Accendra Health, Inc. (ACH) Q3 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Owens & Minor Third Quarter 2013 Earnings Conference Call. My name is Ashley, 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, Mr. Craig Smith, Chairman, President and Chief Executive Officer of Owens & Minor. Please proceed, sir.

Thank you, Ashley, and good morning, everyone. Welcome to the Owens & Minor third quarter 2013 conference call. And this morning, we will review our results and take your questions. But first, let me introduce my colleagues on the call today, and I'll do a little editing on the first one. First is Jim Bierman, President and Chief Operating Officer; Randy Meier, our Chief Financial Officer; and Grace den Hartog, our General Counsel. Now before we begin, Trudi Allcott from our Investor Relations team will read a Safe Harbor statement. Trudi?

Thank you, Craig. Our comments today will be focused on financial results for the third quarter of 2013, which are included in our press release and in our SEC filings. In our discussion today, we will reference certain non-GAAP financial measures. Information about these measures and reconciliations to GAAP financial measures are in our press release and in the third quarter's supplemental slide presentation, both of which are posted on our website. Our call today will also be archived 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. Finally, we will be participating in the Credit Suisse Healthcare Conference in Phoenix on November 13, and we're hosting our 2013 Investor Day in New York on December 4. And there's a link to the registration for the event in our press release. Thank you. Craig?

First, I'd like to take -- first, I'd like to call on Jim for our operational overview, and then Jim will hand it over to Randy, who will review the numbers with you. So Jim?

Thank you, Craig, and good morning, everyone. Since Randy is going to review our quarterly financial results, I'll take a few minutes to discuss certain trends and points of interest that we're seeing in our Domestic business. Since we last spoke with you in July, we made progress on a number of strategic and tactical fronts. I'll begin with our provider customers. I'm pleased to report that during the quarter, we signed a new multiyear agreement with HPG, the last of our pending GPO agreements. We are also pleased that we have re-signed all of our HPG member customers. We appreciate the confidence and trust that these member systems have in Owens & Minor, which they demonstrated by recommitting to multiyear contracts with us. We believe the new contract aligns the efforts of our 2 organizations towards improving supply chain performance and contract compliance. Most significantly, with the signing of the HPG agreement, we now have multiyear agreements in place with each of the major GPOs. Negotiation on these GPO contracts began more than 18 months ago. So we are very pleased to have successfully completed this complex process. Our relationship with the GPOs and our health care provider customers remains solid and productive. Together, these GPO contracts represent more than 90% of our hospital business. Although, as we have said many times, our contractual relationships under these GPO agreements are actually made with each individual health system. Accordingly, there are some hospitals that are off-cycle with the GPO renewal dates. Those hospitals will come under the terms of the new GPO agreement on their respective contract anniversary dates. And looking at the results of the GPO renewal process, we are comfortable that the related gross margins are generally in line with our original expectations. As we have said for a while, we did take the opportunity throughout these GPO renewals and hospital sign-ups to price some of our unprofitable health care provider customers at rates that we believe were fair that turned out to be above those offered by some of our competitors. Consequently, we have seen a slight decline in domestic revenues for the year-to-date period due in part to the migration of those customers. However, Domestic revenues improved sequentially when compared to the second quarter of this year. As we have said, we intend to promote our relationships with the most efficient providers, who are capable of collaborating with us to achieve meaningful supply chain efficiencies. We will continue to focus our sales efforts on the provider systems that we believe will be the future players in a consolidating health care market. Turning now to our manufacturer customers. We are excited about the opportunities we are seeing in the manufacturing community. With our ability to offer logistics services to manufacturers in both the U.S. and Europe, we are finding that medical device companies that have not typically used traditional distribution to get their products to market are increasingly interested in our capabilities. As we have said before, we believe this untapped logistics market is conservatively sized at more than $50 billion. These medical and surgical products are being delivered directly to hospitals by manufacturers themselves, rather than by distributors. That is a sizable opportunity for us. And we are seeing an increasing level of interest among manufacturers, who see us as the only logistics partner solely dedicated to health care, capable of offering this service. For example, we are piloting a program with a medical device manufacturer, under which we will warehouse certain of their implantable products, and then take responsibility for stocking and managing the inventory levels within the hospital operating rooms. This is a fee-for-service inventory management arrangement with the inventory is on consignment to the hospital, until it is actually used in a surgery. In other words, we will have custodial responsibility for the product, but we'll not take title to it. This project is significant because the implants involved are the types of products that were typically managed by the manufacturers themselves all the way from the factory to the operating room. This is a prime example of our ability to help medical device companies innovate and adapt to changing provider customer needs. To meet the needs of our provider and manufacturing customers, we have had to make some changes to our supporting infrastructure. Nearly, a year ago, at our November Investor Day Conference, we targeted a level of exit and realignment activities for this year. To date, this year's exit and realignment activities are on plan, and primarily represent changes we have made to the domestic network to meet the evolving needs of our customer base. This certainly is a continuing process that is involving in response to market forces. We are pleased that during the quarter, we opened a regional distribution center. That in particular was in response to the needs of a large health care system customer. This regional facility is equipped with state-of-the-art equipment and systems. We were able to consolidate the operations of several smaller facilities into this larger, more efficient regional center. The advanced capabilities built into this distribution center, along with the associated efficiencies and cost reductions resulting from its size and scope should enable us to recognize economies of scale. We anticipate that we will leverage this facility in service of other strategic areas in the future. As we look at our infrastructure, part of our investment strategy is to ensure that we have the robust and flexible information technology systems, we need for growth. Consequently, during the quarter, we continued to invest in our 3-year $50 million information technology plan. For example, we improved our customer portal, analytics and data management capabilities. All of which are designed to enhance the customers experience. To date, we are on plan for the completion of our initial IT investment strategy. The continued work on realigning and expanding our infrastructure to meet the changing needs of our customer, the progress we made with our GPO contracts and the exciting new offerings to the health care manufacturers are concrete example of the investments we are making in Owens & Minor as we grow our company in the U.S. and abroad. In summary, our teams here in the U.S., in Europe and in Asia are working hard towards the same goals, to ensure that Owens & Minor is fast, flexible and positioned for growth in the years to come. Thank you. Now I ask Randy to provide us with the financial overview.

Thanks, Jim, and good morning, everyone. Jim has given you some insight into the quarter that should help you put our financial discussion into context. As I walk through the third quarter and year-to-date results, for the purposes of comparison, please keep in mind that we acquired Movianto late in the third quarter of 2012. So, we had only 1 month of Movianto results in the last year's third quarter's numbers. Third quarter consolidated revenues was $2.3 billion, an increase of 5.7% when compared to revenues in the third quarter of last year. The increase was driven primarily by our International segment as Movianto contributed revenues of $129 million for the quarter. Domestic revenues improved 2.1%. But, I would note that there is 1 extra selling day during the quarter this year when compared to a year ago. That extra selling day provided approximately $34 million of incremental revenue. For the first 9 months of the year, consolidated revenues increased 4% to $6.85 billion when compared to the same period last year. The International segment contributed $323 million in revenues, representing the majority of the year-over-year increase. Partially offsetting this increase was a decline in Domestic revenues of $59.5 million for the year-to-date period. Domestic revenue trends reflect conditions we have seen in the marketplace all year, including flat utilization, reduced government spending and our efforts to rationalize some less profitable provider and manufacturer accounts. That said, we are very pleased with the Domestic revenue gains in the third quarter. For the quarter, consolidated operating earnings were $49.2 million, an increase by $2.6 million when compared to last year's third quarter. Excluding acquisition-related exit and realignment cost of $2.7 million, adjusted quarterly operating earnings were $52 million or 2.25% of revenues. This $2.5 million decline from the third quarter of 2012 resulted primarily from slightly lowered Domestic gross margin versus last year, partially offset by positive operating earnings from our International segment. For the first 9 months of the year, once adjusted for $5.4 million in acquisition-related and exit and realignment charges, adjusted operating earnings were $153 million or 2.23% of revenues, a decline of $7.6 million from the prior year period. In addition to the factors affecting the third quarter results, year-to-date operating earnings were also negatively affected by higher litigation expenses cost associated with transition to a new fleet vendor and year-to-date losses in the International segment. These negative factors were partially offset by positive impact of supplier price changes in the first half of 2013 and benefits from our sales tax settlement earlier this year. When looking at Domestic segment, operating earnings declined $3.9 million to $51.2 million in the third quarter. A decrease of $5.4 million to $155.4 million for the first 9 months of the year when compared to the same period last year. The year-to-date decline was driven by factors I just outlined in the related -- and related to the Domestic segment. As a component of third quarter operating earnings, gross margin was $273.3 million for the third quarter or 11.86% of revenues. For the same period last year, gross margin was $228.1 million or 10.46% of revenues. The improvement in gross margin was primarily the result of the full quarter's contribution of the International segment. And looking at the Domestic segment, for the quarter and year-to-date, gross margin as a percentage of segment revenues benefited from stable customer margins, partially offset by seasonally weaker fee-for-service business in the third quarter. As for the operating expenses, quarterly SG&A expenses increased $46 million to $211.3 million and were 9.17% of revenues. When looking at the year-to-date period, SG&A expenses increased by $170.4 million to $641.6 million when compared to the same period last year. The increases in both -- in expenses in both periods resulted largely from the Movianto acquisition. In the Domestic segment, third quarter SG&A expenses increased over last year's third quarter due to several factors, including cost associated with increased sales activity, as well as greater health care expenses. However, as a percentage of segment revenues, Domestic segment SG&A improved sequentially in each successive quarter this year. Depreciation and amortization increased approximately $2 million for the quarter, but was $10 million higher for the year-to-date period. The increase resulted primarily from the impact of added International segment. Interest expense for the quarter and year-to-date was $3.4 million and $9.8 million, respectively. Our tax decreased -- our tax rate decreased to 39% for the quarter from 43.6% a year ago. The lower rate was due in part of the acquisition-related cost in last year's third quarter that were not deductible. For the year-to-date period, the tax rate stands at 39.6% compared to 40.7% for the comparable period of 2012. The reduction resulted primarily from the conclusion of the 2009, 2010 IRS audit and certain state tax audits. These benefits were partially offset by foreign tax losses earlier this year. Operating cash flow for the year-to-date period was approximately $161 million, compared with approximately $170 million in the same period last year. In our Domestic segment, asset management metrics continue to be strong, including DSO of 19.3 days and inventory turns of 10.2x. For the third quarter of 2013, adjusted net income was $29.9 million or $0.47 per diluted share compared with $0.49 for the prior period. For the year-to-date period, adjusted net income was $86.8 million or $1.37 per diluted share compared with $1.44 for the prior year period. Included in these results for the first 9 months of the year are the International segment operating losses of approximately $2.8 million or $0.04 per diluted share. Before I address our financial guidance, I would like to make a few remarks about the International segment. Craig and I traveled to Europe in September and met with Movianto team and some of our customers. We were pleased to see the enthusiasm and discipline the Movianto team was applying toward achieving their goals of improving capacity utilization in the network, optimizing their cost structure and building the revenues. Our teams deserve to be commended for this achievement. Finally, a review of our financial guidance for 2013 based on operational and financial results for the first 9 months of 2013. We continue to target revenue growth of 2% to 4%, but we are now targeting adjusted net income per diluted share at the lower end of the range of our original guidance of $1.90 to $2, which includes operating results from Movianto, but excludes exit and realignment costs, as well as acquisition-related costs. Thank you. And with that, I'd like to turn the call back over to Craig.

Thank you, Jim, and thank you, Randy. And with the quarter's result, we're very pleased with the steady improvement we've achieved throughout the year on a number of fronts. Just 1 year after the acquisition, Movianto achieved profitability in the quarter. We reported revenue growth in the Domestic segment and we have completed the last of our GPO contract renewals. Now, we believe the steady progress we have made throughout the year is validation that we are pursuing the right strategies and investments to adapt to a changing health care market. In fact, recent events have underscored that we are in right on target with our global strategy and our commitment to providing third-party logistics services to health care manufacturers. As Randy mentioned, we traveled to Europe in September to meet with the Movianto leadership team. September, as you all know or may know, marked our 1 year anniversary for the Movianto acquisition. I have to tell you, I was very pleased with the team that they achieved positive operating earnings in the quarter and that they have steadily improved their results over the last year. The teams in Europe are very focused on carrying out our strategic vision in Europe and overseas, while at the same time they continued to work on improving efficiency of the business. On the Domestic front, as Jim said, we have worked through the entire slate of GPO contract renewals, a process that took nearly 2 years, but this also means that we have renewed 90% of our business over that period of time, and I believe that is really no small accomplishment. The GPOs clearly remain a vital part of the health care landscape and our relationships with them are positive and productive. So let me give you an update on our board. We're very pleased to welcome 2 new board members to Owens & Minor. Stuart Essig, Chairman of the Board of Integra LifeSciences. Stuart brings a wealth of medical products experience, as well as knowledge of global markets to the board. And David Simmons, the Chairman and CEO of Pharmaceutical Product Development, who also worked for many years at Pfizer will contribute his knowledge of emerging markets and global trade to the board. Both gentlemen I have to say have very impressive credentials, and we believe they will have a positive impact on Owens & Minor. In other board-related business, our board has approved a fourth quarter dividend in the amount of $0.24 per share. And in closing, everyone on our team knows that health care is changing. Our team mates know they need to be flexible and focused. I am confident that our leadership team has a foresight and strategic thinking to make the investment and to develop the tactics to answer our changing environment. With that, we'd be happy to take your questions. Ashley?

Our first question comes from Glen Santangelo from Credit Suisse. Glen J. Santangelo - Crédit Suisse AG, Research Division: Craig, I just want to follow up with you little bit on Movianto. It seems like through some previous comments you made that, that acquisition probably got off to a little bit of a slower start than you had anticipated. But it seems like you turned the corner this quarter, generating a small profit. Can you maybe just give us a little more detail in what that transition was? Are the revenues picking up? Or are you stripping some cost out? And should we assume that the business should be profitable from here going forward?

Thanks, Glen. Thanks for the question. We worked very hard on Movianto. And I think exactly what you said with your opening remark is, we had a lot of work to do on Movianto more than we probably anticipated when we took the business over. I think we've made some very positive changes with the management team over there. I spent a lot of time with them in September. We had a board meeting actually here in October. They have done a nice job of what I would call building a profitable sales time line to get that rolling. And really, we have a very high profile on working on improving efficiency. So I think we've got kind of a double-edged sword there that we really filled the pipeline up nicely. We continue to work on operational efficiency. I think they did a very good job over the last 3 quarters, and I think they'll continue to do a good job for the company long-term. Glen J. Santangelo - Crédit Suisse AG, Research Division: Okay. Maybe if I can just ask a follow-up question on your volumes and revenues. It seems like if you were to strip out Movianto and the extra selling day, your revenues were -- on the Domestic segment were up just fractionally, I think. And if you take out some level of price inflation, are you assuming that at volumes, at least in your book of business are trending slightly in negative territory? I mean, any sort of color there? And I don't want to steal the thunder for the December Analyst Day, but could you give us any preliminary thoughts on the Affordable Care Act? Are you assuming an uptick in volumes as we move into 1Q?

Glen, this is Jim Bierman. And let me comment on both the trends we've seen and probably as you foreshadowed comment to a far lesser degree on what our outlook for next year is. I think we will save that opportunity for our December Investor Day. But to put the growth in the quarter within context, we fundamentally believe that there is little to know, purchase price inflation going on with the products, at least, that go through our channel. And there is some school of thought that would indicate there is actually product price deflation going on. So that to see the revenue growth that we're seeing, I would argue very little of it has to do with any price component, and the growth we've seen probably has more to do on the volume side. But let me put that in context because the -- there are a significant number of for-profit health care customers and companies out there that have released earnings for the quarter, and many of them have cited that utilization softness in the marketplace. What -- where we have seen growth, it has tended to come -- again, as we've talked about for many quarters, from our larger customers who are aggregating other hospitals in the marketplace. So my comments aren't stating that there's necessarily an increase in utilization per say, but the volume increase we're seeing is the expansion of our larger customers as they continue to take share in the market. Glen J. Santangelo - Crédit Suisse AG, Research Division: Okay, I appreciate those comments. Maybe if I could just ask Randy 1, then I'll jump off. If I look at the guidance that you guys are implying in the fourth quarter, the bottom end of that range would imply about $0.53 in the fourth quarter, which seems like a nice double-digit percentage sequential increase from the third quarter. I'm just wondering are there any sort of puts and takes in there you want to call out. Any sort of special things or items we should be thinking about as we go into the fourth quarter?

No, I think, building on the success we had this quarter with continued -- we saw a nice growth in our Domestic business, and we expect that to continue, Movianto has turned the corner. And we would continue to expect to see some reasonable growth there. One area I think we could sort of just highlight, gross profit margin was down sequentially in overall, but we do have some seasonal parts of our business over in Europe. Obviously, now third quarter is traditionally a lighter period of time. And certainly, we had some of our fee-for-service business in the third quarter be somewhat lighter. So I would expect to see gross margin come back in the fourth quarter. But all in all, they would just see a continuation of the positive momentum we started here in the third quarter.

Our next question comes from Lisa Gill of JP Morgan. Gavin Weiss - JP Morgan Chase & Co, Research Division: This is Gavin Weiss on for Lisa. So I wanted first to talk about the increased level of interest you're talking about in terms of the medical device manufacturers and where you think you are in terms of this opportunity? Is it just this initial pilot with 1 manufacturer? Or are you having multiple conversations? And sort of when do you expect to see revenues or earnings from these opportunities?

Jim Bierman again. Great question. I think -- and believe me, we don't want to get ahead of ourselves on this. I think we're in the early stages. I think we had a compelling discussion for a period of a time. But I think it's taking a little while for the manufacturing community to appreciate the opportunity that is there. And I think the early adopters in that community are listening very carefully and participating inactively in the conversations now. We have a theory that once we prove the thesis in a competitive setting, and we think this pilot will be the beginning stages of that, that there will be a large number of manufacturing companies that see this as a potential avenue to that. It gives them truly a cost advantage, if nothing else, if not a service, a huge service-related advantage in the marketplace. And we think that is a subsidive subset value proposition that we can offer. Gavin Weiss - JP Morgan Chase & Co, Research Division: Okay. And that's helpful. And then in terms of the quarter obviously, domestic revenues improved on a same-day basis. Operating earnings continue to decline. Can you just maybe walk me through how each factor, the increased health care cost and maybe the lower margin sales to hospital customers, how that impacted the business and sort of size those impact for us?

I can qualitatively and then I'll defer to Randy if he chooses to share anything of a more quantitative nature, which I truly understand is the essence of your question. Yes, I think -- in re-signing the GPOs and working through all that, we saw margin domestically that certainly was within the range that we've targeted, to say it in other way, it came in within range of expectations. I would point out as Randy said in his prepared remarks and has said, I believe that each one of the 2 quarters leading up to this that the prior 2 quarters were positively impacted by supplier price changes. And there was little to no supplier price change impact in this quarter. And then finally, I'd point out that there is a transitional period with our hospital customers to the new GPO contracts. It is pretty rare. Some of the GPOs have programs that convert from about a single date. But more often than not, the individual contracts transition over a period of time. And so that's going to occur over the course of the year. I think and you heard us say this before, we look at our performance on operating earnings basis. And so not only is it all about how we're improving gross margin or what we're doing to mitigate changes in gross margin, but there's also a component that says are you improving operational efficiency? And the items I cited earlier, the investments in technology, the investments in our network, our actual facilities, some of the improvements we're making in processes, we think will have a long-term sustainable benefits going forward. And that will manifest itself in a reduced SG&A. If there's one thing that I think in your tenure you can relate to that we've demonstrated is the ability to continue to drive down SG&A once we've made investments of this type. So I think those are really the components I would think about as you reflect on operating performance domestically.

I guess, just to echo a couple of thoughts and to add on to what Jim said. One of the things that we have to start thinking about is at Owens & Minor's, we are beginning to have a somewhat more diversified revenue line, which gives a little bit more complicated nature to gross profit margin. We've got an International segment that has seasonality throughout the year, which will contribute some flexibility. We're seeing increasing fee-for-service business, which isn't as seasonally smooth in the Domestic business as the traditional distribution business. I think we saw some of that in the third quarter that impacted gross profit margin. What I'm looking at is probably and to echo again what Jim said, a better metric is our operating margin, which really begins to show some of the productivity benefits and efforts that we've been investing in for the past year and that Owens & Minor has been focused on for the last couple of years. I think the sequential benefit there really reflects a lot of the combined efforts of both our top line efforts and managing our customers, our expansion into Europe, as well as a lot of work at the warehouse as both domestically and abroad. So certainly, we could talk specifically about some increasing health care expenses that we have, that we called down in each of the quarters and the first half of this year. But I think the real operating metric that we will be focusing on and probably highlight a little bit more at the coming Investor Day is operating margin. So I think, again, the sequential improvement there is what we're focused on.

Our next question comes from Robert Jones of Goldman Sachs.

It's Adam Noble calling in for Bob. Just 2 questions. First of all with regards to Movianto. If we look at last year's 3Q, that was roughly about $50 million, which if you extrapolate for this third quarter would suggest that it was down 14% year-over-year. Is that simply just August and July being seasonably weaker than September? Or is there something to read in from this?

I wouldn't read in last year's third quarter numbers and trying to extrapolate a trend and what we are here. I think you're correct that Movianto does have -- you get in the second half of July and August they're seasonally light. But there was so much going on at the time of acquisition last year in terms of the timing and some of the deliveries on some of the business that I think even when you look ahead to the fourth quarter, that's not going to be a really robust comparison. So we'll try to give you as much color as we can going forward. As Craig suggested earlier, we built a nice -- rebuilt the backlog in terms of our projected revenue and continue to have great confidence that we'll see that business grow in the coming quarters.

Great. That's really helpful. And with regards to the Domestic gross -- the Domestic operating margins. Considering you've been able to re-sign the majority of your large clients. Should we view this quarter's 2.35% as kind of the floor going forward?

Well, and I think it would be naïve of me to commit to a floor or a ceiling on any of this. But I would say, and to the points I made with Gavin, that there is a transitional period as this -- as the new GPO contracts make their way through all of the member hospitals. So that should generally run itself out in an additional sort of 6-month period. I think we've seen it run over the course of this year, and I would expect it to continue on for a little bit, particularly for those hospital GPO systems that have just recently been re-signed in 2013.

Great. And if I could just get one quick housekeeping question in. I might have missed it. What were the domestic SG&A as a percent of revenues?

I don't believe we gave that. We gave a consolidated number, which is I think the -- what we've been quoting for the first couple of quarters this year. I will give you that. I think we continue to be very pleased with our cost management and how that's all operating, and I think you can imply from the trending of the percentage of revenue of SG&A that -- and obviously with the magnitude of the Domestic business that we're continuing to manage our cost exceedingly well.

[Operator Instructions] Our next question comes from Eric Coldwell of Robert W. Baird. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Like the last question, I was hoping to get Domestic SG&A nominally or a better sense on the International gross margin. If you look at last year, I think the gross margin for the stub period was around or just under 40%. It's been running closer to 50% recently. So a very big spread. I just don't want to walk away from the call too negative on the Domestic gross margin that my sense is the International gross margin was lower this quarter based on the seasonality comments, but it would be really helpful if we could get that number, so we can have a better perspective on how to model this seasonally going forward.

Eric, this is Jim Bierman again, and then Randy will answer the thrust of your question. But the overarching premise, I don't think you should look at Domestic gross margin negatively this quarter. I think is, I believe, I try to say, it came in within the range of -- that we were targeting within the broader range of what we were looking at for the year. We do point out that the prior 2 quarters benefited from supplier price changes. We did not have supplier price changes impacting this particular quarter. And we do have a transition process underway as customers transition to new GPO contracts. So all in all, we're feeling that the Domestic margin aside from the items that one might characterize as extraneous or noise, has been moving towards stability in a fair degree of comfort in how they're going.

Yes, just to add a little bit of color, I think Domestic customer margins have been very stable all year. So yes, I'm very pleased with that, as Jim indicated, we signed up all our GPOs and we're pretty significantly through that transition. We've seen very nice stability in that. I guess, to answer or address your question on some of the seasonality with Movianto, just to put it in context, $2 million of fee-for-service business equates to about 10 basis points and gross margin. So when you're kind of looking at some things, it doesn't take a lot of seasonality either in our European business or our fee-for-service business over here, which we indicated were impacted in the third quarter to move that -- the gross profit margin down. So again, we think on both those businesses or segments will be very nicely come back in the fourth quarter. So we're very comfortable with where we are our overall gross margin was in the quarter. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Okay. Can you size the revenue impact from the supplier rationalization?

Why don't we get back to you on specific number there? But again, I think what Jim indicated, we haven't had a lot of impact that's been consistent in the first 3 quarters of the year as we focused on our larger customers as we've moved forward.

But Eric, you are right that -- as I was trying to reflect exactly on the dates. But more or less, a little under a year ago, we made some decisions with -- on some suppliers that we had pointed out were fundamentally using our services without compensating us at all for the activities that we were doing, and we made the tough decision that we couldn't carry their product for free on our trucks. And we are coming up to lapping some of those decisions. I can't off the top of my head recall whether or not -- I believe the third quarter, we have not lapped it yet. So it is a component of the variance and an excellent point that you raised. And I want to make sure that it's understood that although that happened at a single point in time, that is a process that we consider on a continuing basis and may in the future have other conversations and tough decisions with manufacturers, where the compensation is inappropriate for the level of effort and activities we're doing on their behalf. But you are right, that was an impact on a comparative basis. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: And the last one, was there any impact charge credit from LIFO this quarter? Anything to call out?

No, we didn't have any this quarter.

Looks like we have time for one more question from David Larsen of Leerink.

Can you talk about the $6 million sequential increase in the International segment's revenue. It sounds like seasonality would be a bit of headwind in 3Q. Looks like you had a good increase there. Was that from the customer wins? Can you talk about that process a little bit, please?

Sure. I think we've seen a nice progression in the first 3 quarters of this year as we've continued to implement new business. The way this business works, a lot of this business was signed up earlier in the year, and then we began to see the implementation of that in the third quarter. And as Craig indicated, we continue to build a nice backlog in that business, which is why we continue to be optimistic about continued growth in our overall Movianto business.

Okay, that's very helpful, thanks. And then like last year, there was some on-boarding of some large IDN accounts that put a little pressure on gross margins. Is that process complete for the most part where there's not going to be significant margin pressure due to on-boarding those large size customers?

Yes, David, I think we were trying to recall if there were any large customers that were on-boarded actually last year. And I think that was really more of the year before that was more impactful. Last year was more a situation of re-signing existing business. But you are right in your premise that as very large customers come on board, we do tend to have a situation where we incur the expense in advance of the customer coming on board. And so there could be a bit of a mismatch in those periods when that occurs. Mismatch in the timing of expenses and the corresponding timing of revenues, as well as it does take a while to operationalize the relationship at a level where we're operating at an optimal tight performance. But I don't think that's an explanation of the variance, at least, for anything this particular quarter.

Okay, great. So without getting too specific, I mean is the 4Q gross margin kind of be a decent run rate, do you think? And then just lastly, SG&A looks like it's trended nicely, actually declining sequentially each quarter this year. Can you just comment on that? Do you expect that trend to continue?

When you start looking at any particular quarter, I always hesitate to say that's a good run rate going forward. I think we gave guidance of 11, 7, 5 to 2.25% for the year. When you look at our year-to-date number, it's been a pretty reasonably in the midpoint at that range. I think we'll probably give you a little bit more color on that down the road at Investor Day. But I wouldn't look at any particular quarter and assume that's a good proxy or run rate going forward. As I mentioned earlier, there is some seasonality as we've expanded internationally and some of our fee-for-service business somewhat has some choppiness to it. So I wouldn't try to read anything into the fourth quarter as we've headed a longer term. And then you had a second half of that question.

Just can you comment on SG&A? Looks like its declined sequentially each quarter this year, which is obviously a good thing. Just any comments on that would be helpful.

Well, I think, as Jim pointed out, the company has a long history of managing its cost very well. It was integrating an international acquisition. I think it's sort of, as Craig indicated, we certainly gotten that much better under control. So I would say that -- I think we're back to where we are comfortable with our cost structure and now can focus more on driving our top line growth. But cost management will always be something that we're tremendously focused on.

Thank you.

Thank you, Ashley. Sorry I cut you up there, go ahead.

Thank you. I am not showing any further questions. I like to turn the call back over to Mr. Smith for his closing remarks.

Thank you, everybody for calling in. I want to remind everyone that's on the call or listening in over the next few weeks, we do have Investor Day, December 4. I think we've got some good updates for you based on our strategy that we rolled out last year, and we're looking forward to seeing all of you in early December. Thank you.

Thank you for your participation in today's conference. This concludes the call. You may now disconnect. Everyone, have a great day.