CVS Health Corp (CVS) 2002 Q2 法說會逐字稿

Good day, everyone, and welcome to

Longs Drug Stores second quarter earnings results

conference call. This call is being recorded.

At this time, for opening remarks and

introductions, I'd like to turn the call over to

Mr. Tim Maron. Please go ahead, sir.

Thanks, Operator; and welcome,

everyone, to our second quarter conference call.

We'll hear first from chief executive officer,

Harold Somerset. Chief operating officer, Terry

Burnside, will follow with his operations review

before chief financial officer, Steve McCann

[phonetic], reviews our financial performance

and provides our expectations for the third and

fourth quarters and fiscal year. As usual, we'll

end the call by responding to your questions.

Let me remind you that we will be making forward

looking statements within the meaning of federal

security laws. 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

filing. Longs does not intend, and assumes no

obligation to, update any forward looking

statements. If you need a copy of the release

that we distributed after the market closed today,

please call area code 925-210-6624.

Now let's begin with Harold Somerset.

Thanks, Dan, and good

afternoon, everyone. I'll begin by paraphrasing

what I said in our news release. We did what we

said we'd do in the second quarter. We were

within our projected ranges in total and same

store sales along with earnings per share.

Looking at it another way, we're beginning to see

tangible results from the strategies we're working

on to reshape our business. Our challenge now is

to continue our momentum despite an unsettled

economic environment. Terry and Steve will go

into the quarter's operational and financial

details shortly. I'm going to focus on some

second quarter highlights, our progress with our

strategic initiatives, and the appointment of two

more independent directors before sharing some of

my personal observations after six months as CEO.

It's important to note that we are also on

schedule with our priority initiatives,

particularly with our supply chain improvements

and our program to generate increased front end

sales. We are currently rolling out our

initiative to improve customer service. We are

into the foundation work for improving pharmacy

profitability and we're developing the programs to

improve our operational processes. Our board is

also moving as planned toward our goal of

establishing a stronger, almost entirely

independent board. Last week's appointment of

cost plus world market CEO Murry dash gives us our

third new independent director this year. Murry

is a highly respected retailing and distribution

executive. We look forward to having his

expertise to draw upon. Branding strategist Duane

nap joined our board in July. Duane is not only a

recognized strategist, he brings extensive

operational experience from his days as an

executive with well known and well branded

national chains. In February we added financial

expertise with the appointment of LeRoy T barns,

Jr., vice-president and treasurer of Pacific gas

and electric. Our board is also moving ahead in

its search for my successor as CEO and we'll of

course keep you informed at appropriate points.

Personally, I continue to expect my successor to

be in place by the end of this year. This being

the mid point of our fiscal year, it's a good time

to share some observations with you. First,

working closely with our senior executives on a

daily basis makes it clear to me we've put

together a first class group. This team

understands what we need to do to reach our goal.

We are working diligently to get there. We will

continue to develop that team going forward. We

also have outstanding people at the store level.

Longs is known nationally for that. They are the

people who will determine our eventual success

through their daily contacts with our customers.

Recognizing the value that our store and pharmacy

managers bring to the table, we're working hard to

enhance our two-way communications with them. Our

senior team, myself included, net with every store

and pharmacy manager in the Longs organization in

a series of meetings in June. [met with]. We're

where in the past we had a single annual large

manager group meeting, we believe bringing smaller

groups together would increase dialogue and help

gather ideas that could benefit our entire

organization. From the feedback we've received,

our store managers are developing a greater

understanding of where the company's going, how

it's going to get there, and the role they

individually and collectively play. Senior

management, at the same time, has greater direct

input on store issues and competitive

opportunities. That's win/win, and we'll be doing

a lot more of it as we continue to reshape the

company.

Let me spend a moment on our top priority,

execution. Our priority initiatives were

carefully planned and thoroughly reviewed before

being adopted as key steps in making Longs an even

stronger competitor. Are we there yet? No. Nor

will we get there overnight. What we will do is

continue to set appropriate expectations and then

work hard to meet them. Again, we're progressing

on schedule toward what we consider a huge

opportunity for all of our stakeholders,

investors, employees and customers alike. Before

concluding, let me say this we have established a

process we're following to ensure that we comply

with the new certification requirements of the SEC

and the Sarbanes Oxley Bill, because our reporting

calendar ends in January. Our deadline for filing

is September 16.

Thanks for your attention, and here's Terry

Burnside.

Thanks, Harold.

Good afternoon, everyone. The last time we

talked, I said we'd made progress on same store

front end sales improvement. I noted that our

performance demonstrated our ability to develop

strategies that our stores can effectively

implement. We made more progress in the second

quarter as Harold noted and as Steve will describe

in detail shortly. We executed well against our

plans and time line. I'll also point out that

we're looking at opportunities to accelerate our

progress. Let's take a look at some of our key

accomplishments in the second quarter.

Our ad sales continue to increase. We're

executing well against our new marketing and

promotional strategies which are designed to

generate greater sales and bring more shoppers

into our stores. We conducted two major marketing

events designed to do exactly that, and we're very

happy with the results of each. Clearly, Longs is

becoming much more promotions driven. And while

that will have some impact on our front end

margin, it will also pay returns in the form of a

larger customer base and of course increase sales.

Supporting that expectation, kneel son data on

California retail drug in the second quarter

showed our front end sales up 4.3 percent while

our retail drug competitors were down about 3.5

percent. The kneel son data also shows our sales

out paced our California competition in an a

number of key categories. For example our

beverage sales showed a nice increase while other

California drug retailers experienced significant

declines in the category. We also achieved solid

sales gains in the dry grocery, liquor, health and

beauty aids categories. According to the kneel

son data, our retail drug competitors in

California experienced declines in those

categories. What is especially encouraging is

that the kneel son data shows us making progress

against the grocery sector with sales increases in

such categories as dry grocery, including candy

and snacks, and beverages which includes alcoholic

and nonalcoholic products.

Turning to our six-state region, we registered

similarly strong performances in most of the same

categories and we see that as further success for

our revamped add and promotions program [Ad]. We

continue to experience softness and photo

processing which we attribute to continued price

compression and what's become ag an ongoing

reduction in travel and vacationing especially

since September 11th. Let's spend a moment on our

core pharmacy business. Pharmacy sales increased

7 percent over last year primarily due to a rise

in average script price, reflects increases in

products such as Claritin, Lipitor, Welbutrin

[phonetic] and Acefex [phonetic]. On the other

hand, gentleman North America alternatives for

Glycophage [phonetic], Prozac, Cestral [phonetic]

and Pritavil [phonetic] were available in the

second quarter sending the average script price in

the opposite direction. According to NBC Health,

overall script counts in the six state strayedding

area in which we did business were flat to

slightly down for the three months ending June

while Longs script counts were slightly positive.

We continue to benefit from the strong performance

of our automated fill center which past its first

anniversary in July. The number of scripts filled

per shift is consistently rising exceeding our

initial expectations. More positive news. The

center has filled more than 50,000 subpoena

scripts twice in recent weeks and that's well

ahead of our original expectations. The center's

volume for the full year is expected to

approximate the output of roughly 60 pharmacists

providing a partial solution to the ongoing

challenge from the pharmacist shortage. For those

of you following this nationwide situation, our

level of pharmacists openings remained in the mid

70s in the second quarter.

Okay. Let's update you on our key strategic

initiatives starting with our program to upgrade

our supply chain. We're still in the preparation

stage with this initiative doing the work

necessary to convert to the new retech system next

spring. This is a detailed time consuming

activity and we're on schedule. Our main land

distribution centers, meanwhile continue to add

merchandise categories and in fact added the

entire product line of a major outside distributor

during the quarter. Our D.C.'s also handled all

of our Halloween products from candy to costumes

during the quarterly. That's the first time an

entire promotion has been distributed through our

centers. In addition our new product allocation

process continues to pay benefits by insuring that

we gain a maximum return on our sales and

promotions by getting the right products to the

right stores and at the right time. Our price

optimization program has been implemented in about

half of our front end target categories. Let me

point out that our stores are executing well,

helping to accelerate our new programs. The

support we're getting from our store managers and

associates is invaluable and as Harold mentioned,

strong execution across our operations is vital to

our priority initiatives. We have just begun to

roll out our initiative to improve customer

service which we believe will further

differentiate us from our competitors.

In summary, we're taking care of business, doing

the things wee need to do to keep our company

moving in the right direction. We've got the

right strategies and are seeing early benefits of

the programs already underway. We'll continue to

focus on executing and I look forward to sharing

our progress with you.

Right now, though, I'll ask Steve McCann to step

in with his financial overview. Steve?

Thanks, Terry, and good

afternoon, everyone. I'll begin with a financial

review of the second quarter before providing

guidance for the third quarter and the balance of

the year.

As Harold noted, we were within the range we

projected last quarter with total sales growth of

5.7 percent and same store sales growth of 3.3

percent. Our front end same store sales growth of

1.4 percent marks our second consecutive quarter

of increased growth. Reversing the negative trend

that we've been experiencing coming out of

last year. The improvement was primarily the

result of our promotional activities and

continuing enhancement of our advertising program,

both major components of our initiative designed

to improve front end sales. Pharmacy same store

sales rose 5.9 percent over a year ago and

pharmacy sales accounted for 44.4 percent total

sales. That compares to 44 percent a year ago.

Third-party sales, mean^while, made up 91.1

percent of pharmacy sales compared to 89.4 percent

last year. While our sales were within the

projected ranges for the quarter, we like many

retailers began to see some softening in sales in

July. RX America our pharmacy benefits management

subsidiary purchased in the third quarter of

last year continues to prove a solid acquisition.

The P V M had sales of $5.3 million this quarter

with pretax income of 2.4 million. Last year RX

America contributed around $700,000 in pretax

profit to Longs as a joint venture with Albert

son's. Our second quarter gross margin rate was

26.3 percent compared to 25.9 percent a year ago

with the additional improvement in rate coming

from the inclusion of RX America and our

consolidated sales and gross margins. Our

consolidated margin rate last year, gross margin

rate last year excluding RX America would have had

us flat with last year. The increases in - we

did have increases in pharmacy margins within the

quarter, however, they were offset by a decrease

in our front end margins as we increased our

promotional activity to drive sales and increase

customer traffic. Second quarter net income was

10.9 million or 29 cents a share compared to

11.2 million or 30 cents a share a year ago.

From a financial standpoint our supply chain

initiative had no impact on that income in the

quarter which was a bit better than the projection

that we provided you last quarter. We expect this

initiative to have a slightly positive impact on

net earnings over the balance of the fiscal year.

Operating and administrative expenses were

22.6 percent in the quarter compared to 22 percent

in the comparable period last year. The increased

partially reflects the fact that RX America

expenses are now included under our O and A

expenses whereas last year we were on the equity

method of accounting and we reported our share of

the profits. In addition our O and A expenses

this year also include the incremental expenses

we're incurring in connection with our supply

chain initiatives so those are added in. Lastly

as with our first quarter we're continuing to

invest in our infrastructure bringing in skills,

expertise and resources we need that will help

reshape our business going forward. Depreciation

and amortization expenses were $19.2 million this

quarter compared to 18.9 million a year ago. Note

that this year number excludes the amortization

of good will expense and certain other intangibles

which was 1.7 million a year ago. We stopped

expensing good will as of the beginning of

the year in accordance with the implementation of

SFAS-142. That interest expense for the quarter

was $3.1 million compared to 3.6 million a year

ago reflecting both a lower level of borrowings

and lower interest rates. This quarter's tax rate

was 38 percent compared to 39.7 percent a year

ago. The decrease was primarily due to a federal

tax law change that we implemented that aloud

us - that now allows us to deduct dividends paid

on shares in our ESOP plan. Let me spend a moment

on our results for the first half of the year

which includes a 5.7 percent increase in total

sales bringing us to 2.19 billion for the 26 week

period ended August 1st. First half same store

sales were 3.8 percent over last year. Pharmacy

same store sales were up 7.1 percent, and front

end same store sales were up 1.2 percent.

Pharmacy sales comprise 45.2 percent of drugstore

sales over the period compared to 44.3 percent

a year ago. Third-party pharmacy sales year to

date represent 90.9 percent of total pharmacy

sales compared to 89.3 percent a year ago. First

half net income before the cumulative effect of

adopting FAS-142 was $21.9 million or 57 cents a

share. Including the effect of SFAS-142, we had a

loss of $2.7 million or 7 cents a share loss. Now

let's turn to the balance sheet. Cash and other

current assets are up about $5.6 million

from a year ago. Primarily the result of adding

RX America receivables to our balance sheet.

Offset in part by a reduction in cash on hand. We

continue to manage our inventories effectively

with quarter end [inaudible] inventories per store

of about 1.4 million essentially flat with a year

ago. Inventory turns also are flat with last year

at about 1.4 times [inaudible]. Good will is down

last year compared to last year on the balance

sheet due to the adoption of FAS-142 in the first

quarter. Other noncurrent assets is are lower

than a year ago due to the elimination of our

investment in RX America following our purchase of

the Albert son's 50 percent ownership in the third

quarter of last year. Moving to current

liabilities, they are also down from last year,

again as we explained in the first quarter is

primarily the result of a timing difference.

Last year was a 53 week year and now our quarter

end dates this year are a week later. As a result

the calendar month end oriented payments that were

included in liabilities last year are already paid

this year, so they're out of liabilities and

they're out of debt. That debt which is short and

long term debt less cash on hand was 140 million

at quarter end compared to 147 million a year ago.

Debt, with debt being down about $9 million and

with cash as we previously mentioned being lower

[inaudible]. Turning to our cash flow statement,

net cash from operating activities declined this

quarter slightly as a result of higher inventories

due to new stores and the lower current

liabilities again due to timing changes we talked

about earlier. Capital expenditures were in the

expected range at about 45.$6 million compared to

48.4 million a year ago. We continue to expect

net capex of about 120 million for the full year.

Turning to store growth, we've opened nine

new stores year to date. We relocated two stores

and we've closed three stores. We expect to add

13 new stores while relocating one over the

balance of the fiscal year. That would take our

total count to 455 stores at the end of this

fiscal year compared to 436 stores at the end of

last year. Okay. Let's move on to projections

for the third and fourth quarter as well as the

full year. I'd like to point out that we'll be

comparing against softer third and fourth quarter

sales this year. Basically a reflection of the

aftermath of the 9-11 event. In addition, there

are six fewer shopping days between Thanksgiving

and Christmas this year. That's going to add

another did degree of uncertainty to our

projection, so just thought it might be worthwhile

pointing that out. For the third quarter we

anticipate total sales growth to be 6 to 8 percent

above last year with same store sales growth of 4

to 6 percent. Third quarter earnings per share

including the impact of our supply chain

initiative is projected at 11 to 16 cents compared

to 7 cents a year ago. For the fourth quarter

which will be a 13-week period this year compared

to a 14-week period a year ago we're projecting

total sales to be anywhere from 1 percent below

last year to 1 percent above last year. And for

those of you that are updating models, the extra

week last year was worth about $80 million

[inaudible] that we won't have this year. We're

projecting fourth quarter same store sales growth

of 4 to 6 percent on a 13 week to 13 week basis.

So we've adjusted the same store calculation to be

the same number of days as well [inaudible]

provide comparability. We're projecting earnings

per share of 56 to 61 cents compared to 58 cents

in the fourth quarter of a year ago. For the

fourth quarter we're projecting total sales growth

of 3 to 5 percent above last year, again

remembering that last year was a 53 week period

compared to the 52 weeks this year. Finally we're

maintaining our original projection of $1.25 to

$1.35 in earnings per share for the full year

excluding the impact of one-time [inaudible]

compared to $1.25 a share last year.

That completes my review. I thank you for your

attention. And now I'll ask the Operator to begin

the question and answer session.

Thank you, sir.

Today's question and answer session will be

conducted electronically. If you'd like to signal

to ask a question, please press the star key

followed by the digit 1 on your touch-tone

telephone. Once again that is star 1 for a

question. We'll pause for just a moment to give

everyone a chance to signal.

[Pause.]

Our first question comes from Meredith Adler

[phonetic] with Lehman Brothers.

Hi. I was wondering if you could talk

a little bit about what kind of receptivity you're

getting from your store level people, your store

managers and stuff to all the changes you're

making. Would you say that these people are on

board with what you're doing? That's my first

question.

I'll speak first, Meredith.

This is her Harold Somerset then I'll let Terry

add his comments.. That's a really good question.

Obviously Longs has a very strong culture, I think

one of the unique things about this company that

I've found is that the employees love the company.

And they're willing to do a lot of things for the

company that other companies might not enjoy as

much as Longs does. That doesn't mean that our

managers don't have strongly held notions about

what's good and what's right and senior management

team does, too. That's why we spend a lot of time

working on communications. But kind of getting to

the bottom line of your question, I would say that

to the extent that we can make our - make where

we're going clear and have our store managers

understand what the purpose of the various

programs are and what the advantages are and are

going to be, and we are putting a great deal of

effort into that, they're on board. They really

are. I'm very - I get a lot of synergy out of

talking with our store people. There's a lot of

energy out there. Terry?

Hi, Meredith. This is Terry.

Hi, Terry.

I'd have to say what we

started, in particular, those June store

manager - actually, store and pharmacy manager

store meetings are pretty rewarding. Jump talking

about what Harold said, we had many of both

groups, both store and pharmacy managers approach

us and kind of refer to it as a new day at Longs.

And we changed that format to allow for a great

deal of give and take as well as a stand and

deliver type of presentation where we didn't have

answers for some things we're working on, we told

them that. So we do have plans to continue the

communication, both in person and through other

vehicles such as E-mail. But I think the message

we received was twofold. One was bring it on,

we're ready, we're hungry, but do it well. And

we're focused on doing exactly that, execution.

Okay. Another question I have is you

gave us data that you said you seem to be taking

back some share in the front end. The question I

would have is what do you think is happening in

pharmacy? I mean I've had conversation with some

of your competitors who believe that they say

their comps are stronger in the market, so they

would seem to be taking some share. How do you

think you're doing there?

Well, as I mentioned, in the

text of the initial comment, our script count, how

we measure that is through N D.C., national data

corp. it's our syndicated data source to be able

to monitor our script count activity. What we saw

through June was that our script count was very

slightly positive, and it shows that our peer

group in the six states where we do business is

flat to slightly down. There's no question that

we've seen softening of script counts all year.

And while our count has been flat to slightly up

from that data we see our market share up.

And would you say that's a fall out?

Do you think that your situation was worse

earlier, or is it pretty steady?

I wouldn't call it a

turn^around. I would say it's steady.

Okay. My final question is just, you

guys did say that it's a difficult environment.

Could you talk a little bit about what that means?

Are you seeing average ticket go down, are you

seeing people, you know, maybe avoiding what they

would think of as much more discretionary items,

the higher ticket items, and are you seeing heat

up in the competitive environment?

It's Terry again. That's a

big question. There's lots of moving pieces.

Obviously we've changed our promotional focus to

become much more promotional and to drive bodies

across the threshold and there are some trade-offs

we see from that. In the marketplace generally,

I'd have to say my observations are that - and

we've seen this from some of our competitors in

that class of trade. Front end sales are just

soft. There does seem to be activity in the

market that suggests some strengthening in mass

merchants and other forms of discount type of

retailers and I'm talking front end goods now, not

pharmaceuticals. But it's a tough market with

difficult discretionary income I think being a bit

more limited. We continue to see areas where

unemployment and difficulty in Northern California

are certainly a factor. So from a competitive

standpoint, things haven't gotten any easier. So

the activity in the market would indicate to me -

and what you see promotionally as well is

everybody is trying to carve out that piece and

hold onto market share right now.

Right. Okay. Thank you very much:

Next we'll take a question from Lisa

cart right from Salomon Smith Barney.

Good afternoon. It's Elizabeth Lynn

calling on Lisa's behalf. I have a quick question

about the California state Medicaid program. It

looks, according to recent press, like California

is going to be the latest battle ground. I was

wondering if you could comment on the impact to

Longs if the state does follow through with

lowering its reimbursement rates to pharmacies.

Elizabeth, it's Terry again.

On an individual store basis it can be impactful.

Certainly we do have stores that in fact dispense

far more medicate Medicaid prescriptions in

California as a higher percentage of their total

script - scripts dispensed. But on an overall

company basis, even with what we see happening and

what those reimbursements might look like, we

believe that impact will be fairly minimal to our

business or more specifically to the profitability

in pharmacy.

Okay. Great. Thank you.

We'll go to jack Murphy from Credit

Suisse First Boston.

Thanks. I wonder if you could give us

a sense of how things are looked since the end of

July last reported number and maybe talk a little

bit about what give you confidence to accelerate

off of your July numbers.

Hi, jack, this is Steve.

Hi.

The third quarter is going to

be a pretty bizarre quarter, not only for us, but

I think it's going to be for everybody with the

9-11 event happening there. In total we see the

third quarter as being, in terms of how we

projected it, as being more robust than the second

quarter and actually we've forecasted it up

slightly from the second quarter. To us that

makes perfect sense given the 9-11 event last year

and the impact that it had. Out of the box, I'd

really rather not talk about that. We [inaudible]

the monthly sales release and we'll probably just

continue with that process as opposed to giving

new updates. At this point we're still

comfortable with our quarter projections but we're

going to continue to watch it. And I think

from not only our standpoint but I think everybody

is going to have a little bit of heartburn going

through the quarter as you try to match up how you

projected the quarter to run out, given the

uncertainty of what impact the 9-11 event had

versus what we thought it had.

So I guess, you know, [inaudible]

September is going to be a lot bigger than any of

the other months, I guess?

That's certainly our

expectation.

Concerning the idea about increased

promotional posture, what's your level of concern

that there could be an aggressive response

from competitors, I guess specifically I'm

thinking about wall gleans and how you kind of

figure that into your thinking when you lay^out

the guidance? [Wall green's]

Jack, this is Terry again.

I'm certain that we've done things promotionally

that as competitors noticing what we're doing.

We're not foolish to think they haven't. We have

a distinct advantage I think in a bigger box from

the standpoint of display and presentation to just

do things that those folks can't do. The other

piece that goes hand in hand with this frankly is

the allocation piece in our supply chain. When

our marketing people can go to a supplier and say,

I'm going to guarantee you X number of cases and

we know where to put it to get sell through, and

we've got the space to do it. Other drug

competitors don't have that advantage. So we'd be

foolish to think we're not being noticed but we

think we have ways to deal with that because of

the box we offer that's differentiating and just

give us a very distinct advantage.

We certainly can't predict

what our competitors will or won't do. We have

considered that, certainly, and we believe we have

appropriate plans to act and counteract that if it

does happen. We have thought about that relative

to the guidance we gave.

Okay. And just a last question I

guess for Steve is, could you give us a little

more specifics on the pharmacy margins in the

sense of how much the growing generic piece

contributed to the pharmacy margins?

I can tell you that pharmacy

margins were up slightly and is primarily due to

that. You know, we do believe there was a pretty

big impact on the sales side because of that flip.

We think that was about 270 basis points on the

branded generic shift on the sale side. Pharmacy

margins like I said were slightly up [inaudible].

Was there any other thing - other

large item that was a negative impact on pharmacy

margins?

No, no. That was the primary

impact on the chain.

Thanks.

Just as a reminder, it is star 1 to

ask a question. Next we'll go to Kenny Ohe

[phonetic] with SAB Capital.

Just wanted to actually find out

within the quarter how much discrete supply chain

initiative expenses were, and how much the LIPO

[phonetic] charge was.

Kenny, the LIPO charge was

1.7 million, I think that compares to 1.4 million

a year ago. That was up 300,000. On the supply

chain piece, we've avoided handing out that level

of specifics at this point, but we can tell you

that the overall supply chain impact was basically

zero in terms of EPS on [inaudible] effect on net

income.

I was actually asking about you guided

towards 14 million for the year and you broke out

what it was in the Q for the first quarter. I was

wondering would you break it out in the second

quarter Q or can you provide it now?

We'll continue to report that

consistently.

Okay.

Next we'll take a question

from Franklin Morton with aerial capital.

Good afternoon, gentlemen.

Good afternoon, Franklin.

Can you give us some coloring on what

the targets are for the company when all of these

initiatives are completed, how long are they going

to take, and what should the end of the tunnel

here in terms of profitability growth, returns,

however it is you all measure it?

Franklin, this is Steve. At

this point we're not ready to do that, frankly, to

tell you the truth. We're still rolling that up.

We've spent a lot of time in the first six months

of this year generating what we think all of those

projects are, and in fact, we're still kind of

penciling it out trying to understand what this

thing looks like on a quarter by quarter basis.

When we're ready, we will do that, though.

[pencilling]

Could you give us what kind of sense a

time frame all these initiative in aggregate will

take? Is it a 12 months or four years or how

would you sort of handicap that?

It's different for each one.

I mean, if you're talking about - we've laid out

a timetable for supply chains that takes us

through fiscal 2006, you know. The front end

sales improvement initiative is well underway now

and we're seeing benefits to that already.

Pharmacy margins or pharmacy profitability, that's

going to be probably about a two- year timetable,

customer service will be ongoing forever and ever,

and process improvement will hopefully be ongoing

forever and ever.

Where do you think you'll be able to

provide us with some more specifics in this?

[When do you think] some^time by the end of

this year a reasonable expectation?

I'll tell you what, we'll take

that as a target time and do our best to meet it.

Okay.

We really haven't discussed it

internally in terms of when we thought we would be

done rolling it up and when we'd be ready to take

it public. We'll take that down as an action.

Okay. Thank you.

And we have a question from Dan

Johnson with UBS global assets.

Thank you very much. Actually two,

one is just a background question. Could you give

us a little more color on the size of RX America

in terms of obviously you gave us revenue and

profitability, but just just to get a better

sizing in terms of the amount of scripts you put

through that business, and even if you had them on

a retail versus mail basis?

First of all, RX America

doesn't have a mail facility, so that's - that

will provide some clarity.

Okay.

In terms of scripts for the

quarter, over three-and-a-half million. And what

else was there? Is.

And just a sense as to what is the

growth of that - that script count was year

over year although I realize the ownership

structure was different this time last year.

Yeah, in terms of its

growth year over year it's in the 4 percent range.

And then the other question is, within

your guidance time period for the next few

quarters, I believe the potential for Claire tin

moving to over the counter happens or has the

potential to happen. Have you included that into

your guidance? And if not, what is your best

estimate as to the implications of that shift?

Thanks.

At this point we have included

it in our guidance to the best that we understand

what impact it will be, sure.

And what are you assuming for that

implication broadly?

That's the level of detail

that I'm not sure would be helpful. It's a small,

small piece, December and January.

For the fourth quarter it's two-thirds

of the fourth quarter?

Roughly. I think it flipped

some^time in December [inaudible].

Yeah, I think that's [inaudible].

Month and a half, whatever.

Part of this is predicting what the consumers'

response will be.

Right. I'm just trying to get a gauge

as to if you think this is completely immaterial

or not.

I don't think - in terms of

how we've crafted the fourth quarter we haven't

factored in material impact for guidance in the

fourth quarter if that's what you're asking.

No, I'm curious as to whether or not

you think that depending on the range of

reasonable outcomes as consumer response could

even have a material impact.

This is Bruce. Obviously we

realize the impact on pharmacy sales and

[inaudible] O T C and Claire tin sales [inaudible]

are all dynamics that are in play. I mean the

plan that [inaudible] and I put together to try to

mitigate all those pieces to try to come tout

outcome we want to have, which is same profits and

sales. To the extent that we can do that, you

know, we'll be successful. We all realize that

more players will come into the marketplace once

it's just not available on prescription. So there

are too many [inaudible].

Great. I'll check in with you three

months or three months from now, then. Thanks a

lot.

Next we'll go to Roj Yarisee

[phonetic] with Oz Capital [phonetic].

Hi guys, I have a couple quick

questions. I was wondering on the script volume

versus price, how much was price [inaudible] year

over year?

Price year over year has been

five and a half to 5.9 percent range.

Okay. So that's significantly below

where it was in the first quarter?

Yes.

Okay. Great. And then I was just

wondering if you could give us some color on the

latest pharmacy comp number for the month of July

I was just surprised by how low it was. Four and

a half percent?

I think we'll ask Bruce to

address that as well.

Yes. We had a tail end off of

our prescription volume in the last two weeks of

July that tended to [inaudible]. But we also had

a move from what we reported in the month of June

into July as well, and that's the fifth week of

June was a holiday week and so it showed

significant sales in that particular week which

was offset by a very weak week, week 1 of July.

So we had a little bit of calendar ship playing

into the 9 plus [inaudible] that we had in the

previous month versus what we reported

[inaudible].

I thought when you had a Holiday Inn a

month it tended to hurt because the pharmacy would

be closed [inaudible]. Is that not the case,

or - yeah, I'm referring specifically to the May

[inaudible] Memorial Day specifically with what

was given as a reason for the low comp in that

month.

Right. What ended up

happening in the month of June is that you had the

benefit of Memorial Day as being [inaudible] our

first week in May with a very large week. It was

[inaudible] low twenties. Week nine was double

digits as well, that was the early pick up of

prescriptions would be 4th of July holiday. So

when we moved into the actual July month, a lot of

the sales were already out and counted

[inaudible].

Okay. And that's the lead up to the

4th of July, the days preceding it.

That's correct.

Okay. Thanks.

We have no more questions in queue at

this time, so I'll turn the conference back over

to Mr. Maron for any additional or closing

remarks.

Ladies and gentlemen, thanks

for joining us today, and we look forward to

talking to you again.

This does conclude today's conference

call. You may now disconnect.