麥卡遜 (MCK) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the PSS World Medical fiscal year 2007 fourth quarter conference call. During the presentation, all participants will be in listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, May 24, 2008. I would now like to turn the conference over to Mr. Robert Weiner, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Don. Good morning everyone. Thank you for joining our call today. Today our speakers on the call are David Smith, Chairman and CEO, and David Bronson, Executive Vice President and CFO. We issued our press release last evening and if anyone needs a copy of it please call us here at 904-332-3000 to request a copy and we will send one out to you as soon as we can. Additionally, our release and the financial workbook that we put out for fiscal year 2007 and the fourth quarter are available on our website at www.pssworldmedical.com. The financial workbook contains GAAP and non-GAAP financial measures that provide greater insight into each of our businesses.

Now I will read the forward-looking statement. All statements in this conference call that are not historical facts including, but not limited to: Anticipated growth and rates of growth and revenue earnings per share; operating cash flow; EBITDA; goals for growth and operating margins; and all statements made with regard to the Company's goals and objectives, 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 that we describe from time to time in the reports that we file with the Securities and Exchange Commission are all based upon current expectations. We alert listeners to read and understand the forward-looking statement disclosures in our SEC filings, particularly our annual report on Form 10-K. Listeners should rely solely on the forward-looking statement disclosures the Company files with the SEC. These statements are forward-looking in nature and involve a number of risks and uncertainties.

We alert listeners of this conference call, users of the Company's website and reader's of the Company's press releases to reference these risks and uncertainties, which are explained in our Forms 10-Q, Form 10-K, and periodic filings on Forms 8-K. The Company's 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 and its replay 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. Company also wishes to caution listeners that it undertakes no duty or is under no obligation to update or revise forward-looking statements. Thank you.

Let me remind our listeners that we will hold our annual investor day here in Jacksonville on Tuesday, June 5th. We invite those interested to join us in person or over the internet listening in to our webcast. We will discuss our financial goals for fiscal year 2008 on that day and issue a corresponding press release. For our call today we follow our formal remarks by a question-and-answer session as prompted by the operator. We will limit this time call to no more than one hour in duration to be mindful of other reporting companies and investor events.

I am now pleased to turn the call over to our Chairman of the Board and Chief Executive Officer David Smith.

Thank you, Rob, and good morning, everybody. Thank you for joining our fiscal 2007 year-end conference call. I will start off with some comments on overall strategy, winners and losers for this past fiscal year, then I'll hit on a few highlights of the divisional results, but avoid commenting on '08 strategy, tactics, and goals until the June 5th investor day in Jacksonville. We encourage all of you to come to Jacksonville and experience one of our investor days.

This comment is not intended as a victory lap but fiscal 2007 was a very good year, for customer satisfaction, employee retention and shareholder value. Our revenues were driven above two times the market growth by customer satisfaction in our services, solutions, and value propositions. Our employee retention is at record levels due to their satisfaction with our culture, programs, and opportunity. Our shareholders are benefiting from both of these, plus the resulting consistent industry superior earnings growth rate.

Now to the strategies. The two biggest strategy winners that contributed to the success were, first, the sourcing and marketing of our Select brand products, and second, the repositioning of our Elder Care business, and I'll talk about both those strategies. The Select sales for fiscal 2007 were $185 million, or 10.6% of total revenues. The Physician division had growth of 20% and the Elder Care division had growth of 14%. We exceeded both our Select revenue goal and Select operating profit contribution goal. Our sourcing operation has taken over 45% of the manufacturing and production responsibilities, up from 20% last year and that is also ahead of our goal.

Thomas D'Innocenzi, our VP of Global Sourcing, and his team received a big boost recently from our signing of a new exclusive sourcing contract with [Emcino], a Shanghai-based healthcare products manufacturer. The Emcino sourcing team will supplement our tiger organization and enhance our execution of our '08, '09 and '10 goals and objectives in sourcing. We will further discuss sourcing and branding opportunities at our June 5th investor day, as well as Emcino.. The last comment on sourcing and our Select brand is that Q4 results continued to show strength and momentum. The Physician division had 20% growth in the quarter and the Elder Care division had 21% growth in the quarter.

The second successful strategy that contributed to the results of fiscal 2007 was the realignment of the Elder Care business. We have shed over $100 million in revenues of large chain customers in the last two years including $40 million in fiscal 2007, yet we are more profitable with more oper -- with operating profit up 120 basis points in this last year to 4.2%. We redesigned and realigned the commission program, sales force, product portfolio, management team, and their compensation. There were many balls in the air at the same time, yet this team executed with precision and professionalism. We're very proud of what this team has accomplished and how they are positioned and focused for '08, '09, and '10 goals.

The biggest failure of strategy this year was the customer convenience flu vaccine distribution. This product is the only one of its kind in our portfolio, and it's the only one that has a total risk of take or pay for the entire year's production and sale on us as a distributor. Fortunately we had a small percentage of the market, because our strategy was limited to customer order and requests and not a franchise or corporate strategic initiative. We have always been undersized and disproportionately small as a part of the market due to its risk/reward profile as a product. We also declined to participate in the IDB contract about a year and a half or two years ago due to the inappropriate heightened risk of the contract. Our contract historically has been with Chiron, which we were fortunate to be able to exit after this last year's oversupply incident.

The system -- there's really a problem here and it's systemic with the manufacturers. They continue to produce more vaccine than the market will use. The distributors have a problem in that all of them have take-or-pay contracts that most of them can't get out of, and last year the manufacturers produced 121 million doses and the distributors received 102 million doses, but only 85 million were used. We believe a total of 40 million doses went unused. We believe doctors and caregivers bought 20 million doses from distributors and manufacturers that went unused. Doctors have enough financial headaches without adding this burden to them. They are very frustrated by the flu vaccine situation. For very clear profit issues and customer satisfaction issues we decided to exit this market until a more fair and balanced market exists for manufacturers, distributors and customers. We also believe this next year -- or this next flu season is going to be even worse with 132 million doses expected to be produced. Prices are declining in the market today, and -- due to the oversupply versus demand, and we're happy not to be saddled with the yoke of the financial risk or the customer response. We hope and expect a change to occur in the future and we would like to return to the market only if the risk profile is appropriate.

Now, just a few comments about the business, then I'll turn the call over to David Bronson. The Physician business had a very good year, with 12.9% growth of revenue. Our Smart Scan product continues to be impressive. We signed up another 375 customers in Q4. Revenue through Smart Scan customers is now at 2.4% of total, with customer order size and customer revenue growth after Smart Scan installation at two times the normal customer rates. We're proud of the Physician business growth, but there were five items reduced revenue growth in the Physician business down to the 12.9% level: First, unsold flu vaccine; second, new accounting for EMR sales; third, generic conversion of RX pharmaceuticals; fourth, bone densitometry reimbursement change; and fifth, the conversion of brands to our Select products. These five, while they're not big individually, cumulatively they significantly reduced revenue growth.

The other item worth mentioning is the performance of our operations and shared services teams. We have significantly improved service levels of completed orders, pick, pack, and pull error rates, customer credits, on-time delivery, yet we have significantly improved in leverage of cost to serve as a percentage of sales, cost to deliver as a percentage of sales, and warehouse labor and G&A labor as a percentage of sales. At the same time as that we've been able to improve our balance sheet metrics and cash flow, which continue to both strengthen. These teams have successfully balanced growth, customer satisfaction and profit in a difficult environment of fuel cost, employee benefit costs and tough competition. Their execution is pretty impressive.

Now to wrap things up for me, we have two very strong high-performing core businesses that continue to produce predictable revenue growth, cash flow and earning streams, at higher rates than our competition and double the rate of our market growth. More importantly to me we have opportunities to enhance our value proposition, growth rates and profitability through global sourcing, the improvement of our Select brand recognition, and market reach, healthcare technology expansion, new diagnostic products, home-care market focus, and acquisitions, in addition to the existing revenue growth and leverage of our core business infrastructure. So I would say, overall 2007 was a very good year. We will look forward to discussing '08 et cetera at the June 5th investor day.

Now I'll turn it over to David Bronson for his comments.

Good morning, everyone. I'm going to start with a quick recap of Q4 results for the Company, and then make some comments that -- about our full-year performance for fiscal '07. Revenues of $443 million grew just under 5% for the quarter. Physician revenues grew by 7.7% in Q4, led by strong growth in our Select brand products, as Dave mentioned. Elder Care sales declined by 1.5% in the quarter, the last full quarter where our prior-year comps include the national chain business. Excluding this, the $129 million for the quarter for Elder Care represents growth in the mid 3% range and exceeded our internal targets for the quarter. Consolidated operating margin of 5.5% for Q4 was a 60 basis point improvement from prior year and is the best quarterly operating margin this management team has reported, in spite of higher-than-normal corporate expenses associated with some noncash compensation expense accruals. A lower-than-anticipated overall tax rate in Q4 thanks to some one-time utilization of deferred tax benefits distributed around $0.01, leading to $0.23 of EPS for the -- to finish out the year.

Of particular note in Q4 was our consolidated return on committed capital. As you know, for a few years now we've been talking about a goal of getting return of committed capital of 30%, which we felt was world class as an overall measure of profitability for a distribution business, and which I'll tell you at the time, when we first started talking about it, seemed a long ways off. Well, we achieved that mark on the first time on a consolidated basis, reporting 31.1% for Q4, mow for full year -- or full fiscal year 2007. Consolidated revenue growth for fiscal year '07 was 7.5%, just below the low end of our goal of 8% to 10%. We had a change in revenue recognition for our EMR products that resulted in $5 million less revenue reported; we report that on a net basis instead of a gross basis, and that's just some new accounting rules. And we had less flu sales than expected, about $7 million or $8 million less.

The Physician business revenue growth was 12.9% for the year, as Dave said, in the middle of our goal of 11% to 14%. Elder Care business revenue decreased by 3.5% for the year. Excluding the lost chain business revenue growth was somewhere in the mid 3.6%, 3.7%, which on this basis was in the middle of our goal for the year and our expectation, an the Elder Care business exceeded our internal expectation for revenue growth. Both businesses reported double-digit growth of operating income in fiscal year '07. The Elder Care business grew operating income 36% for the year and achieved an operating margin of 4.2%,and that represents a 120 basis-point improvement, coming in ahead of our goal of 3.9% that we set in last year's investor day. For the full year the Elder Care business grew operating income by $6 million on $18 million less revenues, validating, as we said our press release, the decision to exit the national chain business 18 months ago. The Physician business generated 21% growth in operating income, if you exclude the one-tame inventory write down of flu vaccine, and represented an operating margin on that basis of 7.4%, which is a 40 basis-point improvement.

The total Company revenue growth in '07 dropped through to operating income at about 14% as we continue to leverage our volume increases over our fixed cost base. Cash flow from operations was $63.5 million for the year, slightly below our revised goal of $65 million to $68 million. Q4 operating cash flow was $2.6 million, a little below what we expected when we increased our full-year guidance. The shortfall was due to some inventory buy-ins, opportunities that we took advantage of at calendar '07, our Q3, in advance of some announced price increases from manufacturers. A chunk of that inventory is still in the system but the related payable was settled during Q4. We'll see most or all of that inventory turn in this next quarter.

During FY '07 we returned $43 million to shareholders, repurchasing 2.1 million shares at an average price of $20.17, and this helped to partially offset the dilution from the convertible notes and option and restrictive stock exercises during the year. We still, despite that, had about a 2% increase in our total outstanding shares compared to prior year.

Just a quick update on a couple of the acquisitions we've made over the last couple of years which during this year, in particular. made really meaningful and profitable contributions to our overall success. First, our Part B business, Proclaim -- which is part of our Elder Care business -- had a terrific year in '07, growing revenues by 14% and income by over 100% for the year. The smaller CSSI acquisition in California that we announced last year, also a Part B business, was successfully integrated into Proclaim during the year. This Part B billing service business constitutes an important part of our overall offering to the elder care market. The SAS, or Southern Anesthesia business that we acquired about 18 months ago also had a very good year, achieving about 103% of our internal expectations for profitability and coming into their own really as our flagship operation for distribution of both controlled RX as well as the distribution hub for the rest of our pharmaceutical product line.

FY '07 was another solid year for PSS, with good execution of our business plan and the emergence of some exciting new business opportunities, which -- a couple of which Dave mentioned. We look forward to presenting these at our June 5th investor day. I'm also pleased to let you know that we'll be filing our 10-K tomorrow, which will provide some additional discussion on our results as well as our financial position. I will turn the time back over to Rob now for questions.

Operator, if you could queue the line for questions we'll now take those.

Thank you. (OPERATOR INSTRUCTIONS) And our first question comes from the line of Jennifer Hills from Goldman Sachs. Please proceed.

Good morning. There was significant improvement in the Elder Care margin sequentially and year over year. Can you dig into it a little bit? I know there have been a lot of moving parts for some time, but what is sustainable? Is this the new base going forward?

Good morning, Jennifer. Hey, you know, it really is about eliminating revenues that were unprofitable and focusing on business that is profitable. And so we really have a full year of elimination of the Beverly and Mariner revenues now, and this is the business as we see it going forward. We'll be looking to grow off this base, both on the revenue side and off the profitability side. And we feel like we have the product portfolio repositioned, the sales force repositioned, the commission plans, the management team that are really focused on where they're headed now, which is a different type of nursing home and the home-care agency and hospice market. I hope that answers. David?

I would just add to that they've really really gotten a benefit from selling our Select brand and private label products on the gross margin line and our cost to deliver has seen some significant improvements, some of which are driven by the fact that our Elder Care business now is -- for the first full year is on our JDE operating system platform. We completed that conversion beginning of FY '07, and they're starting to see some real benefits in terms of how we manage the warehouse and how we pick-and-pack orders, and we've just seen some real nice efficiency gains.

Okay. On corporate expense, that was high higher than we had expected in the quarter and we had anticipated a rise due to year-end compensation. Was there anything else in that?

No, it really -- that really was the whole difference if you compare to prior year, and it related more to our long-term incentive plan, catching that up to our performance, as opposed to short-term incentive plan, so it's more on the three-year plan.

Great, that's all I had. Thank you.

Our next question comes from the line of Larry Marsh from Lehman Brothers. Please proceed.

Good morning, everyone. I just really wanted to drill down three things, if I could. First, Dave, with the tax benefit you came in at the high end of your suggested updated range for fiscal '07, and I know last quarter you gave us an '08 range of 87 to 89. Today you're communicating you'll give us more details at your analyst meeting. How should we think of the prior guidance in context of what you've done today, or are you just saying there could be a change that's going to be communicated at the analyst meeting?

You said you were going to have three, but I'll answer the first one.

That's one.

Okay, that's one. Larry, I would say we're going to update on many things at the June 5th meeting. When we gave that guidance it was a year ago, so there's a lot of parts that are new that we'll be able to talk about, a lot of programs that we've just launched that we'll be able to talk about, things going on in the field we'll be able to talk about. So I think in general the context isn't there right now, nor is the number there right now, so I think we need to update both of those on June 5th.

Okay.

And I apologize for not doing it at this call. That's just the approach we've taken with counsel and with our process here.

No, I understand. It's just you only gave that guidance back in January, so it's a little unusual not to comment about it on this call, is what I would suggest.

Okay, well I got 12 days.

Okay. Second question for you, Dave, you gave us some sense of the top line, flu being $5 million of an imp $ 5 million impact -- excuse me, $7 Million to $8 million, EMR $5 million. Are you quantifying the impact you've thought about with this diversion, bone densitometry, and brands to Select in the quarter?

I don't have those numbers in the quarter; I could probably get them. But the generic conversion was about five -- it reduced our growth by about 5%. We grew pharmaceuticals from about $200 to about $237 million, and that was the -- the growth rate there was reduced by about 5% for generic conversions. We lost about $7 million for the year of hologic and cardio sales as a result of some changes; the reimbursement patterns, et cetera. Clearly we didn't sell some of the flu that we expected to sell in our plan, and the brand conversion to Select, I'm in the sure we've quantified the dollar there but we know it has definitely slowed down our brand growth, because we're -- I don't know the exact percentage sitting here, but some of the Select growth is new sales, some of the Select growth is conversion, and the split out of that affects the rate because we sell at a little bit less price and a little bit more margin, of course. So, I would have to come back to you on that piece of it, but the other pieces I've kind of given you the numbers on.

Okay. And just is it fair to say, then, the $5 million top-line impact was created through a change in accounting on your software sales, should we assume that that's going to --?

I think that one was three -- it is $5 million? Okay that was $5 million, sorry.

Is it fair to say that that's a -- I guess, Dave, you said, that was a new change in the quarter, so that's going to be a recurring top-line impact, obviously not being any earnings impact. Is that right?

Correct.

Okay. Final question is, last quarter you gave us some sense of where you were with Abbott, having sold the desktop and hematology business to GE. You suggested you were going to have some meetings to determine direction there. Are you in a position to give us an update on what's going on there today?

Yes, I can do that, Larry, with what I know. First, we've had some very -- what I would consider very good meetings with -- the GE management team's a little ham strung. They can't make decisions or implement strategy, but we can have conversations with them, which we've done, and we're also signing new agreements on other products that are adding to our portfolio that we'll talk about in June -- on June 5th. But instead of a 10-day window, we now have a 45-day window that we've both agreed to that will give us time to get this thing -- instead of it just being on a shorter fuse when the deal's done, to get all these little things that we've talked about implemented and done, so we've had a really substantive, valuable conversation.

I believe that it will take some time for GE to impact the things that we have addressed and Abbott has addressed with them as being issues in the marketplace, but I do believe that GE bought this business to significantly invest in the product portfolio of this business. So I am more positive than I was when the deal was announced because I didn't know what it meant, and, of course, human nature makes you worry about it. I am not completely ready to pound the table for two reasons. One, I haven't seen the final of the agreement and what we're going to have between the two of us, but I believe it's going in the right direction. And the second is that I think it'll take a little time for GE to make some of the changes that I think need to be made for us to really profit from a revenue side from some of the existing products as well as some of the new products. So I hope that is -- that is what I can tell you, so I hope that is sufficient there, Larry.

Okay. That's fair and I'll drill down a little bit more. When you said 45 days, does that mean there's going to be a deadline, a resolution here in the next month or so or, again, is that more open ended?

Well, it's when it closes. I think the deal will close in June, then we'll have 45 days from there. And I think we'll have the deal done before then, whatever we're going to have done between the two of us.

Okay. All right. I'll stop there. Thanks.

And our next question comes from the line of Robert Willoughby from Banc of America Securities. Please proceed.

Thank you. Dave, is it safe to say -- I guess with the flu gone and growth slowing somewhat here -- I guess you'll touch on this at the investor day -- but M&A clearly a bigger priority for you in the next fiscal year, and if so, what areas can you build out or comments on valuations?

Hey, Bob. I don't understand the idea that growth 's slowing down. The business grew pretty well -- the Physician business grew at least double the market. I saw Schein's numbers. They were 1% below base line -- or they were -1% for internal growth, and McKesson was 4% or 5% of growth, so we're doubling the competition and we're doubling the market rates, so I don't quite see that as a slowdown. What I was referring to on those items is, I was expecting a little more growth than 12.9% this year but those things that I outlined reduced that growth that I was expecting. So I would say that in par we're exactly where I thought we'd be. The revenue growth has doubled in the market or more and I think that'll continue. I don't see that slowing down. But your question's a very good one. Do we expect to do acquisitions? And, yes, we do. I'll let David just comment real quickly on what that pipeline looks like, but it's of interest to us to continue to do acquisitions and fold them in.

Yes, that's really the reason that I wanted to kind of talk a little bit about a couple that we have done. We are pleased that we can do these things and be successful with them. I think that you'll really see us continue to focus on fold-in type acquisitions. I wouldn't be surprised if we see an announcement very shortly here of a fold-in opportunity. I'll tell you, also, that some of the indications that we've seen recently are that there's a lot of money chasing these, and we want these to be as successful financially as they can be. And we've been -- we've walked away from a couple that were just overpriced because there was some private money chasing them at multiples that were not justifiable in our opinion. But having said that, I think you'll see us with an announcement or two very shortly.

That's great. Thank you.

And our next question comes from the line of Lisa Gill from JPMorgan. Please proceed.

Hi. It's (inaudible) in for Lisa. Good morning, guys.

Morning.

Quick question. I know you don't comment on the breakout of sales from the Select brand, but in terms of sourcing, you said that you'd taken it up to 45% from 20% a year ago, and your operating margin was up about 60 basis points, so what state of the margin expansion do you think you're in, where due think you can get to from here. And then, secondly, perhaps how many SKUs do you have at the moment?

I'll let Kevin answer part of that and I'll just I'll answer part of it. This is David Smith. Our goal that we came out with when we first announced the Select initiative and the sourcing initiative was we thought we could get to 20% to 25% of total revenues. We didn't give a time line because it's such a new project and we were just getting started. And then last year, we had a goal of -- I believe it was 8%. This year it was 10%, and we accomplished both goals. We had a stated goal that we had out of 12% for next year and getting the 40% up to 60% to 70% contribution from manufacturing, and we'll update you on any modification of that goal that we have on June 5th. So I think we're right on track with what we thought we'd accomplish. We thought we'd get $3.5 to $4.5 million of -- or $4 million of operating profit contribution, which we exceeded, so we basically beat every goal on the sourcing side this year. And we see plenty of runway left, because when we came out we thought that we could get to 20% and 25%, and we haven't changed that thought process. So we're about maybe halfway of where we could get to, or a third of the way that we could get to, and that goes for profit as well as it goes for revenue on the product line. Now, you want to add some specifics to SKUs and --?

Yes, sure. This is Kevin English. We're closing in on about 900 SKUs in our global -- globally sourced Select product line. Those represent, as Dave mentioned, about half of our Select product line. That number is up about 400 or 500 from nine months ago, so we're tracking as we expected this year, and we expect to add another couple hundred in the next six to nine months.

Okay, that's interesting. Great. Just as another unrelated question on the Elder Care business. Dave, you mentioned the growth was about 3% or so, and what do you see as the market growth there? Do you have any more unprofitable or low-margin business that you intend to shed going forward?

Yes, we had about 4%, if you X out the loss of the chain customers that we exited. Two-thirds of our business is basically flat; it might be growing 1%, it might be shrinking 1%. And then one-third of our business is probably growing about 10%. So as we grow the agency, the hospice, and the home-care business, our growth rate will pick up. I don't expect much of a change in the nursing home business. I see it as a pretty plotting kind of market, maybe 1% plus, 1% minus, 2% plus, 2% minus. I don't see it as a big growth area, even though regionals are growing faster and there's an opportunity with regionals to grow quicker, which is where we're focused. I don't know if the 4% is a bad number to expect. We'll update that on June 5th, but those are the kind of buckets that we're working with. As long as the bigger bucket is a slower growth than the smaller bucket, we're going to have slower growth than we want.

Okay, all right. Lastly, do you see any impact from fuel cost in the quarter?

Sure. Yes. You're aware that we do have somewhat of a hedge in terms of a fuel surcharge that we input. There's a lag on that. We do wait 60 days before we adjust it, so when we see a precipitous increase in fuel cost it hurts us a little bit. I don't think it was a material number in the quarter, but we watch that carefully, and our people continue to work very hard to mitigate that through more creative solutions in terms of how we get the product to the customers. So it's a struggle for us, it's a challenge, as it is for everyone.

It's why I mentioned earlier that it's very impressive that our cost of service as a percentage of revenues and cost to deliver as a percentage of revenues has improved in the face of fuel costs and benefit costs and competition. So our teams have creative ways of dealing with it from automation of routes to -- even our technology products are helping, like Smart Scan by creating bigger orders, making it more efficient to deliver, and those kind of things. So we're working many angles to offset any costs that are in the market because we cannot, in good conscience, raise prices as long as we have efficiency gains that we can accomplish.

Okay, thanks, guys.

And our next question comes from the line of John Kreger of William Blair. Please proceed.

Thanks a lot. Sorry for the background noise. Could you give us an update on your targeting of physician-owned surgery centers and also talk a bit about whether or not the lighter cold and flu season impacted either of your segments this quarter? Thanks.

Okay. First, we're right on target with our surgery center revenue plan for this year, but we did not after leader. We just brought on a business unit leader by the name of Will Cruise, and he's got 14 years of experience with mostly Cardinal and Owens and Minor. He just came on board. He'll be developing a strategic plan for us. We know what areas we're missing. We need some technology products, which we -- I think we just found some great technology products, both through -- I'm going to hold off until June 5th on that. We've got some great opportunities to plug and play some things on our surgery center accounts as well as we need to add some products. So he's just come on board, and he'll be building that portfolio and that plan with our team, and I look for some growth there, maybe -- in addition to our existing growth, probably in four to six months. So I hope that answers --?

Cold and flu.

Oh, cold and flu. I don't know. I didn't really -- we didn't hear about it from the field. We didn't track it so it could not have been material, other than the write-off of the unused flu vaccine.

Great. Thanks.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Terri Powers from Robert Baird. Please proceed.

Yes, good morning. This is Terry in for Eric Coldwell. I had two questions on the Physician segment and one on the Elder Care. First, wondering if you guys are seeing is any impact, or if you're not seeing do you expect any impact on the physician market related to increased use of retail clinics, where patients are choosing to go to a pharmacy or a grocery store to see a nurse practitioner instead of actually going to their general practitioner?

You know, I believe that that is a -- both an opportunity for us and a threat for our physicians, and I believe that the number one customer they're serving right now is more than likely an unserved customer by the current customer base that we have, while I think longer term that will be a trend that could impact that group. So as of right now, no, we're not seeing anything. But we see that as an opportunity to -- which we're partnering with some of those folks to provide products, as well as our branded products, our Select products, but we also see it as something that we have to help the physician with so they can market and be competitive. So as of right now we're not seeing any activity or -- good or bad from that expansion. Dave, any other thoughts?

No, it's something that we're watching very closely. We've had conversations with some of those providers, and I think --

We're doing business with a few.

Yes, we're doing business with a few.

Okay, that's great. And then actually a follow up to Jennifer's question. She asked about the strong Elder Care margin performance in the quarter and the base going forward. I realize you're limited on the going-forward comments, but maybe you could just talk a little bit more about the strength in the Physician segment margin in the fourth quarter?

In Physician?

Correct.

It really is just the execution of our model, which is to leverage the revenue growth across our distribution infrastructure. Dave talked about cost to deliver and cost to serve in Elder Care, which was very good, but we had similar gains in the Physician business, and I think also at 20% growth in our Select product helped the gross margin there a little bit. Our gross margin was probably, I think, 40 or 50 basis points higher than sequentially, and that's related very closely to our sourcing of our products, and so I think that that's the answer there.

Okay. Great. Then a question on the Elder Care business. We're hearing more and more about competitors rolling out per-patient day models in that market, and I'd like to hear your thoughts regarding the impact of that, if any, currently on the marketplace as well as -- and your ability to grow -- which actually Dave's probably already addressed. But what are your thoughts on current impact and, also, have you tested a per-patient day model, and if so how is that going?

None yet but we're helping -- none yet as far as impact, but we're helping some customers and that's probably a conversation for maybe a quarter or two from now. So it's a great question, Terri. It's a little ahead of its time right now, but we are working with some customers and right now there's no impact, but I think we'll have more to add to that maybe next quarter or so.

Okay, great. Look forward to that. Last, can you provide us an update on the competition within both of the businesses? Obviously I'm specifically addressing McKesson's increased focus on your two key business segments following their divestiture of their acute business.

You've asked me that question the last couple of quarters, so you believe there's something there.

Got to keep asking.

Yes. So I haven't seen it and I looked at their quarterly release, and they were only at 4% or 5% growth, and so I really don't see it when I look at their actual numbers. So whatever they're saying, whatever they're doing may be disparant differences.

Thank you very much for the commentary.

And gentlemen, there would appear to be no further questions at this time.

Thank you, everyone, for joining. We really would encourage you to come to the June 5th. If not, we're going to be on the internet with the June 5th meeting. It will be fun, and it will be a good experience. Thank you for being here. It was a great year, and we look forward to '08. Thank you very much.

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