Daniel Grosslight -- Citi -- Analyst

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

Edward A. Pesicka -- President and Chief Executive Officer

Yeah. On HealthTrust, we're actively working with them. We got a great relationships and that relationship expanded during -- during the pandemic, so that's just going through -- very similar Viviant and Premier going through the process, where we have an open dialog -- transparent dialog and trying to find ways that can be beneficial to both. So we are -- that's the process on that one. It's just part of the normal cycle of what we're going through. So that's really the last major one that's out there.

Daniel Grosslight -- Citi -- Analyst

Got it. Okay. And 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 and perhaps an increased dividend, share repurchase continued debt pay down. Sure. I'll start and Andy can add some color. I would say that the team has done an excellent job paying down debt. But I don't want to just focus on that, because over the last two years we haven't just pay down debt while we paid down debt, we've made substantial investments in the business in additional operating -- operating type initiatives to drive more efficiency. So it wasn't like we just -- we focus completely on debt. We pay down debt. But yeah, we're still reinvesting in the business and capex as well as from an operational standpoint. I think about it going forward, yeah, you're right, we're at 1.7 [Phonetic]. I think Andy made the comment, it's the lowest we've been in nearly five years, and we've talked about this throughout the year. We're going to continue to look at capital deployment from a -- from a fungible capital deployment standpoint. We're going to look at what provides the best long-term ability to provide long-term profitable growth to our shareholders and that could be internal capital organic investments, that could be inorganic investments as well as continuing to invest in operations, but we believe right now, we have significant opportunities to reinvest in the business for long-term profitable growth as of today versus share buybacks or dividend increases, but we're going to be very disciplined as we have been in the past on that.

Andy Long -- Executive Vice President and Chief Financial Officer

Yeah, Daniel. It's Andy. The only thing I would add to that is I think that's a real plans [Phonetic] and covers our strategy very nice. I think the only thing I would add is just in recognition of the lower debt levels, just to mentioned within the last week or two, we did get another upgrade from the rating agencies. This time it was Moody's upgraded us a couple of weeks ago, so I just want to mention that.

Daniel Grosslight -- Citi -- Analyst

Yeah. Got it. Very helpful. Thanks guys.

Operator

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

Michael Minchak -- JP Morgan -- Analyst

Good morning and thanks for taking the question. As we think about your Global Products business., the margin rate there has bounced around quite a bit this year obviously with the gloves pass-through and pricing dynamics and some of the other unique drivers in 2020. How should we think about the baseline margin profile of that business, if we do sort of normalize for some of the various puts and takes that you've experienced over the past 18 months?

Edward A. Pesicka -- President and Chief Executive Officer

Yeah, Michael. Good morning and thanks for the question. So you're absolutely right. There has been a lot of movement this year. I think the cadence of the year in 2021 even going back to 2020 quite frankly the cadence of the year has been disruptive that typical seasonality that we see in the business is really not applied over the last 18 to 24 months. And certainly, no quarter within 2021 would be a quarter where you would want to take our margins in the Global Products business in annualized. There's just -- there's just too much distortion caused by the glove cost pricing. So originally when we talked back in Q2, I would have said that we are planning to exit the year in 2021 with glove costs starting to see some normalization in Q4 being relatively clean. I'll say with the shift that I talked about of costs moving from Q3 into Q4 due to those delays and transportation that we referenced Q4 is not as clean as we once thought it would be. Again, I think that slippages contains 2021, which is good. You saw that, it doesn't impact our total outlook for the year, but we're not exiting the year at a place where I would take any kind of run rate in the business. So I still think sequentially from Q3 to Q4, Global Products will have margin expansion, but we just won't be at Q4 at that level of where you'd want to annualize going into our expectation for 2022.

Michael Minchak -- JP Morgan -- Analyst

Got it. Appreciate the color on that and then you had previously talked about the opportunity to sell through PPE products into some newer verticals both within healthcare either nursing homes or dental and outside of healthcare. You mentioned clean room, consumer, retai, international markets. Any update on the progress you're making around those efforts at this point.

Edward A. Pesicka -- President and Chief Executive Officer

Yeah. And that's -- those are all the factors I should have added earlier that really are driving that continued growth of our Global Products when you exclude the glove cost pass-through. In fact, that's has been another factor of those, the launching of the products and the retail into other ancillary healthcare markets, as well as the global market. So that's another factor that is driving that growth.

Michael Minchak -- JP Morgan -- Analyst

Got it. I appreciate the color.

Operator

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.

Edward A. Pesicka -- President and Chief Executive Officer

So, thanks everyone for joining. I mean I'll just close with this. As you know, I'm extremely pleased with how we performed in the third quarter and I don't want to miss this and the fact that this is a continuation of our path on to really a record setting year for the company from a profit standpoint. If I think about our performance in the quarter, it was exceptional, and it's really our business model that the customers appreciate and the customers are looking for that focus on high-quality service, while still providing value in that vertical integration to make sure that they can have the continuity of supply. And then lastly, we continue to strengthen our financial position, which gives us tremendous flexibility going forward. And I look forward to the conversation after the end of the fourth quarter and then at that call sharing a lot more insight into 2022. So thank you everyone.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Jackie Marcus -- Investor Relations

Edward A. Pesicka -- President and Chief Executive Officer

Andy Long -- Executive Vice President and Chief Financial Officer

Allen Lutz -- Bank of America -- Analyst

Jailendra Singh -- Credit Suisse -- Analyst

Eric Coldwell -- Baird -- Analyst

Daniel Grosslight -- Citi -- Analyst

Michael Minchak -- JP Morgan -- Analyst

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