Owens & Minor Inc (OMI) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Owens & Minor's First Quarter 2018 Financial Results Conference Call. My name is Glenda, and I'll 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 your host for today's call, Ms. Trudi Allcott. Please proceed, Ms. Allcott.

Thank you, operator. Good morning, everyone, and welcome to the Owens & Minor First Quarter 2018 Earnings Call. I'm Trudi Allcott. And on behalf of the team, I'd like to read the safe harbor statement before we begin.

Our comments today will be focused on financial results for the first quarter of 2018, 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 the most comparable GAAP financial measures are included in our press release and in information posted in our website. In the course of our discussion today, we may make forward-looking statements. These statements are subject to risk and uncertainty 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, the new strategy and the acquisition of Halyard's S&IP business; and Randy Meier, EVP and Chief Financial Officer and President, International, who will provide details on the transaction, an update of our financial results and more insight into our business performance.

Now I'd like to turn the call over to Cody Phipps, who will start things off this morning. Cody?

Thank you, Trudi, and good morning, everyone. Thank you for joining us on the call today. I'll begin with a few comments on our most recent acquisition and our results for the quarter, then I'll discuss the continuing steps we're taking to transform our business and the potential we see for our new company going forward. Randy will follow with a discussion of our results and more details about the Halyard S&IP transaction, which closed last week.

We're excited about the opportunities we see in the market for the combination of Owens & Minor and the Halyard's S&IP business. This transaction marks a significant step in the transformation of Owens & Minor into a true global health care company. Our teams around the world are excited about the future and are already hard at work executing our plans. Our immediate task is the onboarding of our new teammates and bringing them together under our new combined organization. We believe the combination of our 2 companies gives us a stronger position in the marketplace with a leading portfolio of products and exceptional teams around the world. The Halyard transaction is the largest in our history. And by combining Owens & Minor and Halyard's S&IP business, we can leverage our existing channel and our leading portfolio of products to grow our business. The S&IP acquisition also gives us significant opportunities for growth in attractive new markets, including Canada, Japan, South Africa and Australia.

To focus our organization and enhance our execution, we have formed 2 strategic business units: the Global Solutions SBU with Stuart Morris-Hipkins as President; and the Global Products SBU with Chris Lowery as President, who was most recently COO of Halyard Health. This new structure for our organization creates sharp execution focus and clear accountabilities to move our business forward. Randy will outline the financial performance of the 2 SBUs in his remarks.

Let me comment briefly on our results. In looking at the first quarter, as expected, the acute care distribution space remains a challenging environment. Margin pressures, particularly in our U.S. distribution business, continue. At the same time, we experienced executional challenges in our U.S. distribution business, resulting in higher-than-expected expenses. Our global manufacturing solutions business also incurred higher than expected transportation and onboarding cost, especially in the U.K, resulting in a shortfall to our expectations.

To address these challenges, we are adding additional leadership and resources to our operations, and we are working to improve our value proposition with enhanced processes and technologies in our distribution centers. We expect to see steady improvement in these areas throughout the year. Despite these headwinds, both of our new SBU segments showed sequential improvement from the fourth quarter. Additionally, Byram's first quarter results demonstrate strong revenue growth, exceeding our expectation. And for the company as a whole, we continue to work aggressively on our cost and productivity initiatives, which are all helping to offset the headwinds in our U.S. distribution business.

Looking ahead, the acquisitions of Byram and now the Halyard S&IP business are strengthening and diversifying our business model by moving us into higher margin and higher growth businesses. Let me elaborate on this. The thesis for combining the Halyard S&IP business with Owens & Minor centers around 3 main opportunities: one, expanding our own brand product portfolio and growing this through our channel; two, bundling this expanded product portfolio with our proprietary solutions at the point of care, good examples of this include our QSight point of use technology and our SurgiTrack perioperative solution; and three, creating a platform for future product growth for our own private label and additional complementary products.

As you're aware, we just completed this acquisition but what I can tell you is that the Halyard S&IP business is off to a good start in 2018, and we're excited to integrate this business. Byram, which we acquired in August of last year, is also off to a great start and is creating momentum in our strategy to expand across the continuum of care by reaching patients directly at home. The home health market represents a rapidly growing channel for medical products. We're very pleased with the progress that the Byram team is making. This business is accretive to our earnings, and we see opportunities to enhance our home health value proposition for large IDNs to further accelerate this growth.

Lastly, we remain laser-focused on improving our operating performance, and we are looking across our entire enterprise to drive productivity and reduce cost in everything we do. As we've discussed, we have a large-scale effort underway that we call our business transformation initiative. We are continuing to focus on this program and believe we can going to achieve $100 million to $150 million in annualized operating income contribution by the end of 2019. These are all elements that have been put in place within the last year. That is progress no matter how you measure it.

While the challenging competitive environment is unlikely to abate, what is changing is Owens & Minor's ability to serve the evolving market through more owned products with the addition of the Halyard S&IP products, greater access to attractive alternate site markets through Byram and a more sustainable cost structure through our cost and productivity initiatives. Our focus remains on executing our strategy and improving our operating results.

We had anticipated being able to provide financial guidance on this call but based on the complex nature of this carve-out acquisition and the significant amount of work acquired to integrate the business into our new Global Products SBU, we intend to provide guidance when we announce our second quarter results. That said, we remain confident that the Halyard S&IP acquisition will be nicely accretive in 2018 and increasingly accretive in outer years.

In closing, I'd like to welcome the Halyard S&IP teammates to the Owens & Minor family. These teammates are skilled, knowledgeable and resourceful. We are all looking forward to a new era of our combined company. We are truly better together.

With that, I will turn the call over to Randy to review our financial results. Randy?

Thank you, Cody, and good morning, everyone. Today, I'd like to start our discussion with our results of the first quarter and then spend some time talking about the Halyard S&IP business, which we acquired on April 30.

For the quarter, consolidated revenues increased 1.9% to $2.37 billion. Consolidated operating income for the quarter was $24.2 million compared to $35.5 million last year. Adjusted consolidated operating income for the quarter was $47.6 million, virtually the same as last year's first quarter. Performance during the quarter was affected by the previously discussed ongoing price and margin trends and higher-than-expected cost in the U.S. and the U.K.

For the quarter, we reported net income of $8.2 million or $0.13 per share with adjusted net income of $26.2 million or $0.43 per share. The adjusted effective tax rate for the first quarter was 29.6%, reflecting lower income and our more favorable tax jurisdictions. However, we continue to expect our adjusted effective tax rate for the full year to be in the mid-20s.

For the quarter, our consolidated asset management metrics were in line with recent trends with DSOs of 28.9 days and inventory turns of 8.3x. Recall that both measures now include Byram, and these metrics will further adjust as our business mix continues to evolve with the consolidation of the Halyard S&IP business in the second quarter. Cash flow from operations was $18.3 million compared to a $26.4 million use of cash last year, and our cash balance at the end of the first quarter was $87.6 million.

As we have indicated in the past, we've organized our business segments into 2 strategic business units: Global Solutions and Global Products. For your convenience, we have filed an 8-K today containing our historical results and the new SBU reporting segments. The Global Solutions SBU is comprised of the former Domestic and International segments and includes Byram Healthcare and contains 4 business lines: distributor solutions, provider solutions, manufacturers solutions and payer solutions. For the quarter, Global Solutions revenues were $2.34 billion compared to $2.29 billion a year ago. Byram Healthcare, acquired in August of last year and now managed within our payer solutions category, contributed $118 million to revenues for the quarter.

Quarterly operating income was $31.6 million compared to $38 million in the prior year. The decline reflects the continuing impact of provider margin pressure, customer losses from the prior year and cost increases due to warehouse inefficiencies in our U.S. distribution solutions area and underperformance in our manufacturing solutions business, primarily in the U.K.

The Global Products SBU represents a combination of our former Proprietary Products segment, which as a reminder included our CPS and Global Sourcing businesses and will now include the Halyard S&IP business beginning in the second quarter. Global Products revenues in the quarter were $121 million compared to $137 million a year ago, primarily due to the CPS business. Quarterly operating income was $9.8 million compared to $8.1 million in the prior year. Operating income improved largely as a result of improved operational efficiencies, primarily in our CPS business line.

Now let's spend a few minutes discussing the Halyard S&IP transaction, which closed on April 30. As we have stated, the addition of the Halyard enhances our ability to execute our strategy and pursue growth opportunities around the world and further enables us to achieve sustainable, profitable growth by combining its leading portfolio of surgical and infection prevention products with our global distribution and logistics capabilities. While we remain confident that this transaction is both strategically and financially attractive, the transaction is highly complex carve-out. Over the last 6 months, a tremendous amount of time and energy from various dedicated teams from both Owens & Minor and Halyard prepared for the closing. But more importantly, the integration process. The volume of work required to create the global infrastructure to accept the carve-out assets enabled the onboarding of over 8,000 teammates around the world and aligning new processes for the existing and new enterprise has only partially been reflected in the financial terms in the first quarter results.

And I'd like to take a moment to thank all of our new and existing teammates who participated in the process and those who backfilled the everyday work required to service our customers. Well done. But now the real work begins. We have doubled the number of teammates, expanded our global footprint and added world-class manufacturing and clinical sales expertise. We will also be operating under a significant number of transition services agreements, or TSAs, in the coming months. As a result, the work we must do in our first 100 days will be as significant as the effort to plan the integration over the last 6 months. Our focus will be not only on the integration but on expanding and delivering value for our customers.

During this initial period, we expect to gain greater visibility and insight into our ability to realize the expected synergies on or ahead of schedule and exit the majority of the TSAs as soon as possible. In doing so, we are confident that this transaction will be accretive in 2018.

As previously discussed, upon consolidation, we expect to gain approximately $750 million of incremental annual revenues from the acquisition. The balance of the $1 billion of revenue generated by the S&IP business already flows through our channel. We remain confident in our ability to deliver $40 million to $50 million in synergies over the next 3 years with approximately $13.5 million of synergies achieved in the first 12 months. These initial synergies are expected to be generated in several areas: first, operating expense and corporate overhead cost synergies through the consolidation and reduction of corporate expenses. We expect to achieve savings in logistics and distribution expenses. For example, we should see savings from strategic sourcing of common carrier rates for shipments, allowing us to consolidate volume and achieve improved rates. Indirect sourcing of various services is expected to generate savings as a result of our increased global scale. And finally, we expect to realize synergies as a result of consolidating our own brand and leveraging our distribution channels.

On the financing front, the acquisition was financed with a combination of cash and debt. We recently closed on an amended credit agreement, which included a $196 million Term A loan with our bank group and an institutionally financed $500 million Term B loan. While this will meaningfully increase our leverage, we believe the acquisition will be accretive to earnings this year and improve cash flow as well as allow us to effectively manage our balance sheet going forward. And finally, our Board recently approved the second quarter 2018 dividend payment of $0.26 per share, a 1% increase over the prior period.

Thank you. And with that, we will turn it over to the operator for questions. Operator?

(Operator Instructions) And our first question comes from the line of Michael Cherny from Bank of America.

I want to think about -- I know you're not providing guidance but maybe if you could talk about the puts and takes as you expect the business into this year. Can you talk about what are some of the tailwinds you have, maybe explain some of the comp effects that you've had in terms of some of the recent headwinds, whether it's customer attrition, market pricing, whatever it may be? Just so we can get a sense on how at least the base business or traditional distribution business, absent S&IP, should be growing as we head over the course of this year, especially with all the noise, I would say, that is currently going on as you to work to integrate S&IP.

Yes, Michael, let me take that, then I'll ask Randy to comment. First, I think we've been clear. We expect the challenges that we've seen in the acute distribution space to continue. So from a headwind standpoint, the margin pressure in that space -- and I would call that out as the primary headwind and then we still expect to be working through some headwinds in our International segment. On the tailwind part of this and where we are excited, we're very excited about the steps we've taken to strengthen and diversify our business model. So going forward, we expect to see benefits from the Halyard S&IP acquisition. Obviously, it's going to bring a platform for growing our own brand products, and we have more headroom there than most. And the second one we're very excited about is Byram and how it's allowing us to access the attractive alternate site markets. So I would call both of those out as areas where we expect to see tailwinds. And obviously, we're working very hard to improve the sustainability of the margins in our distribution business. Randy?

Sure, Mike. I think Cody said it very nicely. And as you all know, we've been highlighting some of the challenges in the what we formally call our core distribution business and the ongoing transformation activities that performed pretty well in 2017 and are off to a reasonable start in 2018. With the new segments, a lot of these activities are going to be captured in the Global Solutions business. And I think when you put the core distribution business together with our transformation activities, the consolidation of Byram and the positive results they're showing, I think we have a fairly reasonable outlook. And as we said in our last quarter, we were looking for sequential improvement over the fourth quarter, which admittedly was not a great quarter but much more in line with the third quarter, and I think that's what we delivered. And I do expect to continue to see that kind of performance going forward.

Understood. And then just one other question. When you think about the rapid business transformation and the steps you're taking to reposition some of the cost base on a long-term basis, is there some kind of calculation or rule of thumb we should be thinking about in terms of the type of organic growth you need to see some of those RBT cost savings flow down to the bottom line and going forward, as you continue to pursue on this plan, what you think this can contribute, just a broad-based margin expansion versus what some might be reinvested in the business?

What I'd say, first of all, I'm very pleased with how that team is operating it. We're going into our second year of that business transformation effort, and we're seeing very good results from it. Not all of it related to the productivity in our facilities. So what I'd say is we expect to see continuous improvement there on contributions. The one area that you're pointing out that is more challenging is we had some lost business last year and some deleveraging going on. And in that environment, it's very difficult to drop productivity improvements through to the bottom line. We're hoping to see the business -- we're starting to see the business stabilize. And if it does, we expect to see more of those DC productivity initiatives flow through to the bottom line. And as you've seen, we've committed to the $100 million, $150 million of sustained improvement by the end of 2019.

Yes. And Mike, just to sort of echo those comments, historically, the trend of that business has been pretty in line with overall utilization rates, and we always get a comment about utilization rates. We might as well address it here. We continue to see reasonable utilization. Obviously, the flu season in the first quarter probably contributed to some of that. But overall, we can still believe there's a positive nature to the utilization rates in that segment of our business. And typically, that augurs fairly well on a go-forward basis.

And your next question comes from the line of Robert Jones from Goldman Sachs.

I just wanted to go back to the performance of the core business a little bit better. I know you guys commented on it. But within Global Solutions, it seems like maybe revenue would have been down slightly versus last year if we adjust for Byram, and it looks like operating income in the segment might have been down maybe roughly north of 30% if we adjust for Byram. I guess, first, is that directionally right? And then, Randy, if I heard you correctly, would you characterize the core business as having gotten better sequentially versus 4Q? I know 4Q was a tough quarter. And then just relative to the trend, do you think that core business in 1Q was more stable, better, worse? Just trying to get any thoughts around the core business would be helpful.

Sure. You kind of have 2 questions there. One, sort of top line growth year-over-year and where we're going to be. As you recall, we had a fair amount of turnover in the last year's first quarter with the puts and takes. That's all come through the business. So it's [kind of] (inaudible) I think when we're thinking about sequentially and where we're going, we continue to believe that we have from an overall volume through the channel some reasonable opportunity to continue to see some positive trends there. And what I was alluding to was the sequential trends that we had -- we had announced year-end results. We talked about expectations in the first quarter, and we didn't give formal guidance. But what we suggested is that we would continue to see sequential growth on a consolidated basis. We happened to see good growth in our 2 new segments as an aside, but we expected to see sequential improvement in terms of the overall performance in the company more in line with the third quarter. And I think we accomplished that.

Okay, that's helpful. And then, Randy, just to follow up on the synergies. It sounds like you expect from S&IP to be the same as what you had outlined previously but maybe the costs might be a little bit higher to onboard the business, if I heard you correctly. Just curious, are those costs separate from the synergy targets that you outlined?

We've never really talked in terms of the cost to achieve these synergies. I think there's always going to be a number of acquisition-related cost that will incur over the next year or 2 as we integrate this business on a global basis. So they were not net numbers. They were just raw synergy numbers. But you're absolutely correct. The goals and the opportunities, $40 million or $50 million over the next 3 years and $13 million to $14 million in the next 12 months is what we continue to look for.

Robert, I just want to add to that we just closed this transaction. I think Randy articulated how large and complex it is. But I do want to just say that we're very pleased with the early days. I mean, we've -- Chris Lowery is leading this. He was the former COO of Halyard. The transition teams are off to a really good start. It's just early on and a very large integration effort.

And your next question comes from the line of Erin Wright from Credit Suisse.

I guess, a follow-up to that question. I guess, what are more specifically some of those complexities that were somewhat surprising of the carve-out that you were speaking to and in terms of those incremental costs before and potential net synergies kind of from the acquisition? If you can maybe quantify that a little bit better, that would be helpful.

Sure, Erin. I think when we announced the transaction 6 months ago, we recognize that this was a carve-out, so I wouldn't say that they were surprising. I think the surprising nature was just as we went through it and around the world, the amount and the enormity of the activity that would be required to create the infrastructure to absorb both the teammates that we've taken on and a variety of locations around the world as well as just our ability to conduct business on the first day. That said, as we look forward over the next proverbial first 100 days, there's just a tremendous amount of activity. And as Cody indicated, we're off to a very good start. But again, we have a significant number of TSAs, particularly in the first 90 to 100 days to ensure the transition. We still have teammates that are transitioning based on local rules and regulations and how that occurs. We've got a few albeit small rolling closes of a few local jurisdictions around the world, and so there's just a tremendous amount of moving parts that I think when we announced the transaction didn't anticipate just the length of time to accomplish the closing activity and the onboarding activity. And I think as we move through that, again, over the next couple of months and we'll be in a better position with increased visibility and transparency throughout the organization to give you guidance as we move forward.

And I would just add, one of the goals I set for the organization when we started this diversification move was to do this better. And if you look at the results we're getting with Byram in just the first period -- first and second period with Byram, that acquisition is exceeding our expectations. The integration efforts, everything the teams did there is exceeding our expectations. We want to bring that same approach with Halyard, and we're off to a good start. And we see very compelling value from both of these acquisitions, but we want to be very precise in outlining what we expect.

Okay. Great that's helpful. And then from a capital deployment perspective, how quickly kind of do you expect to delever here? I guess, what sort of balance sheet flexibility do you have now?

Sure. What we've said all along and what we've said during our capital raising efforts is that over the next 3 years or so, we would expect to get down to sort of pre-acquisition levels in terms of our total debt to EBITDA, which would be back down into the mid-3s, will be relatively speaking well into the 5s upon closing. So again, we recognize that we'll be fully utilizing our balance sheet. But the focus on improved earnings integration, getting off of the TSAs and continue to improve cash flow and earnings over the next couple of years will certainly contribute to that and allow us to deleverage in an appropriate period of time.

And your next question comes from the line of Sean Dodge from Jefferies.

So maybe going back to Halyard and just thinking about the time line a little more for the stages of the integration, it sounds like there's a lot of upfront focus on building out the infrastructure while you still have the TSAs in place. When we think about the opportunities you've mentioned for growth so opening up new markets to sell the rest of the Owens & Minor platform, it sounds like that's a little bit further down the road in the next -- that's not going to be a focus much over the next 100 days.

Well, again, I think -- let me restate part of the thesis here, Sean, which is, one, we're low single-digit owned brand products. So first by making this move and bringing in the Halyard S&IP products, we go from low single digit to low double digit of owned brand products, and that's just by getting the integration right out of the gates. Another opportunity we see is we have our kitting business, and we control what goes in those kits. So we have a growth opportunity to put more of the Halyard S&IP products into our kits. Another opportunity is to start to take our MediChoice brand, our own brand, that we have here domestically and start to sell that internationally now with the clinical resources that Halyard brings. So I think what we're trying to say is that the immediate focus is on making the integration successful, standing up the new Global Product SBU. And we see lots of value there and then appropriately staging those other growth drivers as we look ahead. But most of the focus right now is making sure we get that initial phase right.

Yes. And just to echo that again and add some color, one of the things that we've spent a tremendous amount of time on with Chris [and activities] and what we talked about in our prepared remarks was the focus looks beyond integration and making sure that the pieces are all going to work and fit together. We can take the cost out and create those synergistic opportunities on the [call] side. But Chris understands and the teams understand around the world, we want to hit the ground running with these products. As we've said, the products already flow through our channel. So on the revenue side of the equation, don't mistake the fact that we are very prepared to continue to be focused there, so there's no delay in sort of the top line aspect to that.

I think the other thing I'd add, too, is we know the Halyard folks. Well, we've been a strategic partner of that business for a long time. And what's exciting for both of them and for us it to bring the 2 organization together. Within the old Halyard organization, there was a lot of focus on other medical device categories. We're bringing them over here, and they are the focus and we've formed this new Global Products SBU. So I would say the esprit de corps amongst the 2 organizations is very high to let's get out there and sell more products. So we just want to get that initial phase right.

Okay, very good. And then on the kitting business, I know you've been wrestling with some production issues there. It sounds like those have been stabilized in the United States but still a little challenging internationally. Did I interpret that right?

Well, first of all, what we used to call the CPS business is now part of the Global Products SBU, and we like it under that new leadership and team structure. That business made very good progress operationally in both domestically and abroad so stabilizing the business, and both of those units are now turning toward growth. And that's going to take some time, but we were pleased with the progress they made to operationally improve and position the business to grow.

And your next question comes from the line of Steven Valiquette from Barclays.

First one, just despite the general market comments on flu prevalence, which is lower acuity, there's actually been a lot of discussion this quarter from the publicly traded hospital companies witnessing greater acuity within their inpatient admission mix. So I guess I was curious whether you guys were seeing an evidence of that higher acuity per admission within your own SKU sales mix in the quarter. And also more importantly, perhaps, did that help your results at all in 1Q versus what your results would have been otherwise in the first quarter?

Thanks, Steven. That's a great question. Going back to the January-February time frame, we did see some incremental volume flowing through the channel. We attributed it, a large part, to some of the activity around the flu season, and so that activity at the acute care center really is being driven by that. Little softer in March time frame, but again so a really pretty good quarter in terms of utilization and volume through the channel. We pay a lot of attention and stay close to our customers to try to sort of get some visibility [under] the sustainability if it was more just a flu season or something else there. But again, always good to have increased volume and positive first quarter. It's a good way to start the year, and we'll keep you updated as the year progresses. But that's where we're, so I think it's pretty much aligned with -- I listened to the Tenet call and the HCA call, and they seem to indicate similar trends.

Okay, great. And maybe one other quick one, if I can sneak another one in. The balance sheet capacity you're spending on M&A and the associated increased financial leverage, some investors are asking us about your dividend policy and whether you plan to stay committed to it at current levels or could there perhaps be a change in your dividend philosophy going forward.

Sure. Absolutely, in terms of our dividend policy, as we indicated in our remarks, the board did authorize our dividend, and we're continuing with our history of continuing to grow the dividend. One of the things we spent a lot of time on during the past year as we made both the Byram and the Halyard acquisitions was understanding how well we could do at sustaining the dividend as we simultaneously delevered the balance sheet and we continue to believe that we can do both and move the business forward and continue to grow it. So I think at least at this juncture, there's been no change in our perspective on that.

And your next question comes from the line of David Larsen from Leerink.

Can you talk a little bit about the year-over-year growth rates for Byram and Halyard? What were those revenue growth rates? And what are the operating margins?

Well, when we talked about Byram, we can only give sort of anecdotal growth perspective. It was not a part of public company last year. It was part of our larger organization. We can -- as Cody suggested in his remarks and then commented on, we continue to see both sequential nice movement in that business, both from a top line and from an operating perspective. And so we are very pleased with the acquisition and the progress that's been made and the future outlook there. We haven't given guidance on margins, but we continue to see very nice margins there. It's well above what the historical distribution business was. And as I think most folks understand and as Cody pointed out, the home health and some of the chronic disease states that Byram supports is one of the fastest-growing segments of health care. So again, from both the top line and the profitability perspective, we're well pleased with that acquisition and how it's going. With regard to Halyard, we have tried to give some indication, along with the RemainCo that's out there and what Halyard has been, we saw some pretty positive results in the fourth quarter sequentially as this business continued during the transition. And into the first quarter of that, we continue to see some positive momentum in terms of revenue growth. So I think some of the concerns about the trend line growth of the past year, I think, are beginning to be addressed with some of the more recent results. So again, we are very positive about the acquisition and the opportunity to integrate it and really see this as a springboard to the future.

And David, if I could just add on the Byram case, again, exceeding our expectations, accretive to our earnings. What's been nice and just we've owned it since August of last year, but our teams have done a nice job of connecting the Byram team to large IDNs, and we're starting to unlock growth there. And what we see is as the industry moves to value-based payments, more and more of our large IDN customers care about following their patients to the home, and we see a compelling opportunity to connect the Byram value proposition back to our large IDNs. A little early on that but I'm seeing a nice trend there, and I like the way the 2 teams are working. But for purposes right now, growth is exceeding expectations. And as Randy said, it's accretive and much higher margins than the core distribution.

And then when do you lap this customer losses? And do you have significant renewals on the horizon?

Most of the significant exits and things that we referred to over the past couple of years are going to be behind us as we move into the second and third quarter. So from a top line perspective, you should begin to see more reasonable comparisons as we move ahead here. But there's just the normal trend and churn in our business every year, so there's ebbs and flows to that. And as far as any meaningful renewals, as we've indicated a number of times, anywhere from about 25% to 30% of our business is always up for renewals every year. There's large customers, small customers, so the breadth, I would say, we have ongoing opportunities to continue to retain and grow our business as we move forward. But that's kind of everyday life for us as we go forward, so I don't think it's anything that's material when we look out ahead.

(Operator Instructions) And our next question comes from the line of Eric Coldwell from Baird.

I wanted to go back to David's question just now on Byram and the growth rate there. Last quarter, we had Byram doing $129 million of sales. You reported $118 million today, but you just said it grew sequentially. So I'm hoping to get a little more specificity on what you're saying there.

Sure, Eric, and I'll be a little bit more specific. I think it grew sequentially based on our own expectations of where it should be. But the Byram business is seasonal, as I'm sure you know that side of the business with their leverage to reimbursement and third-party payers. And so in the first quarter, when people are getting their deductibles, there's always the seasonality in that, and fourth quarter is seasonally their strongest quarter. So you're actually correct. I misspoke relatively to just the absolute numbers, speaking more in terms around expectations. But year-over-year, it's seeing very nice growth, and we continue to be very positive about the opportunities to leveraging that business with our own customer base and channel access, which is the thesis behind not only Byram but also Halyard. So combining both from a more vertical orientation on that and expanding down the continuum of care with Byram certainly creates opportunities for us to continue to see nice growth and improve profitability on a go-forward basis.

Got it. Quickly on S&IP, we had a lot of questions here, obviously. But how much of their inventory is moved through the channel on a consignment basis?

Formerly, their inventory and consigned to us?

Consigned globally so perhaps in these 90 countries, they're in that -- they might not have infrastructure or footprint. They might be consigning maybe through some kind of a third-party organization or directly to a hospital in some countries. So I'm curious, how much of that inventory might be under consignment?

Well, we would be integrating or consolidating all that inventory if it were consigned. There's not -- given their portfolio or the portfolio that we are acquiring, there's not a lot of consigned inventory. Perhaps the RemainCo and some of the products they're selling has a little bit more [consignment] given the nature of those products. But we're going to get the vast majority of the inventory on our books it moves through. We have a few third party or 3PL-like situations, which creates synergy opportunities with our own global distribution and logistics channel. But most of that, again, that would be, to use your word, a consignment of owned inventory at a 3PL. But again, that would be consolidated on our balance sheet. So the traditional consignment stock at a hospital or a point-of-care, that usually doesn't occur with these products.

Okay. And then last question, do you know how the inventory is tracked, what the systems are in each of those countries? Is it one global standard? Is it kind of some of the legacy stuff that we've seen with some other global medical supply companies, like Excel spreadsheets? Or is this a more robust cloud-based system? How do you track inventory in that business?

I think this gets to one of the challenges and opportunities of the integration and this sort of transitional period. And part of the myriad of TSAs that we have in place, one of them is an IT TSA. We operate a variety of platforms around the world, and I think that one of the reasons that we acquired the underlying IT systems was so that we could create a little bit more continuity as we move forward. The basic infrastructure technology that Halyard was utilizing is an SAP platform around the world. But I would say, it's not cloud-based. We're not using Excel spreadsheets, but we're somewhere in between and there's opportunities as we move forward. But again, the long pole in the tent, so to speak, will be the IT transition, which is we're expecting sort of an 18 to 24-month opportunity. And I think both the RemainCo of Halyard plus ours, we are both recognizing the cooperative opportunity and really focused on doing the things necessary to ensure a smooth transition there. But again, there's going to be a lot of work there around that going forward.

(Operator Instructions) And there are no further questions at this time. I will now turn the call back over to Mr. Phipps for his closing remarks.

Thank you for joining us today. We're excited about the steps we've taken to strengthen and diversify the company, including the Halyard acquisition. We look forward to seeing you on the road this summer and updating you on our second quarter call. Thank you.

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