Owens & Minor Inc (OMI) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Owens & Minor Second Quarter 2017 Financial Results Conference Call. My name is Kevin and I'll be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would like to turn the presentation over to your host for today's call, Trudi Allcott. Please proceed, Ms. Allcott.

Thank you, operator. Good morning, everyone, and welcome to the Owens & Minor Second Quarter 2017 Earnings Call. I'm Trudi Allcott, and on behalf of the team, I would like to read a safe harbor statement before we begin. Our comments today will be focused on financial results for the second quarter 2017, which are included on our press release. In our discussion today, we will reference certain non-GAAP financial measures. Information about these measures and reconciliations to the most comparable GAAP financial measures are included on our press release and in the supplemental information posted on our website. 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 Chairman, President and CEO, who will provide an overview of the business, our strategy and the acquisition of Byram Healthcare; and Randy Meier, EVP and Chief Financial Officer and President of International, who will give an update on our results and insight into the performance of our 3 segments. Now I'd like to turn the call over to Cody Philips, who will start things off this morning. Cody?

Thank you, Trudi, and good morning, everyone. Thank you for joining us on the call this morning. This morning, we will review our strategic progress, quarterly results and segment performance with you. As for our financial and operational performance, we have been expecting a soft first half of this year, and that's exactly what we've seen in our results. While we're not satisfied with our current performance, I see positive underlying trend that we can build upon. As the healthcare market continues to change, new challenges and opportunities emerge every day. We are working to transform our business, so that we can capture these opportunities. So far, this year, our teams have continued to work to overcome challenges, such as the loss of a major domestic customer last year, stepped-up competitive dynamics and production challenges in our CPS unit, which had a significant impact on our results year-to-date. While we're seeing improvement and growth in our CPS unit, our work is not yet finished in returning this business to performance that meets our expectations. However, our customers are embracing the value proposition that CPS offers, which is helping us to gain traction in the market. While we're not happy with our results, we're taking aggressive actions to improve operating performance and execute our strategy. Our teams are dialed in to what they need to do to improve our performance and to achieve success with our strategy.

On a positive note, we are pleased to report that we officially closed the Byram transaction yesterday. We welcome the Byram teammates to the Owens & Minor family, and we look forward to working with them to expand our reach along the continuum of care. Byram represents a significant step toward expanding our services across the continuum of care, since they are the #2 player in their market. With 900 teammates and a nationwide network of 5 distribution centers, 9 sales and service centers and 2 national pharmacies, their revenues topped $450 million last year. With its national leadership position, Byram has unique direct-to-patient expertise. We are impressed with their seasoned management team and their sales force. With leading positions in the major chronic disease categories, Byram is well positioned for growth as healthcare services are increasingly consumed in the home. By giving us channel access to the healthcare consumer, Byram makes us more clinically relevant along the continuum of care. This also makes us a more valuable partner to our provider and manufacturer customers. Our commercial teams have already identified initiatives with IDNs and manufacturers, and we are working on plans to capture these opportunities. In the market, we continue to face stepped-up competitive dynamics and margin pressures in our domestic distribution business. We understand these dynamics and challenges. We're taking the right steps to move our company forward. Our response is twofold. First, we have a broad scale of transformation process underway, which we are calling a rapid business transformation or RBT. We are using this disciplined process to review every aspect of our business and identify specific initiatives and in improving operating efficiency and generating revenue growth. As I've said in the past, with every step we take, we will look to drive continuous operations improvement and new growth opportunities. These initiatives have specific targets, detailed implementation plans and our teams are working toward realizing these improvements. Second, as we outlined at our Investor Day, we have a 4-part strategy that is designed to position Owens & Minor for sustained profitable growth. As we strengthen and change our business model, we will become more clinically relevant and viable to our partners. At the same time, we will align with the emerging opportunities in this market.

As a reminder, there are 4 elements to our enterprise strategy. First, we are building the most intelligent route to market, by investing in our supply chain to bring scale, efficiency and enhanced connectivity to the flow of medical products. A key element of this strategy is to develop a track record of continuous operations improvement. We are making progress in lean processes, safety and overall continuous operations improvement. We are also investing in new technologies and end-to-end connectivity. Now more than ever, we believe that what the healthcare industry needs is a world class supply chain connected from the point of manufacturer all the way to the point of care. And that's exactly what we intend to deliver. Our second strategy is to expand our services across the continuum of care to help our provider customers follow their patients. As leading an IDN, seek to drive down costs, more and more care will take place outside of the hospitals. This will lead to outpaced growth in these settings. Additionally, all the demographic trends point to many more people managing chronic diseases in the home. Therefore, it's hard to overestimate the importance of nonacute services to our provider and manufacturer customers and to us. As I mentioned, Byram will give us significant momentum in this area. Our third strategy is to become the preferred outsourcer for leading manufacturers. Our manufacturing partners are also facing significant cost pressures as the U.S. market moves towards new reimbursement models and hospitals come under more and more pressure. We are a trusted partner to our manufacturers, and we continue to make good progress with large medical device manufacturers, who want innovative, new services and who seek to lower their costs. Owens & Minor has a number of different services, an optimized network of service centers to the point of care, a unique procedure-based delivery model and a proven ability to reengineer processes using lean principles and technologies that create supply chain transparency. We have signed several new contracts with manufacturers in Europe. In the U.S., we are providing point-of-care logistic services to several large device manufacturers. And we're also providing value-added warehousing services to small and midsized manufacturers. Manufacturers are recognizing the value that we bring, and we see more growth opportunities on the horizon. Finally, our fourth strategy is to drive value through data, analytics and services. We sit in the middle of the flow of goods, funds and information from the point of manufacturer to the point of care. Therefore, we see opportunity to aggregate and analyze data for our customers to reduce complexity, provide valuable insights and to create value at the point of care. Going forward, we have a realistic view of the market. And in the near term, we have ample improvement levers and growth initiatives to drive improved operating performance. We have a broad scale operations improvement agenda underway. And we are using a disciplined process to implement these initiatives. At the same time, we are executing our 4-part strategy to reposition our business for long-term success. With that, Randy will review our financial results and provide an overview of our segment results. Randy?

Thank you, Cody, and good morning, everyone. I'd like to start with an overview of the Byram transaction and then update you on the second quarter financial and operational results. As we said in our press release yesterday, we successfully closed the Byram acquisition for $380 million. We financed the transaction. Last Friday, we completed a new $850 million credit facility, which included a $600 million line of credit and a $250 million term loan. Byram Health is a key to accelerating our entry into the direct patient nonacute care market. As we expand our services, along with continuum of care, Byram gives us a market-leading presence and a strong reputation. We welcome our new Byram teammates to the Owens & Minor family. We expect that Byram will contribute approximately $450 million, an incremental annual revenue, and we'll have a slightly accretive effect on our 2017 operating earnings and we'll be further accretive in 2018. With the Byram Healthcare acquisition, Owens & Minor has adopted a revised non-GAAP presentation that excludes amortization of acquisition-related intangible assets as well as items already excluded. This revised presentation will improve the consistency and comparability of our results as we remove the variable impact from acquisition costs on our results. Prior periods have been recast on the same basis. As is our practice, please keep in mind, that adjustments made to our reported results are outlined in our press release.

Turning to the quarter. As we have been saying, we had expected the first half of the year to be challenging and it was. As we look ahead to the rest of 2017, and into next year, our teams have launched a variety of initiatives, designed to improve productivity and efficiency. We believe these initiatives will gain momentum in the coming months. Projects include initiative designed to help our distribution center teammates, improve productivity and bring operating improvement solutions to our IDN customers. We are also engaged in a variety of other initiatives related to our 4 strategies that are designed to be drivers of improved profitability. As we indicated at our Investor Day, we outlined our 4-part strategy that is designed to drive productivity and profitability improvement. We indicated that we expect the initiatives associated with these 4 strategic areas will yield a combined $100 million to $150 million in incremental operating income over the next 3 years. These initiatives and others are part of the RBT process, which Cody discussed in his remarks. We expect the RBT initiatives to yield between $50 million and $60 million and annualize benefits by the end of this year and to make similar contribution in 2018. Keep in mind that a portion of this value will be offset by the competitive pressures, strategic investments and investments in global networks and systems. As we mentioned at Investor Day, the long-term financial goal of our business transformation is to achieve long-term annual earnings growth of 8% to 10%.

For the second quarter, we reported net income of $20.1 million or $0.33 per share and adjusted net income of $25.8 million or $0.43 per share. Our results continue to reflect the exit of a large domestic customer in 2016 as well as challenges with our CPS division. For the first 6 months of the year, net income was $38.9 million or $0.64 per share. Adjusted net income was $52.3 million or $0.86 per share. Net income in both periods benefited by $3.4 million or $0.06 per share from the release of an income tax valuation allowance during the second quarter. Adjusted results in both periods also reflect the revised amortization presentation, $0.03 per share for the quarter and $0.06 per share for the year-to-date. Revenues for the second quarter were $2.27 billion compared to $2.48 billion last year. For the year-to-date, consolidated revenues were $4.59 billion compared to $4.94 billion last year for the same period. Operating earnings were $32.8 million for the quarter compared to $52.1 million. While adjusted operating earnings were $41.4 million compared to $61.3 million. For the year-to-date period, operating earnings were $68.4 million compared to $97 million in the prior year period. Year-to-date, consolidated adjusted operating earnings were $89.1 million versus $119 million for the same period last year. The effective tax rate for the year-to-date period was 29.1%. This rate reflects the European income tax valuation allowance release of $3.4 million during the second quarter as a result of improvement in operating performance in Europe. The adjusted effective tax rate for the year-to-date was 30.9%. As a result of the allowance release, we are now expect an adjusted effective tax rate for the year to be in the range of 33% to 35%. Asset managing metrics included DSO of 25.6 days and inventory turns of 8.2x. These results are not acceptable. And we are working aggressively to improve our inventory turns. Our goal is to achieve inventory turns of 10x in our Domestic segment by the end of the year.

The impact of lower asset management metrics was an increase in working capital. For the first 6 months, the primary driver of the increase was high inventory levels, which resulted from several factors, including the loss of a major customer last year, building inventory for new business and a decision to build levels in certain markets. As a result, cash flow from operations was a negative $82.5 million compared to operating cash flow of $43.2 million last year. As I said, we recognize the inventory balances are too high, and we are working to bring them down in a systematic way.

Now let's look at the 3 segments. Domestic segment revenues for the second quarter were $2.13 billion compared to $2.35 billion for the prior year. Revenue declines primarily reflected the exit of a significant domestic customer in 2016. Second quarter domestic operating earnings were $29.5 million versus $43.5 million 1 year ago. Year-to-date, domestic operating earnings were $66.8 million versus $85.2 million for the first 6 months last year. Again, this change was largely due to the exit of a large customer, along with gross margin pressures and lower income from manufacturer product price changes on a year-to-date basis. We expect these factors include any ongoing competitive market dynamics to continue to affect our results. Turning to the International segment results.

Quarterly, International segment revenues increased 8.3% to $95.9 million compared to $88.6 million last year. The improvement was driven by growth from existing customers and new business, partially offset by unfavorable foreign currency translation of $6.7 million. For the year-to-date period, International segment revenues improved $19 million to $191 million, an increase of 10.9%. For the second quarter, operating earnings for the International segment were approximately $750,000 compared to $890,000 last year. The decline was primarily due to onboarding costs associated with new business.

For the year-to-date, operating earnings were $1.4 million versus $2 million in the same period last year. In the proprietary product segment, second quarter revenues were $131 million compared to $135 million last year. Decreased sales of sourced products contributed to the decline in revenues.

For the first 6 months, revenues were $268 million compared to $276 million for the first half of last year. Second quarter operating earnings for the segment were $8.8 million compared to $14.3 million in the prior year as a result of lower revenues and increased production costs. Now let's turn to our guidance for the remainder of 2017 and 2018. As we have indicated, we have revised our non-GAAP definition of adjusted earnings per share.

With the closing of the Byram acquisition and the first half performance behind us as well as the ongoing competitive dynamics in the market, we are revising our financial outlook for 2017 adjusted earnings per share from $1.75 to $1.85 to a range of $1.90 to $2. And our 2018 adjusted earnings per share from $2.05 to $2.20 to a range of $2.25 to $2.35. Thank you. And with that, we will turn it over to the operator for questions.

(Operator Instructions) Our first question comes from Sean Dodge with Jefferies.

Cody, you mentioned seeing some encouraging signs or trends that give you confidence things will improve as you go into the back half of the year. Can you talk a little bit more about those?

Yes, Sean. Thanks for the question. One that I would point out, we've talked a lot about the loss of a major customer. And as you know, our business model, we're leveraged to volume. So when you look through that loss, which will start to lap in -- late in the third quarter and into fourth quarter, when you look through that into our productivity trends, in our distribution network, I see some really good productivity trends there. We'd like to be seen on the bottom line. They're not showing up because they're swamped by the loss. That certainly the one I'd point to. I'd say another one is, when I look at the underlying trends in our CPS business unit, which we had a lot of work going into that. I see good trends there in terms of production. We're getting the production issues behind us. We're improving quality. We're starting to win some new accounts. So we're not where we want to be yet, but I see some good momentum there. I guess, the third one I'd point out, in Europe, where it's not contributing the way we wanted to yet. We just won a couple of new contracts there. So those will be 3 examples that I point to. But the general theme is, when you have to look through the loss and deleveraging of that large customer into the underlying trends, and that's what I was speaking to.

Okay. And then going back to the kind around CPS. Revenue there is still running well below where you were last year despite the large client you signed. Has that large client you signed in the second quarter last year, has that begun to ramp now?

Yes, I'd say it's begun to ramp probably slower than we thought. Again, we took that on, we ran into some production issues that caused some hiccups for us. We've done a lot of work with that client. They're pretty happy with us now. And we're starting to ramp that, but albeit slower than we had originally hoped for.

Our next question comes from Michael Cherny with UBS.

Can you just, for split’s sake, maybe just as a housekeeping item, give us the bridge in terms of specific for the '17 guidance. What changed, in terms of how much amortization you expect? How much is the operational change, and then how do you factor in the specific tax aim. I think, you said $0.06, if I heard you right. Randy, I just want to make sure I have all the numbers in place?

Sure. Just to recall, are you looking for the guidance, or are you looking for just where earnings were in the quarter?

For the bridge on guidance in terms of what changed relative to the accounting change versus operationally?

Sure. I think if you use as a starting point, our original guidance, which was $1.75 to the $1.85. And I think, with our first half of the year performance we're above guiding starting point sort of low end to midpoint of that range. I think we would then look at adding the intangible amortization, which is on an earnings per share basis, approximately $0.11 to that. And then you'd add in some of the accretion associated with Byram. And that's really the simplicity of bridge to where we are going forward.

And so just trying to understand, was the $0.06 tax release, was that contemplated in the original guidance?

No. It was not.

Okay. Great. And then, just thinking about Byram. I know, it's ridiculously early days so I may be getting a bit ahead of myself. I might save this for the next quarter. As you think about the rollout of that business on your platform, I guess, where are some of the quick and easy wins, I would say, that you think you can capture in the market based on your current infrastructure versus some of the development of new opportunities that you think, will take more time?

Yes, Mike. Well, first of all, we just closed that yesterday. And we're delighted to bring it onboard. And one of things we like about Byram is the capabilities they bring. Again, it's the largest acquisition the company has made. It's right down our strategy #2, of expanding into the continuum of care. So first and foremost, we want to make sure we keep their investments and growth on track. They've got a great sales force. They've got great momentum on that side. They've had a track record of success and growth. And we want to continue that on. What I'm excited about is the potential that build back from the home and create a value proposition for the large IDNs. So one of the things our teams have started to work on is, when we talk to our IDN customers, they want to follow those patients outside of the hospital, all the way into the home. They want to help manage those chronic disease state. So one of the future things we're looking forward is how we connect the dots on a value proposition back to the large IDNs. And it plays into our first strategy around connecting our supply chain. We're writing the flow that we want to track that data, where those products go, how they're used. But I'd say first order businesses is to do everything we can to facilitate the ongoing growth of Byram in their current channel. Randy?

Yes. Just to add to that. I think, Cody, I think, hit the nail on the head, but first and foremost, the opportunity to expand their customer base, align up with some of the large IDN customers we have. We also think, over the course of the next few years, we have the opportunity to integrate their supply chain and their sourcing activities into our sourcing. So there are some opportunity, maybe to benefit from our scale. We also think our network over the next -- course of the next 2 or 3 years will provide some opportunity for some additional synergies as well. But first and foremost, we believe that the top line synergies between our large IDNs and some of their customers to connect with the patients is the real opportunity.

And Mike, I'll just add one last thing. For our manufacturing partners, they view this as a new channel. Owens & Minor just opened up a new channel for their products. So they're excited to explore what new product categories, what new opportunities we can explore on that front. So we see a lot of upside.

Our next question comes from Lisa Gill with JPMorgan.

It's Stephanie Davis on for Lisa Gill. Could you talk to your investment arc for '18 and '19. And maybe just how the Byram acquisition might impact this cadence?

Sure. I think from a perspective, right now, we're -- with the just closing this transaction, I think, we're first and foremost really focused on the integration over the next 3 to 4 months and really making sure that we bring onboard the Byram teammates, integrate them into our domestic and global platform and make sure that we've got that consistency and continuity build going forward. Cody mentioned in his remarks. The RBT process and some of the things we're doing there. And as we mentioned on Investor Day, part of creating our strategy one that end-to-end connectivity is investing in our own network and our own capabilities. So we'll probably continue to see some internal investment around productivity tools, both in the warehouse, some IT platforms, as you saw in the second quarter and going forward. And I think, that's really where we're going to be focused for at least the next few quarters.

The next question comes from Erin Wright with Crédit Suisse.

This is Adam Krasner on for Erin Wright. I just want to follow-up on the question on intangible amortization, the $0.11 impact in the guidance that you cited. That seems pretty consistent with the level of amortization that you had in the most recent quarter, around $2.3 million. Is it the right way to interpret that, that there's not going to be big step up in amortization with the close of Byram?

No. It wouldn't be. I think what we wanted to do is utilize this quarter as a transition in our adjusted earnings to what I'd probably characterize as adjusted cash earnings and just begin the process of excluding intangible amortization. The amortization that we excluded in the second quarter and in the first half of the year is our historical amortization. So going forward, now that we closed it, we'll probably be seeing a reasonable increase in that amortization as a result of the acquisition.

Our next question comes from Robert Jones with Goldman Sachs.

You guys talked about the 2018 guidance. You've raised the range by $0.15 to $0.20. I think Randy's decision to exclude the deal amortization adds about $0.12, and Byram obviously, is going to be accretive, as we look out into next year. So it seems like on that math that you're a little but more cautious on the underlying business. If I'm thinking about the moving pieces. They're correctly relative to how we were thinking about '18 before. So can you maybe just talk a little bit about what actually you are seeing differently in the core business, or in the environment that would have you slightly more cautious on the business as you look out into '18?

Sure. And that's a great question. When we thought about our guidance and sequencing it from 2017 to 2018, we did want to pay particular attention to the question of how Byram is going to impact that. And as we've mentioned to everyone, since we've made the announcement of the acquisition and even as far back as Investor Day, the 2018 guidance did include some benefit in that for moving down and expanding in a nonorganic fashion that continuum of care. So when you think about moving from prior guidance, adding the amortization and then some of the benefit of Byram, the incremental benefit from what we already had in our guidance is what's really being represented there. So it doesn't represent all of the benefit of the Byram transaction because we had already had some of that implied in our future guidance. For 2018, as we said, or I just said a few minutes ago, we're probably looking at lower half of our range for 2017, I think, as Cody alluded to. We have a number of initiatives with the RBT process and where we want to go strategically. So we do think we are well positioned now to continue to improve earnings. We have always said 2017 was going to be a transition year with lots of our large customers. And we do see sequentially, revenue beginning to improve as we go to third quarter and the second half of the year. But hopefully, that gives you a little bit more color.

Robert, I guess, to address your question directly. As I said, our current business model leverage the volume. We've now seen the impact of that with the loss of a large customer. We commented on the competitive dynamics out there, which are a little tougher than we thought. And so as we look ahead, we have moderated our view a bit. I'd say, based on what we're seeing in the marketplace when we ran or retain business, we're having to give up more margin than we had originally thought. So that's certainly a factor in our view going forward. And the other thing is I think, we've seen a modest softening of utilization in the marketplace. Others have commented on that. So I think, your question was what do we see, why -- maybe we're less optimistic going forward in the base business. It's driven by those 2 factors.

No, that's super helpful, Cody. And then just one quick follow-up on the RBT initiative. If I think about maybe you could touch a little bit on that, just on more qualitatively, is that program relative to some of the other initiatives that you guys had underway? And then, I guess, on the numbers, I think, you said $50 million to $60 million. Is that incremental to the $100 million, to the $150 million that you guys laid out at the Analyst Day, or is that part of kind of the overall EBIT improvement?

I think, no, it's not incremental. I think we just want to give you some color. We've been asked on a couple of occasions how that might rollout over the next couple of years. With the RBT initiative, really being the process and the program really to initiate and execute a lot of the initiatives in that arena, we're going to see the benefit, we believe, about $50 million, $60 million of operating income this year, and we think we'll also see a like amount on top of that next year.

Yes. Just to give you a little color around that. So we call it RBT internally. We saw the headwinds coming in the marketplace. So we launched a broad scale improvement program with our teammates. I've been really pleased, it's -- we've got a really strong disciplined process, a PMO. Senior management's engaged all the way down to the frontline. Our teammates are doing a great job driving that. So the number we outlined to get more the $100 million to $150 million over 3 years, we have line of sight to $50 million to $60 million this year. We're trying to get off to a fast start. And it's designed specifically to go at those headwinds I just mentioned in the marketplace. So I'd characterize that as kind of a full-blown transformation effort engaging a broadscale -- engaging our organization on a broadscale and top to bottom.

The next question comes from Steven Valiquette with Bank of America Merrill Lynch.

I guess, just for us most of the questions we're getting still are kind of centered around how much EPS accretion from Byram is baked into the 2017 to 2018 guidance. I'm not sure if you're able to more specifically quantify that. And then I guess, you already touched on kind of the reductions for core operations within that. So I think, you already hit on that. But curious just on the -- just around Byram, can you give any more specific quantification around accretion and then I got a couple of quick accounting follow-up one liners after that?

Yes, I think, probably the 2017 is probably a little bit challenges because it’s a stub year and a lot of the moving parts. But for 2018, I think, you could characterize the incremental accretion is about 5% to earnings.

Okay. That's helpful. And then for depreciation related just to Byram, so you're going to strip out the deal amortization, but just depreciation annual run rate roughly for Byram. Do you have just a rough number for that?

That's a little bit of a moving target right now. There aren't a lot of fixed costs, so I wouldn't expect it to be very high, but will -- I probably have to get back to you on that one.

Okay. That's fair. And then final quick one. In the tax rate for this year, you said kind of goes 33% to 35% for 2017. What's the assumption for 2018? Did that go back up a little bit, or is that going to say within that range for 2018? What's the good preliminary range to use for 2018?

Excluding the impact of our onetime valuation allowance that we had the benefit of this quarter, we were on a very modestly declining trajectory over the past couple of years. And I think, if you would go back to that kind of trend line, that's probably where it will be.

The next question comes from Evan Stover with Robert W. Baird.

So I'm trying to round my head around a little bit. What exactly is in the business transformation numbers? The comments around $50 million to $60 million run rate by the end of this year and a $100 million to $150 million long term. $50 million to $60 million, I mean, that's more than 20% of your current EBIT base. So I just want to make crystal clear that -- -- would that include, for example, the incremental EBIT from Byram as part of your continuum of care transformation? Because it feels like it must because it's such a large number relative to your current operating earnings base.

I think, Evan, part of -- the best way to look at is a lot of the initiative that we have in place are -- were started a few months back. We're beginning to starting to see the benefit of these. Some of these transformational effort have some very meaningful benefit going forward in terms of the cost side, some of the productivity opportunities going forward. There is some incremental benefit of Byram in that number. As we said, we had already pro formed in our original guidance some inorganic benefit because we were fairly comfortable where we were when we gave guidance. So had some of it in there. But we are in a midst, as Cody talked about, is a pretty meaningful transformation and drive forward, trying to do some things here. So we remain fairly confident. Most of the benefit is the second half of the year benefit because of the activities that we performed in the first half of the year. So we remain pretty confident that those are achievable.

And Evan, I think, it's fair to say though, more of that benefit is going to offset in the headwinds that we're seeing in the marketplace than we would have liked. So I don't want to be vague on that. This is a transformation because our current business models heavily leverage the volume. And we're -- so when you think about our plan. The RBT is designed to offset some of those headwinds. Our strategy, 4-part strategy is designed to reposition our business for long-term success. But you shouldn't -- I don't want you to misread that, that 50 to 60 is all going to fall to the bottom line because it's not. It's going to go into offsetting headwinds that we're seeing.

And that kind of plays into my follow-up, which is if I look at the Domestic segment, even if I strip out the, what I believe, the Kaiser losses, the revenue declines there have been accelerating. And I know there's obviously margin pressure in that business. But the revenue moderation is more than I thought it would be and it's being getting worse over the last few quarters. So I'm hoping maybe you can tell me, is there also some -- beyond just margin pressures, is there also maybe some other discrete customer losses besides Kaiser that are flowing through the model right now? If there's anything you could give us to help us understand why the revenue is going down, and if it's just utilization, or if there's something else that play there, that would be helpful?

Yes. I think there's a number of factors there. First, obviously, it's Kaiser. And we'll start to lap that late in the third quarter and into the fourth quarter. The second was some of the revenue declines in our CPS business that we've commented on. And the third factor is, when you -- every year when we go out and we bid business, we win business, we lose business. I think what we did a bit of a timing difference between some of the business we're onboarding. It’s probably come on a little slower than we thought. And then we've lost some business. And then the final thing I'd comment on is we do see a moderation of revenue out there, a softening -- a slight softening. So I think, it's a combination of those factors. I think we're actually starting to see a bit of a more normalized trend going forward. But those 4 factors have certainly contributed to a softer top line than we thought. And we knew the first half of this year was going to be tough. I think it's been a little tougher than we thought even on the top line.

I would say -- just to add on that, to Cody. I think the second quarter will most likely represent a bit of the low point and currently where we are in that process, and we'll start to see some sequential improvements as Cody indicated. Most of the folks that we had or customers that we had exiting us been accomplished, and some of the timing differences as the envelope is getting to materialize. So I think, you'll start to see some sequential improvement in that numbers.

(Operator Instructions) And I'm not showing any further questions at this time. I'd like to turn the call back over to Mr. Phipps for closing comments.

Thank you, Kevin. Thank you for joining us on the call today. To sum up our results, we had a tough first half of the year, but we see positive underlying trends that we can build upon. With the acquisition of Byram Healthcare, we're taking a substantial step forward on our strategy to expand our services along the continuum of care. And with the RBT initiatives underway, we have a line of sight toward achieving our goals and improving our operating performance this year and next. Our teams are very focused on the road ahead. And they're making headway on our long-range strategic goals and our financial targets for 2017 to 2018. Thank you for joining us.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.