麥卡遜 (MCK) 2002 Q1 法說會逐字稿

Thank you for standing by, welcome to the PSS World Medical first quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have question, please press the one, followed by the four, on your telephone. As a reminder, this conference is being recorded Thursday, August 1st, 2002. I would now like to turn the conference over to Mr. , Vice President of Investor Relations. Please go ahead, sir.

Thank you, Operator. Good morning, everyone, and thank you for joining us today for our fiscal 2003 first quarter conference call. This is and today making remarks on the call are David Smith, our President and CEO, David Bronson, our Senior Vice President and CFO, and Tony Oglesby, Vice President, Sales and Marketing, for the long term care business. As well, as available for questions are Kevin English, the VP of Finance, David Corner, the VP in Treasury, and myself.

Before David begins our formal remarks, let me read the forward-looking statement. All statements in this conference call that are not historical facts, including but not limited to, statements regarding anticipated growth in revenue, gross and operating margins, and earnings, statements made with regards to our goals, statements regarding the company's current business strategy, the company's projected sources and uses of cash, the company's plans for future development and operations, and other factors described from time to time in the company's reports filed with the SEC are all based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties.

Actual results may differ materially. Many of these factors are outside of the control of the company. The company wishes to caution listeners of this call not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995, and as such, speak only as of the date made. The company also wishes to caution listeners that it undertakes no duty, or is under no obligation, to update or revise any forward-looking statements.

Good morning.

On the call today, I'm going to review our goals for the fiscal year and how we performed this quarter to those goals and my insight look in our future.

David Bronson, our CFO will review financial and operational performance and our division management get this quarter is Tony Oglesby, VP Sales and Marketing for our long term care business. Tony will provide an update of our long-term care programs, as well as the capital hill re-imbursement update.

This fiscal year, is the first year of a three-year business plan for our company. Our objective is to profitable grow the business and bring significant value to our customers and to you, our shareholders.

This plan was development to leverage our existing people, resources and competencies and our goals are simple. This year our goals are to grow earnings about 50 percent. We are going to rationalize 32 of 74 distribution centers and two divisions and centralized back office functions, like purchases, call centers etceteras.

To create significant savings and efficiencies, for us, the shareholders, while we improve customer satisfaction for our user. We will complete the ERP roll out this year also, which is going to provide great efficiency for future years.

We are going to reposition our imaging division to sell and service digital equipment products, which provide our customer savings as well as improved margin and profit for that division. We are going to expand and continue the game of minimum, with our off hands strategies that we started last year.

We are going to add sales people where appropriate, we are going to expand products and portfolios. We are going to add telesales, we are expanding our online services and we are leveraging those innovated programs, we launched last year, like SRX Answers and Service First.

The objective here for revenues is to grow a two times the market gross rate, while we maintain or expand our gross margins. That's the summary of what we are doing, it sounds like a lot. But I can tell you, this quarter, I am very proud of our team's focus, effort and commitment to the plan and I think the results speak for themselves.

We beat our internal plan by over a penny and most analysis's by a penny or two. We did grow earnings by 50 percent over Q 1 last year, while meeting, beating, gaining and gaining traction on almost every strategy in tact that we have in our plan.

We've beaten our expectations this quarter for cash flow, EBITDA, operating profit, EPS, all the earnings adjectives. Each of our businesses, had a good plan for the quarter, even imaging, which is operating in a very tough environment. David Bronson, will also provide some more detail there.

Revenue growth was approximately twice the market in a physician in long term care businesses and our rationalization program in physician and imaging has progressing smoothly and we are a little of schedule.

Now because our focus, on a customer, we have made a few alternations to our schedule in the rationalization. We've moved a couple of branches up in the order, and we've moved a couple back. That's so that we don't disrupt our customer in anyway. And it's an example of how we implement our rationalization program, very methodically, yet with the flexibility not to interrupt, or to be able to adapt to customer needs and concerns.

You know our general business environment is pretty good. We're seeing opportunities in the marketplace to gain share, and more importantly to me, we're winning on the street. For instance, six months ago we started to recruit and hire sales reps. we're already 25 percent of the way to our goal, and it's a three-year goal.

Our SRX and Answers programs are generating results way ahead of our expectations. Plus our customers and vendors really love 'em. And our Service First Program and Imaging is gaining real traction.

You know our focus on the balance sheet and our cash flow improvements are way ahead of schedule, and exceed all of our expectations. They prove the value of discipline and planning, which we've infused into our culture in the last two years. Each of our businesses has several initiatives that have yet to be implemented, and we'll keep you up to date on that progress as we have results.

We're also going to survey our customer near the end of the year. And each of our businesses has specific metrics for customer satisfaction improvement that we're watching very carefully, as we change the business model.

Our environment in general, as I said, is very positive for growth. We're seeing major competitors that, to us at least, appear to be creating strategic opportunities for us in our markets. Though I'm sure they are good decisions for them on a consolidated basis, they appear very attractive to us.

Now, Tony and David are specifically talking about the environment at long-term care and imaging, but I'll talk to you about the physician for a second.

The physician market environment is positive, but there are a couple of things going on. There was a two to three percent reimbursement cut a few months ago that was passed, and it appears to be in the works to repealed by congress, as most of them on Capitol Hill agree that they made a mistake. But the real problem, to me, appears to be malpractice insurance rates and availability.

The worst is for specialists and OBs, or obstetricians that are operating and delivering babies in the hospital. We don't really see any impact for our business, or us as we're primary care focused, and not hospital based. However, baby delivering and surgeries are an issue for all of us personally, as we are all consumers of health care, and we watch it closely.

Stock market. This stock market's pretty ugly. And as a result of that situation, and a fact that is real clear on our financials, we have incredibly good and strong financial position today. We're way ahead of our plans, our balance sheet is the strongest it's ever been. We believe our values, our stock is undervalued, and our current market is too low.

Our current performance and progress on our business plan is ahead of schedule, and we expect to stay that way with future performance on our business plan. So, with that in mind, our board has approved a stock purchase of up to five percent of the shares, of about 3.6 million, from time to time, and as conditions and rules permit.

We will update you on a quarterly basis, in our future earnings releases on the progress of this purchase. We will not comment on it on an interim basis, unless required. This repurchase is one of several opportunities that we have, to improve performance and enhance our long-term value. And it's - most of these improvements are imbedded in our capital structure. We expect to implement other capital structure programs, as we progress through our business plan.

Now I'd like to turn it over to David Bronson, David.

Thanks Dave. Good morning everyone, thanks for dialing in. We're really please with the results for the first quarter. As Dave mentioned, we feel this quarter got us off to a great start to deliver on our financial and operational goals for the full year. Each of businesses achieved plan for the first quarter, and every one of us making good progress on the three-year business plan objectives.

Revenues grew by almost four percent, EBITDA group by 11 percent, and EPSV for charges increased by 50 percent, meeting our expectations in each of these areas. Sales growth for quarter was 30.7 percent overall. The physician business grew at 6.7 percent, led by continued excellent results in our SRX programs. Long-term care revenues grew by 8.5 percent, and we've added over 150 customers to the answers program. Tony, will speak more about this in just a minute.

While revenues in the imaging business were down 1.6 percent in Q1, we believe that we gained share. As some of the large film manufacturers have reported larger revenue declines than what we're seeing. We're particularly pleased with the Women's Health Business Unit within imaging, where revenues more than doubled over prior year. We're seeing an improving reimbursement ramp up environment for mammography, coupled with an industry focus on upgrading the equipment used in these procedures, and our strategy of focussing on this area is helping to offset some of the declines we're seeing in the traditional film and chemistry areas. As Dave said, achieved our internal plan for earnings in the quarter.

Our financial objectives for this year include growing earnings twice as fast as revenues. In the first quarter, EBITDA of 14 million showed growth of 11 percent over prior year, and as Dave mentioned, EPS excluding charges grew by 50 percent in Q1. The company generated operating cash flow of $20 million in the quarter. We did have a $4 million income tax refund in the quarter, and cash flow was also favorably impacted due to timing of accounts payable check runs right at the end of the quarter, for about seven to eight million. Still, a very strong cash performance driven by continued improvement and working capital returns.

We achieved inventory turns of nine times in the quarter for the first time ever at the company. We're starting to see the impacts of our distribution infrastructure rationalizations, particularly in the area of centralized purchasing, which allows us to buy more efficiently, and reduce some of the safety stock in the system, while at the same time, improving sole rates and service levels. We're still in the very early stages of this process, and as we've said before, we expect to improve to 10 to 12 turns on inventory by the completion of our three-year plan.

We continue to be effective in managing other areas of working capital as well. We reduced out overall cash conversion cycle by almost four days this period, to under 44 days. We're getting close to optimum levels in receivables and payables, but as I mentioned, we'll see some continued improvement in inventory turns.

I'd like to give you just a quick core progress report on our rationalization and consolidation efforts. During the quarter, we completed the consolidation of two distribution centers in the physician business, and two centers in the imaging business, as well as centralizing a number of call centers and back office operations into Jacksonville.

The JD Edwards ERP System was rolled out to five physician branches, and eight more branches converted to centralized purchasing. We now have about 35 percent of the business, in the physician business, compared to centralized purchasing in the ERP System. We're on or perhaps slightly ahead of our schedule in the consolidation efforts. Most importantly, with all this change, we have not disrupted our customers, our service levels and fill rates are at, or better, than pre-consolidation levels, while we're beginning to see the impacts of reduced overhead costs. Also as we go through this process, we're adding capacity as appropriate to facilitate future growth. In the area supply chain savings, Bill Mitchell and his team, have identified and implemented approximately 2.5 million, in annualized savings, as part of the 10 million target, we've previously identified, in the areas of freight and shipping costs, travel, office supplies, fleet costs.

All of us continue to be encouraged and excited about our progress and our prospects going forward.

We look forward to continuing to share our results with you in the next few months, will start to share our plans and expectations for next year.

Before I turn it over to Tony, I'd just like to say a quick word about certification.

Dave and I are very confident and are looking forward to complying with both the letter and the spirit of the new regulations on certifications.

Financial controls in the business controls and business processes we have, have never been stronger, and they give us a high degree of confidence, in our ability to certify the financial statements, on a going forward basis, and we're looking forward to doing that.

Now let me turn it over to Tony, Vice President in Sales and Marketing for a long term care of business.

Thanks David, and what has been and continues to be a dynamic long term care industry. Our company has been forced to become more efficient and effective as had the customers we serve.

Let me start by stepping back a bit in times when PSS World Medical required Gulf South, to March 1998.

Then the completion of the merger we saw a strong need to rationalize our distribution network. As a result of those efforts, we consolidated 22 distribution centers down to 13.

The first full year subsequent to the merger, fiscal year 1999, our sales were 342 million, and we had 1120 employees.

In fiscal year 2002, sales were 392 million with 814 employees, at year-end.

Productivity gain of 55 percent is measured by sales per employee. Our customer field rates have increased by nearly 98 percent overall. Our ultimate shields are below two percent, and our inventory turns have gone from less than eight, to over 10 times per year.

In the first quarter of fiscal 2003, we continued on our path of progress, with an 8.5 percent increase in revenues, to 103.5 million, to 73 percent increase in just at EBITDA, and 111 percent increase in operating income.

We have courage our customers with opportunism to share efficiencies, such as, quarter size and frequency, product standardization and E Commerce.

As a result of these efforts, our average order sizes increased over 20 percent in the past year, and we have eliminated 60 vendors, which allow us to leverage our volume with other manufactures as well, as well as our back office functions.

E Commerce is an area where we are particularly proud. In the first quarter, 51 percent of our orders were electronic, with 49 percent coming through our sales reps and customer service group.

Nearly all our electronic orders were via the internet. Also our technology efforts has helped us improve virtually all areas, from cash applications to inventory management as well as investigating continual replenishment planning, with key manufacturers.

The Replenishing process with further reduces our costs by stream lining purchasing to the point of eliminating several purchasing functions.

We will reduce receiving time and be in a paperless environment for most of those vendors' transactions.

Now, I'd like to turn to the future, starting, with the reimbursement environment, and then, speak on our plans for continued intelligent growth.

On the legislative side, we are actively involved with the leading providers and suppliers in our industry, to continue building a strategy to overcome the remaining Medicare clip issues, set to expire on October 1st, of this year.

There was 2.4 billion in reimbursement givebacks, set to expire October 1st. In April, congress approved the extension of the rugs classification adds on, that effectively, extended one billion of the 2.4 billion.

On Friday, May 10th, there was critical Medicare legislation introduced by Senator Gordon Smith of Oregon, Blanche Lincoln of Arkansas and Senator Torricelli from New Jersey that would prevent the Medicare cliffs from happening.

The Medicare skilled nursing beneficiary protection act of 2002 were as 2498 is important to our industry from a Medicare standpoint. The bi parts and legislation were presently focused for the skilled nursing funded base. The various relief measures that acted in 1999 and 2000 to make up for previous and adequate funding. It would also allow for increases in funding moving forward.

This skill is gaining momentum as there are now an additional 11 senators that have signed on this coast. In addition to that, there's been additional legislation that has been introduced by Senator Nelson of Nebraska and Senator College from Maine which will increase the federal match on medical.

We are in support of 2570 as this would be positive as well for our industry. As a company we are actively involved in the effort as we have representation in DC this week and I will be there next week to assist with the efforts. While we are not assured to maintain the full funding, we are confident that given the climate we will receive adequate funding for our customers to remain healthy.

Now to speak on our growth initiatives moving forward. We were successful in undergoing some changes and reductions in our sales force at the beginning of our last fiscal year. We reduced our sales force by 15 laps, redefined our territories and our structure. The strategy paid off and we increased our sales by $25 million, which was our largest growth in several years.

This year we'll be strategically placing resources in specific areas of identified growth opportunities. These opportunities will assist in leveraging our core operational and sales . The first area for our focus is our best practice-marketing program called . The program allows the best practices at nursing homes with our most efficient distribution activities and as a result, the customer shares in the savings.

The program gives our sales reps a solutions program to sale that offers value and requires committed purchasing volume. How successful is this program? 11 months after the launch we have signed agreements with 157 facilities and that represents $14 million in annualized revenues. A second area of focus has been in the regional accounts area. This is the fastest growing segment of the long-term share market.

With similar challenges facing the national players as well as the consolidation among the , there is been a spin-off of facilities that has rebuilt it in growth in the regional groups. As the regional groups grow they require a solution and that solution mirrors those that we provide our large chain customers today. Items such as electronic ordering, development, statistical data and a concentrated focus to exceed their medical supply needs.

We've made investments into additional resources with total focus on the regional customer segment. From an IT prospective, we've developed web-based solutions that greatly reduce the time utilized for the process. We extended our answers program to these customers and finally we've added dedicated sales personnel over the last quarter to concentrate on regional customers and we're beginning to see traction from these efforts.

The next area of growth is in the house keeping area. This market segment is very fragmented in relation to the multi-regional customer. The products represent here general house keeping products such as mops, brooms, paper products, and trashcan liners. We're adding expertise in this area and we believe it will be a solid growth engine for our business. In addition, we continue to explore the home care market as an avenue for growth and we are closely monitoring the reimbursement in that segment of our business.

Our success is rated in our ability to focus on our core competency of distribution - we do not participate in the highly regulated environment of and other services.

Overall we continue to experience smart growth that is growth that is scrutinized heavily from a credit perspective and growth that leverages our core operational and sales expertise which equals operational product - operational profit and customer satisfaction.

We are fully competent that we will meet our growth targets of going at twice the industry growth rate our eight to nine percent this fiscal year and we are also optimistic that by concentrating on smart growth, in the future we will reach our goal of five percent operating profit.

At this time I would like to pass it back to David Smith for final comments.

Thanks Tony and thank you David - I'd like to make a few comments and then we'll open up for questions.

You know I believe the end result of our business plan is going to be a significantly stronger, faster growing, more profitable, better managed and more valuable enterprise for all shareholders - our plan is difficult but it's appropriate. We don't believe our competitors are going to lie down and we do believe the health care environment will continue to change.

But I really like our chances and our odds - I believe we have a stacked hand with a good hand with a good team focused on a solid plan and we already have success and evidence of progress under our belt. We have a strong balance sheet, good systems, a first class sales organization equipped with innovative marketing programs.

I think most importantly though is we have a loyal and satisfied customer base - served by loyal and professional employees and I'm happy that we have the opportunity to share this with you. Thanks for your time and we'll open up for questions operator.

Thank you ladies and gentlemen if you wish to register a question please press the one followed by the four on your telephone - you will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration please press the one followed by the three. If you are using a speakerphone please lift your handset before entering your request.

One moment please for the first question - with Merill Lynch - please go ahead.

Thanks very much and congratulations on the strong quarter.

Thanks David.

I had a couple questions - first of all - in terms of the way that you budget if you could help us understand the way that you come up with your internal targets - the roll up of the financials and whether your internal management targets are above the guidance that you provide to the Street?

First of all you know our goal this year was 50 percent growth in earnings on a basis - which is about 18 cents based on last years performance and we had about 10 cents of charges that we expected and we told people about it about eight months ago which our six cents for restructuring the distribution model and four cents for G&A related to that restructuring.

So, those are the goals that we outlined to the Street - I would you know - I would - I'm afraid to answer that question the way I'd like to because you'll raise my numbers. So, I'll just say that there is our goals and that's where we're headed and our business plans support that roll up and that strategy.

Very detailed business plan here, very detailed roll up - we track metrics across the board in all areas of the business, whether it's the rationalization whether it's revenue growth, whether it's operating profit cash flow, accounts receivable, inventory - everything. It does roll up to a number and we published a number that we felt comfortable that we wanted to guide the street to, cause we have a very difficult plan this year and we have a lot of moving parts.

Dave, would you like to add in anything?

Only that, our internal plans were developed and in placed and finalized, before we gave that guidance David. If that helps.

Yeah, that's very helpful. And.

answer that question?

OK. In terms of the financial reports that were results that were just reported, the PSS, the core PSS and the Gulf South businesses were above my projections, but DI was below. A couple of questions on DI, first of all, why is the film business declining, if paper film is replacing the traditional wet film?

Second, was the DI business below your plan? And third, how should we predict future DI results?

Actually, DI hid our plan on a profit basis, it was a little light of the revenue basis. Was it?

Yes.

We had about $2 or $3 million of equipment actually, in the last week of the quarter, that did not close, because we didn't have some parts and pieces of the equipment of the manufacturer yet installed and trained to the customer. Other wise I think they would have been pretty close to the number.

And the film, what we're seeing is, yes film is declining, people are converting over to digital from analogue, but we are seeing chemistry really been the decliner, not necessarily as much as the film. And we are grabbing more share from our competitors then the competitive landscape would suggest or actual numbers would suggest.

So it is declining, actually Joe is in the room. Joe, what is the number in the industry, that is declining film?

The overall number in the industry of wet film plus dry film is actually about a half of point or so increase Dave, but the other part of the answer to the question is, we are now beginning to see the first of the accounts that have already gone from dry, from wet film to dry film, now they are going from dry film to .

Yeah.

But Kodak showed, about a three percent drop or four percent drop.

Yes.

In the numbers of last quarter, so we are seeing some manufacturers lose ground on film. Greater then our decline.

Great.

So we've you know, where we lost Kodak business, we've been able to make up by taking other competitors products. Or other competitive share. Did I answer the question right?

OK. And with respect to the growth outlook, since the business, can't be expected to grow just given the Mac row pressures that are expected over the next several years. Are you still committed to retaining the business if it's going to be a flattish type, you know, revenue grower over the next few years?

You know, our plan is to really pick up the pace on equipment and service to grow that in double digits. And the profitability of that mix, if lets say film is flatter down two to three percent for the next three or four years. If we can grow our equivalent in service, we will dramatically change the profit model of that business.

Because, the film and chemistry is basically at a break-even or a loss and the equipment in service is at a profit. So if we can substantially increase our share and mix of film and equipment, I mean I'm sorry equipment and service over the next few years, will dramatically change the profit model there. So our base model is to get that business to three percent operating profit. We are on track this quarter with what we were doing with the rationalization, with the rollout of new programes, in many areas of the business and on the bottom line, so from a target prospective, they hit their number. I'd love to see more revenue grow from them, but the reality is film is not going to grow in the future, or if it does, it's just going to convert over to digital, and chemistry will go away. But there is a great opportunity to seal digital products and digital equipment and services. Any other points you have to add to that?

We're just stealing share from competitors, and we're stealing by stealing sales people, service engineers, recruiting them to taking customer accounts for service and lack of service from our competitors. It's coming from a lot of different places.

next to buy back, you would expect that number to continue to grow sequentially?

You know, we gave a number of 25 to 30 million, 25 million for this year, and I told people we thought that was conservative, but we had a lot going on this year. We've got 20 million, or 15 million of costs associated with the distribution that we're going to be spending cash on, so we were conservative and I'd just like to stick with that number right now. Yeah, it looks kind of silly because we've produced 20 million in the first quarter, but Dave kind of outlined 10 or so million of that, that was timely, just because of a refund from government of four million, six to seven, or eight million of payables, so I would just stick to the 25 million right now. Yes, I think it's conservative, but we've got a lot going on this year. My expectation is something different than that for cash flow, but I'll just stick with that right now, and with the 70 million of cash on the books, and the market conditions, and that fact that we know what our two or three business plan is. We can't sit on the sidelines anymore, and be patient with a stock buy back.

OK, thanks very much.

Our next question comes from with Lehman Brothers. Please go ahead.

Thank you. Good morning everyone. Again, a couple of questions for you. First of all, I know you said it before, but remind us again the difference between special charges and your GNA rationalization that you're showing. Where does the GNA rationalization show in your consolidated income statement? And are you still suggesting the same amount of guidance for both categories for the full year?

Larry, this is David Bronson. Our guidance was seven to $8 million of restructuring charges, and four to $5million of additional GNA that doesn't qualify for re-structuring treatment in the financials, but is one time in nature and is associated with our consolidation efforts. We're on track with both of those numbers, we're not changing the guidance on either one of them. The additional GNA shows up on the face of the income statement in GNA, in operating expenses, we break it out because we want everyone to understand that these are costs that go away when we complete the program. We have split them out in some of the schedules, that's the counting theory behind it.

OK. Seven of the press release, Larry. We broke out by division, and by category of special charge or by GNA rationalization expense. Both for last quarter last year, and this quarter this year, and in last there was about 400,000, and this year, there is about 2.7 million. 1.5 million special charge, which qualifies for the re-structuring, as David mentioned, and 1.2 million of GNA expense, and I would just give more clarification, even to the GNA expense, that David mentioned. You know, we've got two teams rolling out the ERP System, we've got two teams rationalizing the branches, we've got new branches that are being constructed, we've got , we've just got a lot of activity that kind of immediately goes away when we're done at the end of this 12-14 month program.

Is the ERP program directly related to cutting facilities and why is it that that does not qualify as a special charge?

It's the additional teams, the cost of those teams, that doesn't, the re-structuring charge is set up for one-time costs such as severance, outplacement, shutting down facilities, but the additional GNA costs do have future benefits, so they don't qualify for the re-structuring treatment.

Why is that so extraordinary that it wouldn't be just considered part of ongoing SC & A I mean why is ERP roll out something that wouldn't happen two years from now?

You know Larry that's why we gave a GAAP guidance of 50 percent growth and then laid out the charges so we had complete visibility of the numbers and left it up to everybody else of them what they wanted to do.

OK, that's fair enough. You gave out two other I just want to make sure we're clarified on that. First of all has there been any progress around the announcement of a new President of the long term care division and also do you have any comments as to any additional interaction we've had with the members of Abbott regarding sooner issues in your interesting getting back in the market for some of the products?

You know I think we were together in the call in May or was it the end of May and I told you 60 to 90 days so we're about 60 days from the last time I talked to you and it wouldn't be fair to comment on anyone specifically but I'll just say we've got some good internal candidates and we're right now going through a process with looking at external candidates and you know I fully expect definitely by the time we talk again on the call that'll we'll have a President in place there.

We've got great momentum in that business, we've got great programes, we've got great management, great people, it's just a matter of finding and making sure I put the right person in there that can take that to another level and grow what we've started.

So we're on track with what I've told you last quarter, 60 to 90 days. It's been about 60 and we're interviewing and active and going to pick somebody. As far as Abbott we've had some great conversations and we're in the middle of some pretty intense discussions but I'll let David comment on that because I've given that one to David.

I think we going to make some progress with Abbott in both of terms of improving the over economics' of the relationship for our sake and our shareholders sake as well as being able to creatively off set some of the impacts that we're seen from their product being off the market.

We have reached general agreement in principle and we're executing and you know and kind of figuring out the details here. But this is going to be a win for both Abbott and us going forward.

I would be neutral, David is getting it done so he's positive. I'll just say that we have to do something there or I'll do something else.

You sound like you have some revolution about direction what by the end of

We've got a board meeting coming up in the middle of August and my full expectation is to have it done by then.

OK, great. Thanks. .

with Goldman Sachs please proceed with your question.

Thank you and good morning to everyone. A couple of questions if I might. There is some suggestion that one of your larger competitors in the imaging business maybe be for sale or there're maybe a change control there.

Hypothetically Dave if that would have happened do you think that would have any effect on you business positively or negatively. I understand that it's hypothetical but I'd be interested in your views.

Second question I'd be interested to get a sense on what have been the savings that have been realized for the 35 percent or so of the physician factors locations that have been converted on to the central procurement system, and then the third question is NSS is ah pharmaceutical services to long-term care market I understand you don't compete with them directly but though two on the change control situation and would that circumstance have any effect on your business in any way. Thanks.

You asked me a bunch there Chris I'll try to remember them. has publicly announced that they're selling which is the old picker business, so that's not a rumor that that's definitely been public and I believe it will be sold. You know from a day to day stand point they've been in my opinion reckless with their pricing, and its caused erosion of profitability and its made life very difficult in the film business for the last six months at that company.

Our people have been faced with picker Philips or ACP Philips selling product below cost to get revenues to make that business look better to sell. so I think immediately it would have an impact of relieving pricing below the low market or even below cost in the marketplace that they were doing just to make it look better to sell it, and I do believe it will sell and if it is bought by who I think who I think has potential then I think they will have to run it as a real business which is very positive for us also.

They don't have the capability and equipment and service that we have so they've got a long way to go to catch up with us, so we have a strategic advantage there on that competitor.

Second question, you know I'd like also David to chime in on this one but ah I think it's just too early, you know we're only 35 percent of the way through, but I really like what's going on in on the inventory side and you know it goes south we take in I think Tony mentioned 60 vendors out of the loop and we take major costs out of the business and at we've taken major inventory savings, we've ah maintained our service levels but at PSS if we can consolidate our purchasing to one place and we can improve service levels reduce back orders and we can go to the manufacturers with a streamline distribution model and one place of procurement you know I know there's savings yes we have numbers, no I'm not willing to talk about them but I know there's savings there.

And then the third was NCS was it NCS

Was that the name you used NCS.

That is correct.

Who is that company in long-term care.

NCS help care.

NCS.

Yes.

we don't directly compete against NCS again that's the part B and the pharmacy business we do a small bit of sales through them but any losses or anything that may occur through them being acquired by another company would be insignificant for us.

OK. Thanks for the clarification.

Anything else.

Did I miss anything Chris.

That's it thank you.

Sean with the please go ahead with your question.

Thank you congratulations again. Did you guys I cant remember for positive, I don't have my notes, if you ever got back to me on what the capitalization of interest expenses associated with the ERP system installation what that is and whether I guess that's the first question part two is whether its on-going this quarter.

There's a one in this quarter that was a previous year adjustment or booking

And what is that? How do you capitalize interest expense associated with a software installation program? I still wasn't clear on that.

Yes, this is Kevin English, Vice President of Finance.

When you're capitalizing internal development costs, people that we have on the payroll that are developing internal software.

Right.

You're permitted to capitalize the associated interest that's relative to the cost. And we're no longer capitalizing the internal development costs, as that product is now functioning at 35 percent branch locations.

Gotcha. Thank you.

with UBS Warburg. Please go ahead.

Hi, , good morning.

Morning Howard.

: Good morning. If you're looking at share repurchases, along the lines of additional or varied uses of the cash, can you comment on acquisition targets or ideas? And the two pieces of you're business that are performing inline to better than expected, that would allow you to do that?

OK. There's several items in our capital structure that are going to allow some value creation. One of them's, definitely, grabbing some stock at these levels. And for the upcoming years, years two and three in our business plan, probably more relevant than this year, if we reduce the number of shares outstanding.

But, you know, acquisitions are now in the - in our preview, especially in the Gulf South. Specifically distribution that would leverage our infrastructure or accelerate our strategic plan in years two, three and four. Where we have capacity, where we can leverage the infrastructure that's built now, and it's done.

Also, I think that we would look at, and have looked at some or some manufacturers where we could take cost out of the distribution channel, and the manufacturing supply chain channel. We won't do anything outside the four dots, any time soon, like buying the Home Care Company or something like that. Howard, I wouldn't even, I don't even think those thoughts, let alone be - would be willing to consider them right now.

So, I think we're going to stay within the four dots, and try to leverage our competency, which is distribution, leverage our relationships our relationships with our customers, and leverage relationships that we have with manufacturers. And on the PSS side, really looking at places where we have distribution that's rationalized. Or with products that we need some competency in.

I think Pharmaceuticals would be one where I wouldn't mind seeing us with some kind of volume in pharmaceutical distribution. So that we could jump-start our position. Clearly, one of our competitors has an advantage there and it's silly for us not to start to participate in selling our physicians pharmaceuticals, which we haven't really done in the past.

So, if there's an opportunity in acquisitions in that area, or the leverage or distribution model, and I'm just a little bit more cautious on PSS, 'cause I'd like to pick distribution centers where they've been rationalized, where we've got the ERP System in, and where we're ready to leverage what we've built. I don't want to do it twice, which is to fold in an acquisition, and then fold in another branch, and then leverage it with ERP. That's just too many, too many, moving parts, too much work and too much opportunity for error.

And our goal is consistent performance over this three-year period, to grow value for shareholders and not to take risks that could upset the apple cart.

And just to follow on, the PPS side, pharmaceuticals under something like seems unlike, is it something we could see, between now and the end of the calendar year, or is it a calendar '03?

You know, I can't predict when this thing will happen, but I'll just say, it's a and wouldn't be surprised if we're spending some time looking at those things right now.

And then, what last, in terms of sharing the PSS side, but as you add sales force, what sort of productivity measures are you going to be looking at, to make sure the right infrastructure has been over laid and how quickly could you unwind it, if productivity is not there?

OK that's a great question. I've got a laser beam on that one, right now. We're looking at those things very carefully, we use metrics that speak to the profitability of the branch, speak to the profitability of that new business, that comes on, you know, we've got a goal of seven percent operating profit, at the physician division, it can't be less than that, when we bring on people, and it's got to be more than it, because it's incremental revenues.

So we look at GP, we look at where they cover accounts, are we disrupting current sales reps, because we don't want to do that, we want to go after competitive areas of the business, where we don't cover it, currently with sales reps.

So, there's a bunch of different metrics that we look at, but at the end of the day, profitability wise, is a key metric, not necessarily market share or anything else.

Yeah, we have a financial model, that we use, every time we make a hiring decision on adding a rep that has a fairly high hurdle rate, from returns from investment stand point, and a quick pay back, and it has to meet those criteria.

So, at the regional level, are you charging your regional sales peoples, cost of capital on their PL, when they hire sales?

Yeah, they are charged at cost of capital, based on the assets deployed, and if they use cash to bring somebody on, or use some asset in any way, they're charged additional cost for that, and we hold them accountable to the strategic plan, which incorporates 90 hirers, at a minimum, for each of those, you know, for a portion of it for each of those regional guys.

Thank you very much.

Our next question comes from Gregory MacCauskill, with Lord Abbin. Please go ahead.

Hello. Nice quarter.

Thank you.

Could you talk a little bit about long term care, you grew, it looks like almost twice the rate of the industry, give us some color as to how you're doing that?

Well, obviously the answers program, that we came out with, the committed purchasing and increase into the penetration into some of the existing accounts that we have, and then the other piece that, we've had, fairly success with, is on the house keeping programs, and we've been able to do that with some of our larger chains, and that's where the revenue growth has come.

I'll tell you what, Tony's being bashful. You know, our internet site, is the best site in the industry, a line with the SSI or on the larger customers in the regional and independent our own, we've got 51 percent of business now coming through there, it's completely stream line ordering and stream lines the business for our customers and makes it easy.

The answers further, and they talk about saving a lot of money for our customers, and it's also helping to save us money, on the distribution side.

The house keeping is just one of the products that we're adding to the portfolio, we've expanded the product line. We're hitting on all cylinders. Our sales people are happy, we've got good innovative programes, and everybody's trying to figure out an answer to answers, our competitors don't know what the hell to do.

So, we got a good sales, we got good compensation programes, our distributions fix, we've got good internet site, we're align with our customers, we're paying attention to our customers want and we're making it happen.

With regard to DI, what percentage of that business would be related to digital? You know, in terms of products and things that you're doing there.

Any percentage numbers their Joe?

.

Joe's estimating right now 25 to 30 percent. That's not a number we have off the top of our head but we can get that for you and over time you know, I don't know how many years whether it's ten, 15, five or 20, I expect all of our business there to be related to digital either through dry film or the equipment in service around the equipment that produces the image.

It's impossible to know how long it takes to convert. There's a cost issue, there's a capital cost issue, there's a computer ability or issue. Systems integration, work flow, how to co-ordinate you know from surgery to the imaging area so it's just a very complex consideration for a hospital or imaging center to make that consideration to convert.

And with regard to DI, I think in the past you've talked about being at break-even by year end, is that still on track?

Yeah, definitely. Our goal is to make a buck.

Did you close that two to three million of equipment in this quarter then that you talked about that was still hanging at the end of last quarter?

No but we expect it to close this quarter yeah. It was just equipment and I mean it was parts and training that we couldn't get done before the end of the year, I mean before the end of the quarter so we expect it to close this quarter.

You've also talked in the past about giving out a backlog number. Are you any closer to that?

I've just looked at what was given out. It's 44 million and it's up significantly from last quarter. I think last quarter we earned in the mid 30's, this quarter we're in the mid 40's.

OK good. And have you done anything with the bye bye dock. You've announced it, are you in the market yet?

You know what we're going to do there is just comment on a quarterly basis or require doing it from our lawyers and just staying quiet. We wouldn't have announced it if we hadn't expected to buy it. This is no game we're playing here, this is one of our business plan strategies. It's just the right timing is now because of the strength of our balance sheet.

The clear conditions in the market where we feel like we're undervalued. We know what our two and three year plan looks like, we know that it's especially as we go through our business plan so, it was just one of the things that was in there that we pulled the trigger on because it's so compelling right now with these market conditions.

So, I'd rather not comment on number of shares and those kind of things and do that on a quarterly basis or, if our lawyers say that we have to we will put out a press release but I won't do it on a one off basis.

We can't buy until Monday anyway because we've got a 48 hour, our internal policy is a 48 hour black hour period after we release earnings.

OK and then with regard to the cash. You went up about 15, 20 million or so. Ex to buy that, do you expect that number to continue to grow sequentially?

You know, we gave a number of 25 to 30 million, 25 million for this year, and I told people we thought that was conservative, but we had a lot going on this year. We've got 20 million, or 15 million of costs associated with the distribution that we're going to be spending cash on, so we were conservative and I'd just like to stick with that number right now. Yeah, it looks kind of silly because we've produced 20 million in the first quarter, but Dave kind of outlined 10 or so million of that, that was timely, just because of a refund from government of four million, six to seven, or eight million of payables, so I would just stick to the 25 million right now. Yes, I think it's conservative, but we've got a lot going on this year. My expectation is something different than that for cash flow, but I'll just stick with that right now, and with the 70 million of cash on the books, and the market conditions, and that fact that we know what our two or three business plan is. We can't sit on the sidelines anymore, and be patient with a stock buy back.

OK, thank you very much.

no further questions, I'd now like to turn the conference back over to for an closing remarks you may have.

Just thank everybody for these last two years. We're having fun here. We're looking forward to bringing a lot of value to you as share holders, and look forward to seeing you in the future. Thank you.

Ladies and gentlemen, that does conclude your conference call for today. And we thank you for your participation and ask you to please disconnect your lines.