Owens & Minor Inc (OMI) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Owens & Minor's second-quarter 2015 financial results conference call. My name is Andrew, and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to the team at Owens & Minor. Please proceed.

Thank you, operator. Good morning, everyone, and welcome to Owens & Minor's second-quarter 2015 earnings call. I am Trudi Allcott, Director of Investor and Media Relations at Owens & Minor, and on behalf of the team, I would like to read the Safe Harbor statement before we begin.

Our comments today will be focused on financial results for the second quarter of 2015, which are included in our press release. In our discussion today, we will reference certain non-GAAP financial measures. Information about these measures and reconciliations to GAAP financial measures are included in our press release and in the supplemental slide presentation. These items are posted on our website, along with an archive of today's call.

In the course of our discussion today, we may make forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please see our press release and our SEC filings for a full discussion of these risk factors. Participating on our call this morning are Cody Phipps, our new President and CEO; Randy Meier, our EVP and Chief Financial Officer; and Grace den Hartog, our General Counsel. Now, I'd like to turn the call over to Randy Meier, who will start things off this morning. Randy?

Thank you, Trudi, and good morning, everyone. Before I review the second-quarter results, I would like to take a moment to introduce Cody Phipps, our new President and CEO, who joined us on July 1. As the former President and CEO of Essendant, previously known as United Stationers, Cody was responsible for streamlining operations, inventory, and transportation throughout the US. His strategic leadership helped position the Company as a leading player in the distribution of business essentials. Before joining Essendant, Cody was a partner at McKinsey & Company in Chicago, where he was a leader in the firm's global operations effectiveness practice. With experience in large-scale distribution and logistics, and a demonstrated talent for strategy development, we look forward to working with Cody to take the Company to the next level. On behalf of everyone on the team, I am pleased to welcome Cody to Owens & Minor.

Turning to the business at hand, I would like to update you on our quarterly results, starting with revenues. Second-quarter consolidated revenues improved 5% to $2.4 billion, when compared to $2.3 billion last year. Excluding last year's two acquisitions, second-quarter revenues improved 2.9% over the prior year, fueled by stronger growth from our larger healthcare providers, as well as new business. On a year-to-date basis, consolidated revenues grew 5.5% to $4.8 billion. Excluding the acquisitions, revenue grew 3.4% in the first half of the year.

On an adjusted basis, quarterly, consolidated, operating earnings improved $8.9 million to $53.6 million, or 2.21% of revenues. For the first six months, consolidated operating earnings were $104.5 million, an improvement of $10.2 million. Looking at segments, Domestic revenues for the second quarter were $2.3 billion, up 5.9% over last year. Excluding the acquisition, revenues improved 4.2% for the quarter. Growth trends remained consistent, with the largest contribution coming primarily from our large healthcare providers, as well as new business, offsetting declines among smaller, provider customers.

On a year-to-date basis, Domestic revenues improved 6.2% to $4.6 billion. Excluding last year's acquisitions, Domestic revenues grew 4.5%. Quarterly, Domestic, operating earnings improved $4 million to $52.4 million. Margins benefited from the strong revenue growth in supplier-price changes, offset somewhat by expenses incurred to serve business growth. On a year-to-date basis, Domestic segment operating earnings improved $1.8 million to $103 million. When comparing the two periods, remember that last year's first quarter included a benefit of $5.3 million in recovery from the settlement of direct-purchaser, antitrust class-action lawsuit.

For the quarter, International revenues declined 11.7% to $105 million, primarily as a result of unfavorable foreign currency impact of $15.7 million. Year-to-date revenues declined 7% to $210 million, reflecting an unfavorable FX impact of $30.5 million. However, on a constant-currency basis, International revenues were essentially flat for the quarter and year-to-date period, excluding the acquisition and the transition of a customer from buy-sell to fee-for-service.

As for International operating earnings, the team achieved positive, operating earnings of $1.2 million for the quarter, making the third consecutive quarter of positive, operating earnings, and an improvement of nearly $5 million compared to last year. When looking at the year-to-date period, International-operating earnings were $1.6 million, a $8.4 million improvement over last year. Our International teams are to be commended for achieving steady progress across the platform. A streamlined management structure, closure of underperforming facilities, and achievement of efficiency gains have enabled the team to greatly improve performance. With a stronger, more stable operation, we were able to look across Europe for profitable-growth opportunities.

Turning back to consolidated results, in the past quarters, we made certain adjustments to operating earnings, which are outlined in the table in our press release. These included pretax, acquisition-related charges for the quarter of $1.8 million and $4.4 million year to date. Charges resulted from the continuing costs associated with the integrating of the two acquisitions including severance and contractual payments to former management, as well as cost to transition IT and certain administrative functions.

As for pretax exit and realignment charges, we recorded $3.9 million for the quarter, and $11.2 million year to date. These charges resulted from efforts to optimize operations, such as: consolidating distribution and the logistics centers, streamlining administrative functions, and closing off-site warehouses in the US and Europe. Non-operating expenses included quarterly-interest expense of $6.7 million, reflecting last year's refinancing.

Our adjusted tax rate was 37.7% compared to 39.9% at the same time last year. Improvements in net-working capital due to timing of payments to vendors resulted in operating cash flow for the year-to-date period of $247 million, compared to $73.5 million for the same period last year. Consolidated asset-management metrics included DSO of 20.4 days versus DSO of 20.6 days for the same period last year. Consolidated inventory turns were 9.6 compared to inventory turns of 10.1 for 2014.

Turning to the bottom line, second-quarter adjusted net income was $29.1 million or $0.46 per diluted share. For the year to date, adjusted net income was $56.6 million or $0.90 per diluted share. In both cases, an improvement of $0.06 per diluted share.

With that update, I would like to comment on the progress we are making on the four essential components of our targeted-earnings growth for 2015, which we discussed at our Investor day in December. The EPS-bridge slide that we used at our Investor day is included in the supplemental slide deck posted on our website.

Starting with the first component, performance in the Domestic segment excluding last year's acquisition, our teams turned in solid results for the quarter, with 4.2% revenue growth while Domestic revenue growth has been strong year to date, we are expecting revenue growth to slightly moderate in the second half, as we are facing tough prior-year comps, as well as a fourth-quarter transition of a large Domestic customer, which we did not renew its contract. That said, we are pleased with our results to date, and continue to look for opportunities to improve Domestic performance.

The second component of this year's targeted EPS growth is the performance of the International segment, excluding the acquired-packaging business. We are very pleased that the International team achieved continuing profitability which resulted from improvement across the platform. Our UK team achieved significant gains year over year, and the team continues to work toward improvement. The ongoing exit of former UK customer is well underway, and is likely to be completed at the end of the third quarter. This exit will have a modest impact on the results for the year. Foreign-currency changes have affected our results this year, but assuming FX remains near-current levels for the second half, and we achieve profitability goals for the first year, we believe that foreign currency changes will affect our full-year EPS by $0.02 or $0.03.

For our third element, our targeted growth rates, the two acquisitions we made in 2014: the teams are on track to achieve cost synergy targets. However, we have seen some revenue softness compared to our expectations with both acquisitions, and we are taking steps to improve performance. We remain encouraged by our pipeline and our integrated approach to the market with this offering.

As for the final element of our targeted growth rate, our tax rate, our adjusted tax rate for the quarter was in line with our expectations for the year.

Now I would like to turn to our financial guidance for 2015. Since we last spoke, we have greater visibility on two developments affecting our results. The first factor is foreign currency. We believe we have a $0.02 or $0.03 headwind in our consolidated results for the year.

The second factor that will affect this year's results are the expenses associated with the recruitment and transition of our new CEO. We estimate that the incremental costs associated with CEO recruitment and transition will be in approximately $0.05 for 2015. After considering these two factors, we believe it's prudent to expand our guidance range for the year. Therefore, we are expanding our adjusted net income per diluted share to a range of $1.85 to $1.95 from the previous $1.90 to $1.95. Thank you, and with that, I would like to turn the call over to Cody for his remarks.

Good morning everyone, and thank you, Randy. Since I'm very new to the Owens & Minor team, I will focus today on my early impressions and near-term plans. Over the last four weeks, I have been meeting intensively with the field and home office leadership, as I want to better appreciate the depth of our talent, our strategic approach to the market, and our tactics for serving the needs of the healthcare sector.

In my first few weeks I've learned more about our long-standing provider and manufacturer relationships, and our deep institutional knowledge of the healthcare market, which I believe will continue to serve us well into the future. I'm extremely impressed with the Owens & Minor teammates and their dedication to the Company, customers and culture. Now that I've had a chance to get better acquainted with our management team, I will be meeting with customers, industry leaders, and our teammates in the field.

To that end, I plan to be on the road throughout the U.S., and will visit with our teams in Europe, who have made great strides in stabilizing and improving their results over last year. While my immersion into the Company is ongoing, I'm already working with our Board and our leadership team to enhance our execution, and to refine our strategy for long-term success and profitable growth. I believe that leaders in transition have a finite amount of time to begin to drive lasting and positive change. I will work with my team to establish an aggressive plan to do just that. At this point, I expect to begin sharing that plan with you later this year at our Annual Investor day, if not sooner.

With the platform that extends across the U.S. and Europe, and some 8,000 dedicated teammates across our network, we will continue to lead the reinvention of the healthcare supply chain, as we connect the world of medical products to the point of care. Our task ahead is to focus on earnings consistency, and on leveraging this great platform to drive profitable growth. Thank you, and with that, we will take your questions. Andrew?

(Operator Instructions)

Robert Jones, Goldman Sachs.

Thanks for the questions, and welcome, Cody. I know it's early and I appreciate your comments in your prepared remarks, but -- and I know you've only been there a little less than a month now, but I'm just curious as you've gotten to know the Company a little bit, are there any things that are obvious to you, any low hanging fruit early on your to-do list, as you think about changes you might want to make relative to how things have been run historically?

Yes, Robert, first of all, let me say, I look forward to working with you. It is early. I am three, four weeks in. But one of the things I see -- I am a big believer in having a strong core from which to build for the future, and to that end, I do see many opportunities to drive enhanced execution and improve the bottom line of the Company, and that will certainly be a focus that I bring.

Got it, appreciate that. I guess just one on the revenue, on the Domestic side. Organic growth seems to be trending in the high 4% range for the past two quarters, and maybe Randy, could you share the volume versus pricing components of the growth you have seen thus far this year? And then, I guess just along those same lines, any sense you can give us or that you're seeing, as far as revenue coming from new customers versus just better underlying utilization growth?

Bob, how are you doing? I appreciate the question. On the revenue side, we've seen predominantly good volume increases for most of the past year, driven by our larger customers. As you probably recall, from the better part of the last three or four quarters, we've been commenting on a couple of very large customers that we've been on-boarding and continued strength, and the utilization rates in our Domestic business, all of which have manifested itself in some pretty reasonable top line growth for us. So mostly, it has been related to existing utilization rates up and the volumes associated with our existing customer base, and the continued growth amongst our larger customers, as we've seen a couple of good wins out there.

Got it. Thanks so much.

Robert Willoughby, Bank of America Merrill Lynch.

Cody, maybe along the lines of Robert's question, can you help me better understand kind of where it is you've come from? What are the some of the anecdotal experiences that do prepare you for your world year at Owens & Minor, and maybe what do you perceive as your mandate? Are you here to grow organically? Are you here for strategic diversification efforts? And maybe what metrics are you going to be compensated on?

Yes, first a little bit of my background, Bob. I spent 13 years at McKinsey & Company in their global operations effectiveness practice, and I think what that gave me was a pretty broad base of experiences, in going into different environments and turning around the operations of broad networks. Eventually, I was one of the founders of the service operations practice, which really focused on complex and distributed service environments. So, I kind of cut my teeth there.

I left McKinsey & Company after 13 years and went to United Stationers, now Essendant. And when I walked in here, I see some similarities there, which is we had a great opportunity there to improve our execution and drive operating performance and leverage in the network, and I see the opportunity to do that here. I think that provides a great platform then to go execute against focused growth initiatives.

So I see my mandate is somewhat of an improve the operations, strengthen the core, and then focus our execution. We've already gotten growth strategies in place, so enhance the execution there, and then build for the future, and try to understand the macro trends impacting the industry, and then shape our future for that.

And that's certainly something I did at United Stationers, as we reposition that Company, given all the changes in that industry. So, that's what I'm excited about. I will be compensated on the long-term performance of the Company, total shareholder return, and operating performance and leverage, broadly speaking.

So it doesn't sound like a transformational deal in the next couple of years is in the cards. This is more get that margin up, get the capital out, and drive growth across most of the existing franchise here?

I don't know if I would say that. I would say is too early for me to comment on a transformational agenda. I am only three weeks in, but I can comment that we are going to focus on the operations and the earnings consistency, and that will provide a stronger base from which to launch those transformation initiatives.

Okay, thank you.

Sean Dodge, Jefferies.

Good morning, thanks. The International segment, you have been profitable there for three quarters now, but you had a couple of clients leave last year, and you are in the process of transitioning another one now. Can you talk a little bit about the stability of the client base that remains in Europe, and anything you can add on conversations you're having or strength of the sales pipeline over there?

Sure, Sean. It's a great question, especially given the transition we have been going through over in Europe. Over the past year, we've really taken a hard look at our existing customers, and the profitability that they are generating, and the activities that we've engaged in, and really began to focus on a handful of areas, especially the focus on our pan-European customers, and trying to leverage those across the entire platform.

We have had a couple of customers in transition. One, as we've talked about, which is exiting, and we are almost at the tail end of that. We see that as actually enhancing our ability to perform for our existing customer base, and we don't see that as a negative impact on the future. And then, one of our other customers, which we've highlighted the past couple of quarters, is a customer that is in a number of our facilities that is transitioning from a buy-sell customer to a fee-for-service customer.

So again impacting revenue, but again, we're benefiting from all the activity fee-based gross profit and operating income that they're generating. Actually, they are exactly the kind of customer that we are looking for, a growth-oriented customer looking to use multiple facilities that we can utilize across the European marketplace. Probably what I have been most encouraged by in our customers is, as we've gone to them over the past six months or so with some annual price increases, that's being accepted pretty widely, and our service levels have improved, and we're starting to get a lot of real positive customer feedback.

So all in all, I am excited about where we're positioned after a year of a lot of transition. I think our customers are starting to respond to the activities, and they certainly hung in there with us over the past years as we've begun to transform that platform. So I think we continue to be pretty well-positioned for the future. We're starting to see fairly good growth in our pipeline, and anticipate getting back in a growth trajectory, as we start looking into out to next year.

Thanks. Very helpful. Then, taking the Domestic revenue growth question in a slightly different way. Within the large client base, if you strip out the benefits from higher utilization, what are the other big growth contributors you are seeing there? Is it selling more unitized delivery services, or is it because that part of your client base is more likely to be the consolidator, or is it something else?

I think what you're asking is probably how do we look at growth, organic growth, and the continued penetration of our existing customers as we began to offer them a broader base of services versus some of our new customer wins, and a little earlier in the call, we highlighted the fact that we certainly have been benefiting over the last year of on-boarding two very large customers that have provided some pretty reasonable tailwinds to that. And certainly, utilization rates have benefited us as well.

But, we continue to see very nice penetration on our existing product line as we attempt to move a large portion of our customers from our basic StockPoint services and further penetrate as we move them up into our broader range of services, we characterize as our CarePoint. So I think it's really been a combination of good organic growth and continued retention of our existing customers on a year-to-date basis, as well as layering in some nice business from some new customers.

Understood. Thanks again.

Dave Francis, RBC Capital Markets.

Good morning, and Cody, let me add my welcoming remarks to you. Glad to have you aboard. Randy, if I could ask a couple of questions along Sean's line as it relates to Europe, can you talk a little bit, maybe asking a little differently about some of the levers that you have available to you to move out of the fix-it mode in that business, and more into a revenue growth environment. What is there, outside of the traditional blocking and tackling sales opportunities that you might be able to do, to lever up revenue growth there?

Sure, and Dave, I appreciate the question. As we talked about back on investor day, both Domestically and Internationally, our acquisitions toward the tail end of last year certainly provide an opportunity to continue to diversify our revenue base, and allow us to target a variety of different services and opportunities, with both our manufacturing, as well as our provider customers. And that is true over in Europe is well.

As we've transitioned in the past year, I think we've got the vast majority of those activities behind us, and the real focus that we're going to have going forward is the growth in our business, and I think that growth is going to be focused in those three areas. One our traditional 3PL activities, which we've been pretty successful at, and the continuing diversification from a predominantly pharma platform to one where we have really had a diversified platform that looks at pharma, diagnostic companies, as well as medical products and medical device companies throughout the European market.

Two, we're looking at the opportunity to deliver various manufacturing services around our CPT and minor kits and tray services. We certainly have done that through the acquisition of ArcRoyal, and continue to enjoy further market penetration. And then lastly, in a few selected markets, we are looking at developing our provider services market, as well. As we've mentioned from time to time, we do have a couple of hospital customers in the UK market.

That is a market that we certainly have the best opportunity to begin that transition and see some nice growth opportunities. So again, similarly to what we're doing here in the United States with the growth opportunities we have, there are fairly similar opportunities, but again, we're focused on a fee-for-service activity than the buy-sell business that we do in this country.

Then as a quick follow up, shifting back domestically, there has been a lot of talk, as you know, of reimbursement shifts potentially gaining more traction here toward more of a fee-for-value and related models for a lot of your provider customers. I guess my first question along those lines is, are you seeing that or hearing that more tangibly from your provider customers today? And to the extent that is in fact happening in the marketplace, how do you see the Company as being positioned for that trend, vis-a-vis some of your competitors in the market? Thanks.

That's a great question and a conversation that we've been having for the better part of the last couple of years, especially with the focus on outcome-related reimbursement, particularly in this market. Certainly that places us pretty well into the various unitized deliveries, and the basis -- when we look at those types of services, our ability on a procedural basis to deliver certain care.

One of the questions that we've asked ourselves, as we look forward, is how do we continue to help our customers follow the patient, post the acute care setting, and as you've asked us over the course, how do we diversify, and we've always responded that we really began to diversify and look at additional markets, and looking at how where our customers' needs are. And it's becoming more and more apparent that we need to follow that customer out into the home after the procedure. And we think we're well-positioned in that with the unitized delivery and some of things we do.

From a competitive position, I think we continue to position ourselves as one where we are going to respond to our customers, and do that in a fairly diligent fashion. A couple of our competitors have diversified somewhat more aggressively than we have, but we think that we're better positioned in terms of our service base, and how we can accommodate customers in a more customized fashion going forward. So again, I think it's a slightly different approach that we've had.

I think with Cody coming on board, it's a terrific opportunity for us to examine what we have been doing and where those incremental opportunities are, to be more responsive, and take on some more profitable situations, and really examine what our value proposition is going forward. So I think our position today, we've turned around Europe, we've gotten pretty good revenue growth, and I think it's a great place to be, and bringing on a new CEO to look at improving our value proposition and profitability going forward.

Thanks guys.

I would just add too, that I do see that this notion of following the patient outside of the acute care environment is something that we're going to spend a lot of time exploring. I think we're very well-positioned to do that for both our provider and manufacturer customers. That's certainly something that has caught my attention and could be a growth opportunity for us.

David Larsen, Leerink.

Randy, congratulations on showing very good EPS growth this quarter. I think it's the highest growth rate in the past two and half years. So it seems like some of your efforts are bearing fruit. Can you talk about incremental sales opportunities on the International side? So for Medical Action, for example, how much revenue has flown through International this quarter, and what could it be, say, a year or two years from now?

Thanks, David. I appreciate your comments directed at me. This has been a pretty broad-based team effort here over the last two years, to resurrect growth, both with Craig and Jim, and now with Cody, and I think that it is the broader-base team based here domestically, appreciate that sentiment. All the hard work has gone into continuing to position the team and the growth opportunity ahead.

With regard to your specific question, on International, I think a few questions ago, I outlined a little bit where the growth opportunities are. As we have in the past, I'm not going to get into specifics about where current growth or specific targets we have. I think as Cody mentioned, we are reviewing those initiatives, probably in a better position today to be a little bit more targeted in what we are doing in Europe as opposed to a year ago. But again, I think the 3PL and the fee-for-service business on the manufacturers and that broader base of pharma diagnostics and device and medical technologies, looking at some of the provider businesses and selected markets, initially, probably the UK market. And then also, as you pointed out, continue to leverage the acquisition of ArcRoyal and some of those custom packs in various small kits and tray businesses into the provider or on a fee-for-service basis to the manufacturer, are going to be the areas of focus. And, I think we have a nice opportunity to get back to a growth trajectory from where we are right now as we get past these transitions.

Okay. Was there any Medical Action revenue flowing through International this quarter?

No, we booked most of the Medical Action transition through the Domestic business. They have a couple of areas, very small, that get shipped outside the United States, in terms of a couple of minor product lines. But for continuity, and as we focus on the integration of those activities, we've tried to keep them consolidated on a Domestic basis more to the segment as we began to integrate them into our broader business.

Okay so there's nothing like with regards to like European regulations or UK regs that would prevent you from expanding sales of Medical Action into your International business, right?

Not at all. ArcRoyal and Medical Action are very complementary in what we do, and there are certainly opportunities in the future to begin to integrate those. But we don't have any regulatory barriers out there in terms of what we can and can't do with distribution of those products.

All right, and just one more quick one. ArcRoyal I think is all International, is that correct? None in Domestic, and you can do the same thing with ArcRoyal, right? Sell in the Domestic space. Is that correct?

Exactly.

Okay, thanks very much.

(Operator Instructions)

Steven Valiquette, UBS Securities.

Thanks. Good morning, Randy, and also, welcome Cody. For us, maybe just a financial question for Randy. The reason you cited for the lower wider EPS guidance seemed pretty straightforward. I guess I'm curious if some of those previous line item guidance metrics are still intact. Particularly, the 12.5% to 13% gross margin guidance, because it does seem like the gross margins are maybe trending a little bit below expectations in the first half of 2015. Thanks.

Steve, that's a very good question. In terms of the guidance that we put out there, really the $0.05 that we took the bottom end of the range down, and why we used the expansion language, then, we were adjusting or modifying our guidance, is really the result of some of the costs associated with bringing Cody on board. There's some compensation and transition issues as we began to amortize, and for this year, those were incremental costs to what we talked about at the time of our investor day back in December.

So we thought it was appropriate just to widen the range, just to give your perspective on some of those incremental costs. We also talked a little bit about, we've got some currency headwinds. Obviously, I think there's probably not a global company out there that's not having some comment related to that. And with the improvement in our International business, the natural hedge that we had when we were at a loss or slightly breakeven, the benefits of being profitable is now we have some exposure to some of the FX exposure going forward; and we just wanted to give you some headlines there that we had some exposure.

We also wanted to highlight, and we mentioned that we were in a competitive position on a renewal on a fairly significant customer in the second quarter, and we did not enjoy the win on that customer, and they will be beginning to transition out beginning in the fourth quarter. Fairly significant customer, a little over $200 million in revenue, and while we feel fairly confident that we can take the necessary steps to mitigate most of the dilutive effects of that transition that's beginning in 2016, we just thought it was important that we provide some insight that we are going to have a little bit of revenue headwind in the fourth quarter, as that customer begins to transition out.

Those transitions usually take several months as we look to that, so we don't think there's a significant impact. But we thought it was important that we highlight that to you, that we've got a couple of things going on that could impact us this year. But again, as Cody talked about, we've got a variety of initiatives that we're going to be looking at to sustain profitability in the future, and profitable growth. We believe we're in a pretty good position as we head into 2016.

Okay, got it. Okay, thanks.

[Michael Polark], Robert W. Baird.

Good morning, and thanks for taking the question. You mentioned in the press release that you benefited in the Domestic segment from supplier price changes. We hadn't heard about that last quarter, or maybe even the fourth quarter of last year. So can you just expand on that comment, and maybe talk about what you're seeing on the manufacturer pricing front broadly?

Hi Mike, sure we can give you a little bit of color on that. As we talked about over the past number of years, profit and inventory and customer or manufacturer pricing increases, that was typically done in a regular cycle in and around year-end, and impacting the first quarter has become something that has become much more sporadic and inconsistent. So we started to see a lot more price adjustments on off cycle time.

I think this is what you're seeing. We had a few customers come in and put some price increases in place, and that adjustment is -- we had a bit of a benefit in the second quarter. But we have experienced this in a couple of quarters last year, and the third and the fourth quarter, we had some benefit, typically, as I mentioned. It's a first-quarter benefit. We don't see any trend here. The only trend I would say is some customers are looking at very targeted price increases, and more typically, we're seeing them in an out-of-cycle cadence here.

So while I would not say that we have any ability to predict when this is going to happen, there may be a little incremental volatility associated with this kind of activity with our customers going forward. In the second quarter, we had a modest benefit. We don't have a lot of visibility into that going forward. But, it's something that can go either way. So I think right now, we're drawing a little bit of a tailwind there.

Okay. That makes sense. And one other quick one on the $0.05 from the recruitment and transition costs. Should we think about that as a one timer to SG&A in the third quarter, or is that a spread evenly over the third and fourth quarters in 2015 as a more permanent step up?

We had a little bit of the cost hit the second quarter in terms of the recruitment cost and some of that. Some of the longer term compensation and other things will be evenly spread over the third and the fourth quarter. Then as we roll into 2016 and beyond, that'll just become part of our normal guidance and the normal operating expenses that we have. So again, we just wanted to provide some color on some unforeseen costs that will hit the second half of the year. And that's again, the reason that we expanded the lower end of the range, just to incorporate some of those newer costs associated with on-boarding Cody.

Okay, thanks very much.

Thank you. There are no further questions at this time. I will now turn the call back over to Mr. Cody Phipps for his closing remarks.

Thank you, Andrew. I want to thank all of you for participating in the call today. We appreciate your interest in Owens & Minor, and I personally look forward to getting to know you and working with you in the future. Thank you, and have a good day.

Thank you for your participation in today's conference. This concludes the call. You may now disconnect. Good day.