Nov 2, 2016
Executives
Truitt Allcott - Owens & Minor, Inc. Paul Cody Phipps - Owens & Minor, Inc.
Richard A. Meier - Owens & Minor, Inc.
Analysts
Lisa Christine Gill - JPMorgan Securities LLC Steven J. Valiquette - Bank of America Merrill Lynch Michael Cherny - UBS Securities LLC Sean Dodge - Jefferies LLC Robert Patrick Jones - Goldman Sachs & Co.
Evan A. Stover - Robert W.
Baird & Co., Inc. (Broker) David M.
Larsen - Leerink Partners LLC
Operator
Good morning, ladies and gentlemen, and welcome to the Owens & Minor's Third Quarter 2016 Financial Results Conference Call. My name is Kevin, and I'll be your operator for today.
At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference call.
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. You may proceed.
Truitt Allcott - Owens & Minor, Inc.
Thank you, operator. Good morning, everyone, and welcome to the Owens & Minor's third quarter 2016 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 third quarter 2016, which are included in our press release.
In our discussion today, we will reference certain non-GAAP financial measures. Information about these measures and reconciliations to GAAP financial measures are also included in 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 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 President and CEO, who will provide an overview of the business and the progress we're making on our transformation initiatives; Randy Meier, Executive Vice President and Chief Financial Officer and President of International, who will give an update on our results and insight into the performance of our three segments.
And Nick Pace, our General Counsel, is also on the call today. Now, I'd like to turn the call over to Cody Phipps, our President and CEO, who will start things off this morning.
Cody?
Paul Cody Phipps - Owens & Minor, Inc.
Thank you, Trudi, and good morning, everyone. Thank you for joining us on the call today.
As you saw in our earnings announcement yesterday, we achieved solid earnings per share for the quarter and the year-to-date period. We made progress on a number of fronts across the enterprise.
We successfully managed the exit of the large customer that we mentioned earlier in the year. Due to the size of this customer, we knew that this will be a challenging transition for our business.
Our teams have done a good job working through this transition. We will continue to take steps to adjust our cost structure.
During the quarter, the International segment had another profitable quarter, helping us to shift our focus to growing revenues and engaging in strategic discussions with a number of important new customers. On the leadership front, we onboarded our new Chief Information Officer, Steve Olive.
He joins us from Philips, a $33 billion global company where he most recently served as their Global CIO in Amsterdam leading an IT organization across 100 countries. Steve is a strategic thinker who has solid experience in business transformations, both in the U.S.
and abroad. Steve is already in process with his energy and vision for the future and he and his team will play an increasingly important role in our go-forward strategy.
Finally, during the quarter, our teams made continued progress in managing costs and improving productivity, staying focused on delivering our plan and helping us to strengthen our foundation for the future. Now I would like to spend a few moments our new enterprise strategy.
Our provider customers continue to experience significant cost pressures driven by new reimbursement guidelines, which are increasingly linked to patient outcomes. This evolving healthcare model is also changing the competitive dynamics in our industry.
While the progress we've made in managing costs and improving efficiency is helping to drive positive results, these actions alone are not enough. We will have to take bolder steps to reposition Owens & Minor for the future.
To address this changing market, we've been developing future strategies for long-term success and we are near the end of that planning process. Our management team and board have aligned on our new strategy, and we are starting to take action in some areas while we continue to refine our detailed execution plans.
We will spend more time on our new strategy at our Investor Day in February, but I would like to introduce the components at a high level today. Building on our legacy as a leading logistics player, we're evolving into a global healthcare services company.
In this role, we will: connect the world of medical products to the point of care; attack complexity and unlock efficiency at every step of the healthcare value chain; and become the indispensable partner for both manufacturers and providers delivering exceptional value. To accomplish this, our new strategy has three key elements: one, strengthen our core logistics platform; two, unlock new growth platforms; and three, transform to accelerate our move into services.
As for strengthening our core, our industry is at a crossroads with unprecedented cost pressures and rising complexity. The healthcare industry is behind almost every other industry in driving continuous improvement and productivity.
Our industry has to become more efficient and productive and we are in a strong position to lead this charge and to attack system-wide complexity for both providers and manufacturers. To accomplish this, we will invest in our core business, from driving Lean practices into our operations to creating greater standardization, to improving our data connectivity and supplier services.
Our goal is to build the most efficient and intelligent route to market from the point of manufacture, all the way to the point of care. As for growth, we have exciting prospects ahead.
I'll highlight three of these areas. First, our newest segment, CPS has great potential for the future.
Our customers want us in this business and they value our procedure-based solutions that create efficiencies while enhancing patient safety. They also want our help in creating transparency and unlocking efficiencies in their networks, operating rooms, and expanding sites of care.
A second area of growth for us is with our manufacturing customers, both domestic and abroad. Our customers want us to bring new approaches and technologies to existing problems, scale and outsourcing for their non-core activities, and enhance data and connectivity to help them navigate the increasingly complex quality and regulatory environment.
Our International customers also want a simplified pan-European approach for their operations. Domestically, Owens & Minor has always been the trusted partner to branded manufacturing, providing them with exceptional value.
We can build on this position, bringing new capabilities and outsourcing services to unlock value. A third area for greater growth involves expanding our reach and services along the full continuum of care, as our IDN customers advance into more and more settings outside of the hospital.
Finally, our strategy is also about transformation. No company these days can succeed by standing still.
Indeed, across our 134 years in healthcare, we have a history of reinventing ourselves. Today we sit squarely in the middle of the flow of goods, funds and information.
We believe a critical component of our value is embedded in the tremendous amount of data and information that we maintain, analyze and deliver every day to providers, manufacturers, and GPOs, and we believe there's more we can do in this area to create value for our stakeholders. Clearly, all aspects of our strategy are centered on the creation of significant and sustained value for our healthcare customers.
We remain focused on achieving our goals for 2016 while we lay the groundwork for the future. Thank you.
Now, Randy will review our financial results and provide an overview of our International operations. Randy?
Richard A. Meier - Owens & Minor, Inc.
Thank you, Cody, and good morning, everyone. Today I will review our consolidated results and provide an update on our segments.
The adjustments we've made to reported results and the reconciliations to GAAP are outlined in our press release. Before I review our results, I'm sure you saw our board has authorized another $100 million in share repurchases over the next three years.
At the same time, the board also approved a fourth quarter dividend payment of $0.255 per share. Both of these actions are aimed at returning value to our shareholders.
Turning to the quarter, we successfully completed the transition of a large customer, primarily from our West Coast facilities. The transition, which started in August and was completed prior to the end of the quarter, affected quarterly revenue by about $60 million.
Even without the benefit of the full quarter contributions from this customer, we are pleased that we achieved quarterly GAAP earnings per share of $0.48 for the quarter and adjusted EPS of $0.51, in line with expectation. Year-to-date GAAP results were $1.32 and adjusted year-to-date earnings were $1.53.
Consolidated revenues for the quarter declined 2.3% to $2.42 billion when compared to last year. On a year-to-date basis, consolidated revenues improved 1% to $7.36 billion.
Compared to last year, revenue improvements on the year-to-date results was from solid performance in our Domestic segment and from one extra selling day in the first quarter. Consolidated operating earnings were $53.6 million for the quarter, essentially unchanged compared to last year.
On an adjusted basis, operating earnings for the quarter declined $3.4 million to $56.3 million. For the year-to-date period, GAAP operating earnings were $151 million while adjusted operating earnings were $171 million, representing increases in $8.2 million and $6.4 million, respectively, when compared to 2015.
For the year-to-date period, the effective tax rate was 37.3% compared to 41.6% in the same period last year. On an adjusted basis, the effective tax rate was 36.7% compared to 37.3% last year.
Asset management metrics included DSO of 21.1 days and inventory turns of 8.9 times. Operating cash flow for the first nine months was $144 million compared to $206 million last year.
The primary cause of the decrease was timing changes in working capital in the prior year and our customer transition this year. Turning to a discussion of our three segments, Domestic segment revenues for the quarter decreased 1.5% to $2.29 billion, largely as a result of the customer exit during the quarter.
For the year-to-date period, revenues improved 1.5% to $6.95 billion, with growth coming primarily from large provider customers as well as contributions from an extra selling day in the first quarter. For the quarter, Domestic segment operating earnings were $41 million, declined 2.3% when compared to last year.
For the first nine months of the year, Domestic segment operating earnings improved 6.5% to $126 million. Quarterly results reflected the customer exit and lower income from product price changes when compared to last year.
These declines were partially offset by reduced operating expenses. Improvement in the year-to-date results came in the first half revenue growth and expense control initiatives.
As for the International segment, quarterly International segment revenues decreased $9 million or 9.7% to $84 million. For the year-to-date period, International segment revenues declined $25 million or 9% to $256 million.
Excluding the negative impact of foreign currency, quarterly revenues declined $1.4 million, while year-to-date revenues declined $12.4 million. This decline is primarily due to the exit of a UK customer last year.
Looking ahead, we know our pipeline of new business is robust and there is growing interest in our pan-European services. The International segment had operating earnings of $1.4 million for the third quarter, decreased slightly when compared to the prior year.
For the first nine months, operating earnings improved nearly $1 million to $3.4 million, driven by improvement in cost controls and operating efficiency. The International team and done a great job in turning around their operations and achieving and maintaining profitability.
As for the CPS segment, revenues for the third quarter were $133 million, a decline of 7.8% when compared to last year. For the year-to-date period, revenues were $409 million, unchanged from the prior year.
Operating earnings for CPS were $14.3 million for the quarter and $41.9 million year-to-date. Both periods experienced a decline in operating earnings of about $2 million, largely resulting from the third quarter revenue shortfall.
During the quarter, we experienced greater than expected demand for our kitting services and solutions, which in turn created production challenges in capacity and workforce availability. Our teams are systematically working through these challenges in order to meet the needs of our customers as quickly as possible.
We are excited about the potential for this new business and we are taking positive steps toward the future, and we're making the right investments to scale the business. As Cody mentioned, we executed the transition of a large customer during the quarter.
We are making adjustments to our cost structure and platform and we remain focused on delivering our 2016 goals. However, with increasing provider cost pressures and the resulting competitive dynamics in our industry, we believe that we will continue to experience gross margin pressure in the fourth quarter and we expect this trend to continue into next year.
That said, based on our year-to-date results and our expectations for the fourth quarter, we are affirming our 2016 financial outlook of adjusted earnings per share in the range of $2.00 to $2.05. We will discuss the changes in our market and our new strategic plan more fully at our Investor Day in February.
At the meeting, our intention is to provide a longer-range financial outlook associated with our new enterprise strategy. Thank you.
And, with that, we'll turn the call over to the operator for questions. Operator?
Operator
Our first question comes from Lisa Gill with JPMorgan.
Lisa Christine Gill - JPMorgan Securities LLC
Hi. Thanks very much and thank you for the details.
I just want to go back to your Domestic business. You talked about growth in large provider customers, but I am wondering what you're seeing in the marketplace right now as far as just core underlying growth in the market?
Number one, what you're seeing around utilization trends? And then secondly, when you talked about cost pressure and the pressure on the providers, is this because of the fact that you're seeing consolidation of the bigger players and, therefore, you have more larger players that have more scale or is there something else going on in the industry from a pricing pressure or competitive standpoint?
Richard A. Meier - Owens & Minor, Inc.
Hi Lisa. This is Randy.
Let me take your utilization question and then I'll let Cody address some of the broader cost pressures going on in the marketplace right now. We've always taken the approach in the last year or two and through most of this year that utilization rates will continue to be positive.
We continue to see that in the market and would expect that going forward, but we're seeing a sort of very low single-digit kind of utilization rate growth. So, again, a positive incremental growth as we're moving forward and we see that continuing to be a relative benefit, driving volumes, and continuing to support the market.
But geographically, it is a bit choppy and, as you've probably seen in some of the results over the last week, the urban environment versus the rural environment in some of the hospital systems are different right now. But broadly speaking, we continue to expect sort of a positive, albeit low utilization rate growth going forward.
Paul Cody Phipps - Owens & Minor, Inc.
Lisa, it's Cody. I'll take the second part of your question on cost pressures.
What we're seeing out there is just the projected decline in reimbursements is resulting, from our perspective, in kind of a big cost pressure wave that's working its way up the system, kind of starting with the large IDNs, hitting the distributors, hitting the manufacturers. That's really the challenge.
I think, in some ways, consolidation is one of the reactions to that. And again, from our perspective, what we want to do is help our large customers, both manufacturers and providers, attack system-wide complexity.
What we believe is that the industry is very inefficient, the price lever's been pulled and pulled very hard. And so what we see is the opportunity to help them reduce their cost structures.
And I was out in the last month or so talking to large IDNs and every one of them has got a $50 million or $100 million cost challenge that they are chasing and we are trying to position ourselves to help them as well as the manufacturers.
Lisa Christine Gill - JPMorgan Securities LLC
Can you just help us maybe just understand that a little bit on the competitive landscape side? So, you're out there with your offering in the marketplace.
Obviously, Cardinal has a big offering, but do you still view this as an opportunity to take market share from some of the smaller players that are in the market? How do we think about the competitive landscape, or is it just more of it's you and another larger competitor kind of battling it out to continue to serve some of the larger IDNs?
And I'll stop there.
Paul Cody Phipps - Owens & Minor, Inc.
Well, first, I think we do see it as kind of a zero-sum game where everybody is chasing the same sheriff, so that creates a very competitive bidding process, and that's what we were alluding to in our comments. That said, the customers that are choosing us believe what I just said, that there's a lot of system-wide complexity that they need to unlock and we are well-positioned to help them do that.
We have our service offerings around that. So when our customers look at us versus others, they're asking themselves the question, who can help them get at the significant and sustained value that's tied up in their networks.
Richard A. Meier - Owens & Minor, Inc.
And Lisa, as you know, our core business has really been focused on the larger IDNs over the past couple of years, and that's served us well and is still serving us well in a consolidating market. So, again, I think we are well-positioned, as we move to the future, a lot of these larger IDNs had some financial challenges, but a lot of them are looking to sort of the longer-term sustainable profitability model, and that plays right into our strength.
So we still feel fairly confident that we can continue to go out, capture market share, and be very competitive in the marketplace.
Lisa Christine Gill - JPMorgan Securities LLC
Great. Thank you.
Paul Cody Phipps - Owens & Minor, Inc.
Thank you.
Operator
Our next question comes from Steve Valiquette with Bank of America.
Steven J. Valiquette - Bank of America Merrill Lynch
Thanks. Good morning, everybody.
So, a couple more things just on the pricing, the gross margin pressure you're talking about. I just wanted to confirm whether or not that's tied to any major GPO renewals or is it just maybe other factors that are driving your view on that margin pressure?
And also the other one, kind of bigger picture. It does seem like you – you always hear about your other major players in this sort of hospital distribution space just finding ways to continue to lower their COGS as they seem to be making bigger strides to increase self-manufacturing of some of the more commoditized products, more private label.
So, just curious to get your latest thoughts on that component of the market and whether you think it makes sense to try to accelerate some of your presence in that arena as well. Thanks.
Richard A. Meier - Owens & Minor, Inc.
Yeah. Hi, Steve.
Thanks for the question. Regarding the margin pressure, where we see the current margin pressure today is really a reflection of just the loss of our large customer and we kind of wanted to remind you, as we moved into next year that, as we said early on, this was going to be – sort of two areas.
One, we'd address pretty quickly our variable costs, which I think we've done pretty well over the last two months. But then there's the fixed costs that are going to somewhat linger over time and it was more just – those pressures are going to be there in the fourth quarter and linger on into 2017.
With the second half of your margin question related to GPOs, we are actually in pretty good shape. We've just re-signed – extended Vizient for, I think it was about another three-year extension.
And we also have completed our renewal process with Premier another five years. And I think it was a pretty reasonable step forward.
We don't really share a lot of comments about the pricing of those, but we were pretty pleased with how they worked out going forward. And as you know, HPG, we signed up at the end of 2015, so we have a little more time before we need to address that.
So we're in good shape with regard to the GPOs. On the competitive side, let me pass it over to Cody to give you his thoughts on that.
Paul Cody Phipps - Owens & Minor, Inc.
Yeah. Steve, I think the second part of your question was around private label products and the role that they can play in our business.
We have chosen a partnership path with branded manufacturers. And so we tend to lean toward stressing our partnership with them.
And one of the things we did during this quarter was we introduced a new value-based funding model with our branded manufacturers. And what that's designed to do is to recognize that distribution is changing in this industry.
We are no longer just delivering to the back of the hospital. We are increasingly kitting products.
We are bundling products. We are taking them into the operating rooms, the cath labs.
We are delivering all the way to the point of care. And we expect to get paid for that value.
So, we introduced that component and we do have – we have at our disposal private label products and we think that will be a meaningful contributor to our margin profile going forward, but we will err on the side of a brand-centric approach through this value-based model going forward.
Steven J. Valiquette - Bank of America Merrill Lynch
Okay. That's great.
Thanks.
Operator
Our next question comes from Michael Cherny with UBS.
Michael Cherny - UBS Securities LLC
All right. Good morning, guys.
Thank you for taking the question. So...
Paul Cody Phipps - Owens & Minor, Inc.
Thanks, Mike.
Michael Cherny - UBS Securities LLC
I want to dive in – you obviously focused on service, the differentiation you guys are thinking about providing relative to service. And I don't want to get too far ahead in terms of the February Analyst Day.
But as you think particularly around your capabilities now around CPS, obviously it's still pretty early in the build-out there, where do you think the build-out has been strongest? And then from an incremental perspective, what areas around service do you think are the most important that clients are telling you they'd love to see you have sooner rather than later?
Paul Cody Phipps - Owens & Minor, Inc.
Yeah. I'll take that, Mike.
First, as we go out and talk to both IDNs and manufacturers, again, what strikes me is the enormous complexity in the industry and the recognition that, with the declining reimbursements and the cost pressures, we've got to reinvent how this industry goes to market and how we get at this, what I call, system-wide complexity. So, some of the areas on the IDN side that they are very excited about, their operating rooms, there is a lot of cost tied up in the operating room and that's why we are in the CPS business.
We can bring procedural-based solutions to that part of their business where we can help them standardize products, go after the waste, obsolescence, overuse of products, and the efficiencies around that. There is also a lot of supply chain time that's impacting the clinician's time and we think we can help streamline that through better processes, better data, better services and, in some cases, all the way to outsourcing functions for them on the IDN side.
Another big area is for them that's increasingly complex is as they expand into more and more points of care, non-acute, they expect us to be there with both logistics solution and value-added services. That's on the IDN side.
On the manufacturing side, there's a number of areas. First, a lot of our manufacturing partners do some sort of kitting and bundling.
It's not really core to them. We think we can bring scale to that, so they are excited about us helping them with that.
We also believe we can bring scale and reach to small to midsized manufacturers both domestically and abroad in delivering their products. But our goal there, again, is to become the indispensable partner to them, to take on non-core activities, to reduce their cost structure and, in some cases, all the way to fully outsourcing services for them.
Michael Cherny - UBS Securities LLC
Great. Thanks.
Paul Cody Phipps - Owens & Minor, Inc.
Thank you.
Operator
Our next question comes from Sean Dodge with Jefferies.
Sean Dodge - Jefferies LLC
Good morning. Thanks.
Cody, maybe staying on the kitting, you mentioned positioning CPS as a growth opportunity. Can you give us an idea of how much runway is left there for you guys?
Maybe how broken in (26:38) you are into your current client base? Or, even more broadly, how we should think about the total market opportunity?
Paul Cody Phipps - Owens & Minor, Inc.
Yeah. Sean, I don't want to frustrate you with the lack of numbers, but let me take a shot at that.
First, we believe we're highly underpenetrated in this market. We have a pretty sizable share on the core logistics business, and our share in the CPS market is considerably lower than that.
And the solution we want to bring is kind of what I would characterize as a procedural-based solution versus a product-based solution. And what that means is we're going to work with the IDNs and the manufacturers to really come up with the leanest, most efficient procedural-based solution for them.
And from what I have seen out in the marketplace, that's what they want. And what we commented on is we had more demand than we expected, and that resulted in kind of some production challenges and some labor challenges for us.
But we remain very excited about this business, and we put new leadership in place, we are investing in it, we're putting in place the steps to scale that business. So we see quite a bit of upside here and we see quite a bit of demand for the business.
Sean Dodge - Jefferies LLC
Okay. And then on that last point you made, the uptick in demand you saw during the quarter, does that relate to the big deal, the 47 hospitals you signed last quarter, or is that still kind of in the process of being implemented?
Paul Cody Phipps - Owens & Minor, Inc.
No, it was partially related to that and also some other wins that were smaller than that. But that was certainly a contributor.
Sean Dodge - Jefferies LLC
Okay. Thank you.
Paul Cody Phipps - Owens & Minor, Inc.
Thank you.
Operator
Our next question comes from Robert Jones with Goldman Sachs.
Robert Patrick Jones - Goldman Sachs & Co.
Great. Thanks for the question.
Cody, I know you guys are going to talk more about the investments you see needed to adhere to some of the changing dynamics that you are talking about here today at the Analyst Day. But I was hoping just – you could give us some sense, order of magnitude, as far as what we are thinking about as far as the internal investments.
I mean, are you guys thinking about this more as like a real overhaul of the way you are investing in the business into those three platforms or those three areas that you highlighted? Or is this really more of a tinkering and refocusing some of the internal investments in the way that they had been invested previously?
Paul Cody Phipps - Owens & Minor, Inc.
Yeah. I don't – I'm going to probably come somewhere in between overhaul and tinkering, Bob.
I think, first and foremost, we think we have a fantastic core logistics platform. And we think that platform can be made even better with investments in better data connectivity and transparency.
So, one of the reasons you saw me call out the addition of Steve Olive, our new CIO, we see great potential to bring better connectivity, transparency and data around our core logistics platform. That's the first point I would make.
The second point is we think that same platform can help power our growth initiatives in CPS and International. So we see it as an opportunity to kind of bring – the way we think about it is people, process and technology.
So we are adding new leadership, we are building better processes, but we are going to invest in some new technologies to create greater connectivity and data transparency. And part of that's the recognition of, we're in the middle of all of that today.
We are touching these products. We are ensuring that they get billed correctly.
We're ensuring they get returned properly. We are providing data to just about everybody.
And we want to connect that story and turn that into services that go at this system-wide complexity that we keep talking about. So it will be a different focus on investment, but that's what we're going to outline at our Investor Day in February.
Robert Patrick Jones - Goldman Sachs & Co.
Great. Look forward to it.
Thanks so much.
Paul Cody Phipps - Owens & Minor, Inc.
Thank you.
Operator
Our next question comes from Evan Stover with Robert W. Baird.
Evan A. Stover - Robert W. Baird & Co., Inc. (Broker)
Hi. Thanks for taking my question.
CPS has been asked on a couple of times, but I wanted to try to dig a little bit deeper. The commentary that I have heard probably for the last two or three quarters is related to pretty exceptional market demand in that segment, a pretty upbeat outlook by you.
But the revenue kind of continued – the declines are accelerating there, and you brought up some production challenges today. I just wanted to know: A, what is the exact nature of the challenges that you are seeing in execution in that unit?
And are we still dealing with any challenges from integrating Medical Action and ArcRoyal?
Paul Cody Phipps - Owens & Minor, Inc.
Yeah, Evan, I'll take the first part of that and then I'll ask Randy to chime in. And let me say right at the get-go, we are not pleased or satisfied with the results there yet.
So what we've done is we've rebuilt the management team, we brought in a new leader, we formed a global business unit. So we've got a long-term view on this and we are making the right investments to scale this business because we see great demand.
That said, what we saw is better than expected demand. And as we started to ramp up the business that exposed what I would call kind of some production challenges for us, some labor challenges.
And so one of the things that team is doing right now is laying out the overall plan for scaling that business. So that's what we referred to.
We still see great demand. We think there's great value here for our customers, both providers and manufacturers.
But we've got some work to do to put in place the right resources and, again, around the whole people, process, technology to scale this business. Randy?
Richard A. Meier - Owens & Minor, Inc.
Yeah, sure. Evan, probably just to give you a little bit more granularity, with the integration of these businesses over the past year and bringing in, we have three primary locations.
Two of them are running fairly well and up and meeting some of the demand, and the one is just experiencing (32:49) mostly some of the workforce issues as we look to take on incremental capacity here. So we are doing a pretty good job, but we knew this when we acquired it, that the location would require some extra effort around scaling this business.
And with the increased demand coming on fairly quickly, which is very pleasing to us, we are just struggling a little bit with some of the workforce requirements and scaling that business up.
Evan A. Stover - Robert W. Baird & Co., Inc. (Broker)
All right. I had one – thank you for that.
I had one clarification on a comment I just heard about your GPO renewals. Want to figure out what's actually incremental, what's happened in the last three months there.
So, you said Vizient was extended for another three years.
Paul Cody Phipps - Owens & Minor, Inc.
Yeah.
Evan A. Stover - Robert W. Baird & Co., Inc. (Broker)
I assume that includes both Novation and MedAssets. And it sounds like that one was done early because I remember a September 2017 date on that.
And on Premier, I thought we were kind of in like a one-year option period. So can you clarify on both of those?
And is that something that just happened in the last couple of months and, therefore, maybe a cause of the near-term pressure, particularly in 4Q?
Richard A. Meier - Owens & Minor, Inc.
Just to sort of clarify, you are absolutely correct and that these have been ongoing discussions and we had some interim arrangements in place on both of the agreements. Vizient had been sort of toying with the idea of whether to continue to extend individual contracts or just go to a consolidated contract.
And, quite frankly, we were pleased that they opted to go to a consolidated contract and extend the arrangement, so that's been done just recently. So we're real pleased that we've got that behind us.
And then similarly with Premier, there we've taken the opportunity during this interim phase to take on and we've extended – I believe it's a five-year contract that gets kicked off with the beginning of the year. So, again, both of these are pretty recent situations that we've been able to conclude.
So we're pretty pleased with the outcome of both of these.
Evan A. Stover - Robert W. Baird & Co., Inc. (Broker)
Great. Thank you.
Paul Cody Phipps - Owens & Minor, Inc.
Thank you.
Operator
Our next question comes from David Larsen with Leerink.
David M. Larsen - Leerink Partners LLC
Hey. There had been some talk in the past about potentially entering into some new markets, like perhaps I think maybe the post-acute space.
Cody, is there any update there, any thoughts there?
Paul Cody Phipps - Owens & Minor, Inc.
Yeah. Dave, what we've outlined is that we need to follow our large IDN customers to their points of care.
So we've concluded through this strategic planning process that I outlined that we will be there. And we are right now going through the planning process for that, exploring both organic and partnership approaches to meet those demands.
So that's an area that we're going to talk more about at our Investor Day in February, but certainly an area of focus for us.
David M. Larsen - Leerink Partners LLC
Okay, great. And then in terms of these large customers that are rolling off, I think you have Kaiser that will start rolling off in 2017, that's obviously not in the numbers yet.
Paul Cody Phipps - Owens & Minor, Inc.
That one's actually done, Dave. That's the one we called out.
It's fully out and we saw the first full month impact at the end of the third quarter and it's now – that one has transitioned out.
David M. Larsen - Leerink Partners LLC
Okay. And then was that a full impact for the quarter or was it a month?
Will there be incremental impact next quarter?
Paul Cody Phipps - Owens & Minor, Inc.
It was not a full impact for the quarter, but by the end of the quarter, it was fully executed.
David M. Larsen - Leerink Partners LLC
Okay.
Richard A. Meier - Owens & Minor, Inc.
We had started that transition August 1, they were out by mid-September, and that was the call-out about the $60 million revenue impact for the quarter. That's not a full quarter impact, which is part of the reason again we highlighted some of the margin pressure in the fourth quarter and into 2017.
Paul Cody Phipps - Owens & Minor, Inc.
Yeah. I didn't mean to interrupt you, Dave, but I wanted to clarify that.
David M. Larsen - Leerink Partners LLC
No, no, glad you did. So, thanks very much.
I appreciate it.
Operator
Our next question comes from Lisa Gill with JPMorgan.
Paul Cody Phipps - Owens & Minor, Inc.
Lisa? Yeah, we can't hear the question if you are there, Lisa.
Operator
If your phone line is muted, could you please unmute the phone?
Paul Cody Phipps - Owens & Minor, Inc.
Operator, we might as well go to the next question because we can't hear Lisa's question.
Operator
Okay. And I'm actually not showing any further questions at this time.
Paul Cody Phipps - Owens & Minor, Inc.
Okay. Thank you for participating in our call today.
We had a solid third quarter and we look forward to sharing more detail on our new enterprise strategy at our Investor Day in February. Thank you and have a good day.
Operator?
Operator
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.
And have a wonderful day.