CVS Health Corp (CVS) 2002 Q1 法說會逐字稿

Please stand by. Good day everyone, and welcome come Long Drug store's first-quarter results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Tim [Marin]. Please go ahead, sir.

Thank you. And good afternoon. We'll begin with remarks by president and chief executive officer, Harold Somerset, followed by chief operating officer, Terry Burnside's operations review. Chief financial officer Steve McCann will provide insight into our financial performance, along with our expectations for the second quarter, before we respond to your questions. But first, we will be making forward-looking statements within the meaning of federal securities laws during this call. We believe that our expectations are reasonable and are based on reasonable assumptions. However, risks and uncertainties relating to future events could cause actual results to differ materially from expectations. For a full discussion of these risks and uncertainties, please refer to our recent SEC filings. Long's does not intend, and assumes no obligation to, update any forward-looking statements. If you need a copy of the release we distributed at market close, please call 925-210-6737. With that, here's Harold Somerset.

Thanks, Tim, and good afternoon, everyone. In February when I became CEO, I said I had one major expectation for my term. That was to move our company forward at an accelerating pace. That remains my priority and I'm pleased with our early progress. I also said my job is to drive consistent top-line growth, while managing the implementation of our strategic initiatives. We're making headway towards those goals. The last few months have been a crash course in our day-to-day operations, and I'm enjoying it. The experience has convinced me that while we have a great deal to do, we have the strategies, the resources, and we have the people to get the job done. I'm also making sure that our senior management team shares an understanding of where we're going and why, and how we're going to get there. We're spending a lot of time building that common understanding into our plans and priorities, and resolving issues. That's particularly important in relation to the five priority initiatives we announced in late February. They are: 1. Improving our supply chain processes to match or surpass those seen as the best in our industry, and delivering the products our customers want when they want them; 2. Increasing front-end sales; 3. Improving the profitability of our core pharmacy business; 4. Enhancing a customer service tradition that has made Long's the drugstore chain of millions of consumers in the western United States; and 5. Improving processes across our operations to maximize our efficiency. Turning to our search for my successor, we've selected [Korn Ferry] to lead the search and we have begun that process. My personal goal is to have my successor in place by the end of this year. I will then assume the role of lead director on our board to maintain the excellent link between the board and our management team. Summarizing our first quarter, we're pleased with our sales performance. We have made a good start on reversing the year-long negative trend of front-end sales. We have work to do on the expense side to drive more dollars to the bottom line, and both of those efforts will continue in parallel. We are still very early in this change process but I'm encouraged by our progress. There has been no pause whatever during this transition. I'm confident that our senior management team agrees that our pace has accelerated, which was my priority. That brings me to the end of my remarks, but I'll be glad to respond to your questions later in the call. Thanks for your attention, and here's Terry Burnside.

Thanks, Harold. There are two key points I hope you take away from today's call. First, we made progress in same-storefront-end sales, reversing what had been a negative trend for more than a year. Second, our first-quarter sales performance demonstrates we have the ability to develop marketing strategies and programs that store operations can effectively implement to attain or surpass the desired results. What's really encouraging is the fact that promotional products featured in our revitalized advertising program drove our front-end sales improvement, and we made that gain without sacrificing margin. We understand that one quarter doesn't make a year, but our first-quarter performance certainly motivates us to step up our promotional activity. Part of the new advertising look that I mentioned is our big-buy items, featured in our weekly print ads. Our personal reporting confirms that these items are positively impacting customer count and sales, which is exactly what they're intended to do. We're also experimenting with shifting our print ads to Wednesdays, in an effort to avoid the clutter associated with being in Sunday's papers. We introduced our new event marketing strategy in the first quarter with a chain-wide sidewalk sale promotion. Here again, we're encouraged by the positive consumer responses our stores are reporting. We have another event this coming weekend and another just before the 4th of July. Both will be supported by our new television, radio, and print advertising campaign that's designed to drive more traffic through our doors and increase market share. On that subject, Nielson research shows Long's with a share of more than 20% of the California drugstore market in the 13 weeks ended April 20th. Nielson also reported that we outperformed our drugstore competitors in all but one of the categories Nielson tracks. These categories include dry grocery, health and beauty aids, frozen foods, nonfood grocery, liquor, and general merchandise. The same research shows we're also keeping pace with grocery and mass operators in the product categories that Nielson covers. Turning to our core category performance, we enjoyed solid first-quarter growth in soft drinks and water, diet, liquor, and cosmetics. We're still not where we want to be in photo or in over-the-counter, where we've experienced softness over recent months. Pharmacy sales increased 9.2% over a year ago, primarily the result of a 8.6% increase in average script price that reflects manufacturers' price increases and the use of newer, more expensive pharmaceuticals. We also saw improvement in generic utilization during the quarter. Same-store pharmacy sales were up 8.4% over a year ago and our script count increased: Our automated prescription fill center continues to set processing records on a regular basis. The facility processed its millionth prescription in early April and has exceeded our expectations by filling more than 10,000 scripts on several different days. The center's current daily output is roughly equal to that of about 60 pharmacists. It's taking a tremendous load off of our in-store staff, as it continues to help offset the impact of the ongoing pharmacist shortage. The fill center is currently processing around 40,000 scripts weekly, a number we expect to continue to steadily increase. Let me spend a few minutes up dating you on a few of the initiatives we introduced in February. As we've said, improving our supply chain practices and processes is of paramount importance, and I'm pleased to tell that you we're progressing on schedule with that initiative. We've concentrated on developing manual processes in the first quarter, in preparation for the transition to automated procedures in development with our [Reed Tech] partners as part of our supply chain initiative. Focusing on quick- hit opportunities that don't remember technology we've aggressively increased the number of promotional products that are centrally allocated, improving our position in vendor negotiations and sell-through on advertised products. Our seasonal allocation program for the upcoming November/December holiday season has already been completed, which will help greatly in related advertising and promotions this year. We've moved several key categories into our mainland distribution centers resulting in significant cost savings and, importantly, lessening our dependence on third-party distributors. We've also benchmarked our supply chain against more than 20 companies who have maximized their supply chain practices, enabling us to monitor our progress as we move ahead. We communicated our supply chain and advertising plans to more than 100 brokers and manufacturers last week, to a very enthusiastic reception. Working with our partner, [Demand Tech], on the price optimization phase of the initiative, we've completed approximately 40 front-end categories. Our activities in the current quarter will continue to be focused on quick-hit opportunities and preparing for the technology phase to begin in the next fiscal year. But importantly, the initiative is clearly delivering the benefits we've anticipated from the quick-hit process changes we're focusing on. I've already talked about our new advertising program, which is an integral part of our initiative to improve front-end sales. Toward that end, we're designing new food [plan-o-grams] for our stores to accommodate more convenience products, including dry, refrigerated, and frozen foods. Again, the emphasis is on convenience and becoming a destination for fill-in shopping trips, something today's customers are increasingly making. Our other priority initiatives are coming together and I look forward to keeping you apprised of our progress. As Harold said, these initiatives impact every aspect of our business, and we're making sure they're carefully developed and rolled out. That's it. I thank you for your attention. Now, here's Steve McCann.

Thanks, Terry, and good afternoon, everyone. I'll begin with a financial review of the quarter before providing you with guidance for the second quarter and the full year. Total sales for the quarter were up 5.6% over last year. The same-store sales increasing 4.3%. Front-end same-store sales increased 1%, as Terry said, reversing a negative trend we'd experienced for the past year. This was driven primarily by increased promotional sales. Pharmacy same-store sales rose 8.4%, primarily driven by an increase in average script price. Pharmacy sales increased to 45.9% of total sales, compared to 44.6% last year. In addition, third-party pharmacy sales were 90.6% of total pharmacy sales, compared to 89.1% a year ago. RX America, the pharmacy benefits management company we purchased in the third quarter of last year had $5 million in sales in this quarter, with a pretax income contribution of just over $2 million. Last year, RX America contributed about $660,000 in pretax profit to Long's. Our gross margin rate in the quarter on a FIFO basis was 26% compared to 25.7% last year. This improvement was primarily driven by increased generic utilization on the pharmacy side of the business. Front-end margins were essentially flat with the first quarter of last year. This was a terrific performance as we were able to manage front-end margins while increasing our promotional sales at the same time. Earnings this quarter before the cumulative impact of the implementation of SFAS 142 were $11 million, or 29 cents per share, as stated in our release. We had a net loss, after the cumulative effect of the accounting change - our net loss was $13.7 million, or a negative 36 cents a share. We adopted FAS 142 which eliminates amortization for goodwill and certain other intangible assets at the beginning of the quarter. Our goodwill on our books primarily relates to store acquisitions we've made in the Pacific Northwest and in California. An independent valuation determined that goodwill, as now defined by FAS 142, in three districts was impaired, resulting in a charge of $41 million, or 24.6 million on an after-tax basis. This new accounting standard also eliminates the amortization of goodwill expense beginning this year. Long's had goodwill amortization of $1 million on a net of tax basis during the first quarter of last year, and had goodwill amortization been excluded in last year's first-quarter results, net income for the quarter would have been $12.6 million or 34 cents a share. Prior to the implementation of FAS 142, the company had goodwill totaling approximately $123 million on its balance sheet, so this write-down accounts for about one-third of our total goodwill. The remaining goodwill on our books relates primarily to stores purchased from a competitor in fiscal year 2000. Turning to our supply chain initiative, it was on track with the first-quarter impact of a negative 1 cent per share. As you may remember, we had projected an impact of up to a negative 4 cents on our last call. Looking ahead, we expect the initiative to cost us from 1 to 3 cents a share in the second quarter, and our estimate for the full year is that its impact will be flat to slightly negative, or the same as our projection that we gave you on our last call. Operating and administrative expenses for the quarter were 22.2% compared to 21.5% a year ago, with the increase resulting from a couple of items. First of all, RX America expenses are now included under our O and A expenses. Last year, RX America was a joint venture that was recorded on the equity method of accounting, and we included our share of their profits last year in O and A expenses. Now we're splitting out each element of their P and L and their balance sheet, along with our line items. Second, O and A expenses now include the incremental expenses we're incurring related to our supply chain initiative. So those are the two primary items that are driving the expense write-up. Depreciation and amortization expenses were $18.9 million compared to 18.6 million a year ago. As I mentioned, this year's number also excludes the goodwill amortization expense, as we stopped incurring that expense as of the beginning of this year. Net interest expense in the quarter was $3 million, compared to 3.7 million last year. This year's interest expense, both - interest expense reflects both lower borrowings and lower interest rates. Our tax rate for the quarter, excluding the impact of the tax on the accounting change, was 37.6% compared to 39.9% a year ago. Most of the decrease was due to a tax law change that allows us to now deduct dividends paid on shares in our ESOP plan. Moving to the balance sheet, cash and other current assets are up about $21 million from last year, primarily the result of, again, adding RX America's receivables to our balance sheet. Our inventories are in good shape. They're well under control, with quarter-ended FIFO inventories on average per store at about $1.3 million compared to 1.4 million a year ago. Inventory turns in the quarter rose to 1.4 times compared to 1.33 times last year. Net debt, defined as short and long-term debt less cash on hand, was $133.7 million at quarter end compared to 164.8 million at the end of the first quarter a year ago, down $31 million. Good performance. On the cash flow statement, net cash from operating activities declined this quarter, primarily because of a change in the timing of our quarter end. With last year being a 53-week year, our first quarter this year ended in May, compared to an April ending a year ago. Our year-end is shifted later by one week. As a result, calendar month-end oriented payments - for example, sales and income tax, rent, and some merchandise payments - were paid in the quarter this year, compared to being included in cash and liabilities a year ago. As you can see, on our balance sheet, our current liabilities are down about $32 million from a year ago. In short, this reduction is primarily a matter of timing. Capital expenditures in the quarter were $18 million compared to 20 million last year. We continue to anticipate net capex of about $120 million for the full year. We opened four stores and closed one in the quarter, giving us 439 stores at quarter end. The stores we opened in the quarter increased our selling square footage to just over 7.2 million square feet at quarter end. We anticipate opening another 7 stores in this quarter - that's the second quarter - continuing to concentrate on increasing our presence in high-potential existing markets, especially California. In total, we continue to expect to open 25 to 30 new stores this year. Okay. Well, let's turn our expectations to the current quarter. We project second-quarter total sales growth of 4 to 6% over the second quarter of last year. With same-store sales increasing between 3 and 5%. Earnings per diluted share, including the impact of a negative 1 to 3 cents for our supply chain initiative, are projected at 27 to 31 cents compared to 30 cents in the second quarter of last year. For the first year - or I'm sorry, for the full year, we're projecting total sales growth of 2 to 4% over last year, remembering that last year was a 53-week year. We continue to project full-year earnings of $1.25 to $1.35 per share, excluding the impact of onetime items. That brings my comments to a close and I'll ask the operator to begin polling to your questions.

Thank you. Today's question and answer session will be conducted electronically. If you'd like to ask a question, please press star 1 on your touch tone keypad. We'll take as many questions as time permits and proceed in the order that you signal us. Once again, that is star 1 to ask a question, and we'll pause for just a moment to assemble our roster. And we'll take our first question from Meredith Adler with Lehman Brothers.

Good morning. Oh, good afternoon, I should say. What planet am I on? A couple of questions for you, just to talk a little bit about the impairment you took. I gather if it's three districts, then it's fair to say that you had to take an impairment not only on the stores in the Pacific Northwest but also some of the [Rite-Aid] stores that you acquired?

Yeah, Meredith. This is Steve. Good to hear from you again. The impairment that we took writes off essentially all the goodwill in the northwest and our approach to impairment for the company was to actually look at it at a district level, and when we did that, we had two districts that had stores that we had purchased from a competitor a number of years ago, and so we did - we did also write off that goodwill as well. So your presumption is correct. There is some -

Okay. And then another question I have is to just, you know, talk a little bit about, you know, kind of what's going on in the environment that you see. Certainly the promotional environment. It was good to see that, you know, Nielson is saying that you're not losing share, but I was just wondering if you, you know, could talk about kind of what the environment looks like, and then I have one more question.

From - Meredith, specifically, this is Terry. Are you talking about the promotional environment?

Yeah.

Okay.

And sales environment. You know, how is the consumer doing.

Okay. What we see in the marketplace from - let me break out the classes of trade as we look at them. From - from drug, we do see one competitor in particular becoming stronger in terms of their promotional advertising, or buy one get one free offers, that type of thing. Grocery, I haven't seen a great deal of change. I can't say as I've seen a great deal of change in mass. From our Nielson data that we look at, it appears that our promotional activity changed a couple of things. Clearly, the trajectory of front-end sales was changed. But in particular, we fared far better and grew market share against drug, even in spite of a key competitor having what I would deem to be stronger promotional activity. We see grocery in mass - and there's always give and take in these category measurements - we see some growth there, but it appears that largely, where our share growth came from and where grocery in mass came from was from the remaining drug competitors. That's somewhat the way we had interpreted what the numbers tell us.

Okay. Great. And then my final question is: It's nice to see that generics are helping drive your gross margin. I'm just wondering what you're seeing on other sort of reimbursement fronts, whether it's from, you know, managed care, which is obviously big in California, or, you know, Medicaid, MediCal, you know, also very big. You know, are you seeing pressure on reimbursements in that area?

Meredith, this is Terry again. We also at the table Bruce sexually, who is our senior vice president of pharmacy and business development. I'm going to ask Bruce to take that one for us.

Yes. As far as the reimbursement schedules that we're seeing from managed care, we are seeing a level of activity on third-party reimbursement, but most of it has to do with the government programs. There's a lot of government regulatory issues that are circling around the country that are trying to drive down these particular reimbursement rates. But not necessarily from the private pay sector. But more so the government-funded portion.

So that means Medicaid or MediCal?

No, we have not seeing anything in MediCal yet but we did see in Washington, they're looking to reduce the reimbursement up there from about - about 3%. So what we are starting to see is some impact there. We have not seen anything in Hawaii or California but that's not to say that it's not on the table in the legislature to change that.

Okay. Great. Thank you very much.

We'll now take a question from McDonald investments. David Rogers.

Good afternoon, guys. One - two questions, actually, that I had. First was about the gross margin, if you could give us a little more detail on the particular front-end gross margins and secondly on the generic [inaudible] rate. The second question I wanted to ask about was your warehousing in-house. Have you seen better in-stocks and on-time deliveries and how do you think that's affecting your business this year versus last.

Sure. Hi, David. The - on the front-end side, we've got multiple things going on here. One is that we're working with an outside partner to do a fair amount of price optimization, some demand econometric modeling to help us understand or - or to help us move the consumer either in - either to drive additional sales or to drive additional margins. So we believe that's working very nicely. We - in addition, I believe that we're buying better, and particularly on the promotional side of the business, so whereas before, a lot of our activity was store by store based, now it's - it's being bought as - you know, as a company, and with our senior VP of marketing, Todd [Vasos], he's added a degree of expertise that previously we hadn't had had hammered down here. So we're pretty pleased with what we're seeing on that side. On the generic utilization, you know, we did have an improvement with Prozac and Glucophage coming in. That's helped drive utilization. But we also, internally, are focused on trying to help our mix in the pharmacy side as well by stressing the generics as in the stores.

Do you have a specific rate on that, Steve?

We haven't typically given that out in the past so I don't think I'm comfortable at this point giving that out.

Okay. And then on the distribution centers.

Yeah, this is Terry. Just to add to one of Steve's comments and then I'll respond to your question on the distribution centers. One of the things that I think that has been real key has been not only did we bring expertise in the party in Todd that Steve referenced, but with the ability to get our promotional activity executed at the store level, that's made all the difference in the world for his negotiation abilities. When you go to a vendor and you're looking for the appropriate deals to reach price points and whatnot that you want to attain in the marketplace but you can't guarantee execution or you can't allocate product which has certainly been one of the early initiatives, one of the manual processes that I referenced in my comments, it becomes very difficult for the vendor to pony up when he or she doesn't know what that outcome might look like. So the two pieces that come with Todd's expertise is our ability total things done at the store level, get displays executed, and also our ability using some manual, at this point, to be automated, processes associated with forecasting product needs we're in stock and that's led to PO quantities that frankly generate the funding we're looking from the vendor. On the warehouse side, we haven't been without our challenges, but clearly in the period since we've taken over the warehouses, we've seen a very continuous decrease in the cost of operation. We're ramping up utilization. Also, as I referenced in my comments, lessening our dependence on third-party distributors or wholesalers, using the warehouses, their capabilities, to a higher degree. We're very pleased with - with what that picture looks like. It's improved our in-stock conditions, and in fact, the utilization of the warehouse as well as driving down our costs.

Okay. Great. Thank you.

We'll now move on to John Sinclair with Montgomery asset management.

Hello, gentlemen. I just wanted to flesh out one issue with respect to the gross profit margin increase. When I compare your gross profit margin trend, at least in this quarter, versus some of your big national competitors, most are suffering gross profit margin erosion. And despite the fact that the generics are a positive, we've got an inherent negative secular mix trend because RX growing faster than OTC. Is it correct to interpret that the big plus for you guys is the price optimization and the better buying that's driving the increase in gross profit margin?

On the front end of our business, our front-end margins were actually flat with a year ago. Our improvement actually came on the pharmacy side of the business. We've got, you know, some competing things going back and forth on the front-end side. I'd say the primary thing is that I think overall, our margins are lower than our competitors and so we had more to work with, with the driving of the - of increased generics and holding our front ends where they are.

So it was - front ends were flat and RX was up fairly materially to equate to a 30 [inaudible] increase for the aggregate store?

That's correct.

And so just with respect to the price optimization, that's not a misnomer in that this is just your getting increasingly better buying by aggregating your purchasing and then reinvesting it in the lower price? This is a combination of inching up some prices to where you can, and also reducing prices where you can?

It is both, and it's - it is truly an optimization. In some cases, we're actually looking for more sales and in some cases, we're looking for more margin.

Okay. Have you quantified, to date, the potential benefit from better buying?

Yeah. I don't have that with me, though. It's the smaller piece of it, though, so . . . We're -

The smaller piece of the supply chain initiative?

In terms of what's been implemented this far, yeah.

I see. Okay. Thank you.

We'll now take a question from Solomon Smith Barney's Lisa Cartwright.

Hi. It's Elizabeth Lynn calling on Lisa's behalf.

Hi, Elizabeth.

Hi. I wanted to find out if you could give us an updated on the automated prescription fill center. I know when you reported the first-quarter, you said that you were averaging about 6,000 prescriptions a shift. I wondered if there was any update on that.

Yeah. It's - Elizabeth, this is Terry again, and I'll ask Bruce to kick in here if there's any add to it. We've just seen continuing growth on a 6-day fill week. We're basically running between 40 and 41,000 scripts a week. Our typical Monday, which is the big day, is right around that 10,000 number. So doing the math, we're up around 66, 6700 a day, and it just continues to inch up every week, so very happy with the performance and how that's progressing.

Okay. And in terms of the pharmacist vacancies right now, has that remained stable? I know that for the past several quarters, you've reported you had about 70 open positions.

Yeah. It has not changed much. We're about at that same number.

Okay. Great. Thank you.

Uh-huh.

I would like to remind everyone that if you do have a question, to please press star 1, and we'll take a question from Raj [Urasi] with [Occzip] capital.

Yeah. Hi, guys. Was just wondering, what were marketing expenses this quarter versus last quarter, year over year?

Raj, we don't typically give out that legal of detail on our P and L.

Got it. Okay. Thanks.

They were - it would be fair to say that they were slightly up.

Slightly up? Okay.

Slightly up, yeah.

And moving on, we'll take a question from Kenny O with SAB capital.

Hi. I had a couple of quick questions, I guess. You mentioned front-end pressure, you know, front-end gross margins were flat year over year, there were some benefits but there were things that were offsetting that a little bit, there were a host of factors going on. I guess question number one is, how much were the offsets, and how much do you expect them to abate over the course of the year and sort of over what period of time? And the second question is, you guys, you know, significantly outperformed the guidance you gave on sales before. You guys were originally giving a range of 2 to 3% on sales, and you ended up being up sort of 5-and-a-half percent. The delta on that is about a 25 million-dollar sales difference and when we compared it with the expectation for the front end, it seems like most of that came from front-end, you know, exceeding expectations and sort of assuming a normal contribution at 30% gross margins, you know, it seems like you guys should have had an additional after-tax contribution from that of 4 to 5 million and it should have been significantly higher on an earnings basis, where it seems like that was sort of offset was on the SG and A line, the SG and A number ended up being much higher than sort of what we were anticipating, and we were just wondering, you know, if you guys had sort of a, you know, explanation as to why that was up so much.

Yeah. On the front-end side, in terms of what offsets that are out there, I mean we had product mix and - product mix and inventory true-up at the end of the quarter were the primary items that were kind of the offsets. We'll continue to - to monitor those as we go forward.

The product mix piece, is that something that would be - is that something that's a sustaining - is that a change that will continue to persist for the rest of the year, and was that the bulk of it? Or was it the inventory true-up a lot?

Well, the inventory true-up was higher than what we had expected it to be. We had hoped that some of that would be - would flow through a little bit more. In terms of it being sustaining for the rest of the year, I mean, we will continue to alter the product mix as we go, but at this point, I don't have a projection to give you on that.

So I mean I guess my question is, when you said, hey, gross margins were flat year over year, product mix and inventory true-ups were some of the things that sort of offset - you know, hold back improvement, as we look through the rest of the year, the - you're saying product mix is going going to continue to change, inventory true-ups, though you - some portion of that offset should abate, basically.

Yeah. I mean I'm - when I say product mix, I'm talking about the promotional content.

Sure.

Okay.

But the inventory true-up piece, it sounds like that was higher than normal and you'd expect that to abate as we progress through the rest of the year?

I would hope so, yes.

And how - how much do you think that contributed to sort of - how much pressure did you - or offset was that on gross margins for front end?

I - I don't - I don't have that number in front of me, Kenny.

Okay. Is that something you can give us afterwards, as a follow-up?

Call Tim, yeah.

Okay. Thanks. And then the second question?

On sales being a lot better than guidance? Yeah. Our - as you're all aware, our front-end same-store sales trajectory was altered pretty dramatically in the quarter from where we were coming out of the fourth quarter, and we made some decisions to spend some money that we didn't originally have in the plan, and we also had a few things that came in higher than what we had expected them to be. Namely, some insurance-type costs such as workers' comp and healthcare costs. The entire insurance industry is evidently going through quite a bit of a shakeout, and so we're - we're managing those costs, but they weren't included in our plan, the way that - the way that they're coming in at this point. So we'll continue to manage those as we go forward, but we intend to make - make the calls on what we spend going forward based upon how our sales trajectory looks, so - but you are right, it was off of the SG and A line.

And when you said you spent more based on the sales trajectory, was that sort of investment spending in SG and A that sort of you expect to pay dividends in the future? Sort of where were you spending more in SG and A? Because I think you just made a comment that marketing was not up that much.

Marketing was up slightly, but that was actually in the plan.

Yep.

You know, some of it is in payroll. Particularly as we continue to re- engineer the corporation - the company as we go forward to a more traditional-looking organization. So . . .

So when you say some of it is in payroll, it would tend to be more traditional, is that you're adding more people and is it mostly coming from addition of head count.

Yeah.

As you guys change the organization?

That's right.

Okay. And that sort of addition of head count sort of at the corporate level, but over time you'd expect productivity to be generated from the store level where you're sort of replacing that - you know, the work effort at corporate to replace store-level tasks and stuff like that?

I think that's a legitimate expectation, yes.

Okay. Oh, one final question. The improvement from margin to generics, is that something that will continue throughout the year, you think?

We're going to continue to try to manage that mix. That's a profit opportunity that we have, so yes.

Great.

And when you guys talk about insurance costs being up, how much of your SG and A is insurance and, you know - because I can't imagine it's, you know, a huge chunk and you're saying it's up more than you expected but I think insurance, workers' comp rates are, you know, up 20% or something. Theations - everybody kind of had the expectation that they'd be up a lot. Sort of - how much of your SG and A costs were insurance related.

Kenny, that's a level of detail that I really don't want to go into on this call.

Okay. Well, was that a significant factor in the SG and A being up because you mentioned that as your - that was the first explanation you gave. Was that a significant factor or was it more that payroll and head count was up dramatically?

Kenny, that was an example.

Oh, sorry, okay.

All right. Can we move on? Kenny, I - I do want to give everybody a chance to ask -

Fine.

- their questions. Thank you.

And as a final reminder, that is star 1 if you'd like to ask a question, and we'll pause for another moment. And we'll now take a question from Henry Levin with John A. Levin and company.

Thank you. Maybe you can just comment on the working capital adjustments in the quarter?

Well, inventories were relatively the same.

Uh-huh.

Hang on a second.

Really the payables which were down a lot.

Yeah, and we discussed that with the shift in the - in the quarter-end timing with our 53rd week last year, where a year ago we would have had payments that are month-end, calendar month-end oriented, such as rent and sales and income tax payments would have been included in our liability balance.

Uh-huh.

At the end of the year last year, our - or at the end of the quarter last year, which was April 26 last year, this year our quarter ended May 2nd, so those payments were paid out this year with that one-week shift in our quarter ended calendar. So the big - the reduction is primarily a matter of timing.

Thank you. Apologies. Thank you.

Sure.

And we do have a follow-up question from John Sinclair with Montgomery asset management.

Hello, gentlemen. Once again, could you flesh out a little bit what the - what the benefit was in the first quarter from better buying, if so, and secondarily, if you could just give us a sense of you talked a little bit of price optimization and that's helpful but if you could talk about what you're doing in aggregate relative to - to year-ago with respect to pricing? Are prices - front-end specifically - moving down, and if so, could you quantify that to the degree that you could?

Yeah, let me see if I can tackle the question. This is Terry. As far as the pricing piece, to be honest with you, I'm trying to remember the start date and I'm having mental failure here in giving you that date, versus a year ago, but we've looked at really several different metrics associated with our relationship with [Demand Tech]. As I mentioned, we've gone through about 40 different categories of product, and as Steve referenced in his comments, one of the things we're trying to do there, it isn't one size fits all, so it's a little difficult to answer your question, and here's why: We have certain categories that have been soft in the front end that are very core to a drugstore environment, so our approach there has not necessarily been the same as, say, a noncore category. By that, I mean our desire to move sales that drives the synergy with other categories in the store has been equally offset with driving margin without the sacrifice of sales.

Uh-huh.

But we do a roll-up very frequently and meet to take the projections of what we believe to be attainable and see where we are in terms of a report card basis, but there is - we have the ability within the price optimization - some people tend to think of price optimization as only being raising prices. Price optimization is really a combination of margin sales and pricing optimizations, so we've taken different tactics in different categories to balance that, so I don't have a net number to give you, other than that it's based on projected activity.

How about if I ask the question a different way. For every 100 basis points that you could gain in better buying or through supply chain efficiencies, how much of that would you anticipate investing in lower price?

Boy, I wouldn't have a number for you. We frankly hadn't even thought of it quite that way.

I see. So you're not necessarily thinking about what you can save in being more efficient and how much you can reinvest in front-end prices to drive sales? That's not necessarily the way you're looking at it?

No. We're tending to look at the - the activity associated with the promotional activity and better buying, we're - we've tended to look at that that the better buying funds the better promotional activity. And the price optimization reflects our need to drive sales in given categories versus extract margin from different categories to balance, you know, the entire picture, so it's been looked upon in that fashion.

And when you say "promotional activity, you mean increased A and P as well as reduced pricing?

Yes.

Okay. Thank you very much.

You bet.

And we'll go back to Kenny O with SAB capital?

Hi. I just had a quick follow-up. In terms of the sales guidance, I - you know, you guys also upped the guidance on that from 1 for 2 for the full year to 2 to 4. The earnings guidance has stayed the same. Is most of the offset coming from sort of higher than expected SG and A expenses as well? Sort of mostly head count and all that sort you have stuff as it relates to the full year.

That's right, Kenny.

Okay. Thanks.

You're we will comment.

And that does conclude the question and answer portion of today's conference. Mr. [Marin], I would like to turn the call back over to you.

Thank you. And ladies and gentlemen, thanks for joining us today. We'll talk to you soon.

Once again, thank you, everyone, for joining us today. That does conclude the presentation.