麥卡遜 (MCK) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the PSS World Medical fiscal year 2009 first quarter conference call. During this presentation, all participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded on Thursday, July 24, 2008.

And it's my pleasure to turn the conference over to Mr. Robert Weiner, Vice President, Investor Relations, at PSS World Medical. Please go ahead, sir.

Thank you. Good morning, everyone, thank you for joining our fiscal year 2009 first quarter conference call. Today on the call our speakers are David Smith, Chairman and CEO; and David Bronson, Executive Vice President and CFO. We issued our first quarter press release last evening. The release and financial work for the first quarter call are available on our website at www.PSSV.com. The financial work book contains GAAP and non-GAAP financial measures that provide greater detail into our business. Now I'll read the forward-looking statement.

During this call we may make a number of forward-looking statements regarding revenue, gross margin, operating expenses, operating margins, earnings per share and other matters that are not historical matters and facts. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from what is expressed or forecasted. For a list and description of certain of these risks and uncertainties we refer you to forward-looking statements disclosures in today's press release and to the other information provided in our most recent Form 10-K and other SEC filings, copies of which are available from the SEC and the Investor Relations' section of our website and from us at Investor Relations. The Company wishes to caution listeners of this call and the 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. The Company also wishes to caution listeners that it is undertakes no duty or is under no obligation to update or revise any forward-looking statements.

Let me also remind you that we may reference certain non-GAAP financial measures. In an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the related GAAP measures in accordance with SEC rules. You will find reconciliations charts at the end of our financial work book and in our Form 8-K submitted to the SEC. Thank you.

Now changing gears, I would like to go over a few upcoming investor related meeting dates. On August 21, we will hold our annual stockholder's meeting here in Jacksonville. We welcome shareholders attendance. We plan on being in the Chicago market on August 27, and 28, respectively, for investor meetings. We will also be attending and presenting at the RW Baird small cap healthcare conference in New York on September 10. And finally, we are planning a European trip the week of September 22. For our call today, we will follow our formal remarks by a question-and-answer session. As prompted by the operator. We will limit the call to no more than one hour in duration to be mindful of other important companies investor events. I'm now pleased to turn the call over to David Smith, PSS World Medical's Chairman of the Board and Chief Executive Officer.

Good morning. We're off to a good start. The new three year strategic plan incorporates many moving parts, changes in investments, but we are executing effectively and continuing to identify new opportunities to modify our tactics around our seven core strategies.

Now, to be honest, Q1 of year one is a scary time. With so many new initiatives in motion, all based on analysis, assumptions and assessments, including investments with results not yet visible, all of which is occuring in a changing economic environment. The economy is definitely making our process interesting, but so far nothing unexpected or unanticipated. Fuel costs are high. However, our cost to deliver is better than planned due to our execution and performance. There is real upward pressure on product costs, but we have been proactive with our supply chain, our vendor partners and our select brand management. Probably the most important thing to me early in our planned rollout, we see real connection between programs, customers and people. The current economic conditions are showcasing our customer solutions as more relevant and timely, not less.

I think our results speak for themselves, 8% and 6% revenue growth in the two businesses and 25% and 31% growth of operating income and earnings per share. These results were achieved though as we aggressively moved forward in our plan investments and strategic priorities. I'll talk a little bit about some of those activities. For example, we reorganized the Physician business, and spent over $0.01 just moving leaders into new positions for maximum future effectiveness and execution of our growth initiatives. We added almost all the new headcount for the year for all the strategic priorities already in Q1. There are many new faces to get to know here.

Our sourcing strategy continues to march forward. Select products grew 23% in the quarter. Now we offer 1200 SKUs from 78 factories and eight countries. Our select products represent a high quality alternative especially in a rising price environment like we have. We have also been proactive in discussions with vendors, outlining the plight of our customers with concrete proposals of supply chain savings, marketing opportunities and customer solution alternatives for products.

Our solutions programs are gaining real traction. Our home care blitz netted 500 customers with independent home care agency growth of 13% in the quarter. Our Elder Care momentum program launches ahead of target for customer signups and gross profit contribution. Momentum was built by customers. It shouldn't be a surprise to us that our customers like it.

In our HIT strategy, we helped Athena hire 13 new specialists to directly support our field and our field teams. Plus, we retrained 160 of our sales representatives. We closed 54 deals but for me, we saw a real ground swell in surge of activity and we built a pipeline for future quarters. I expect a significant ramp-up of traction for this product. Our customers are very receptive. We just needed to get the support formula right.

On the salesforce bandwidth strategy front, we experienced a big increase in eCommerce ordering in the Physician business. eCommerce revenue percentage was a whopping 33% on Smartscan and MyPSS with 3100 new eCommerce customers in the quarter. This trend is strategically important as we free up time for our reps to consult and deliver new solutions to our customer base. As for the big environment, in Washington, the political environment for the next 12 to 18 months I think will be more entertaining than productive for changes or new directions for healthcare. It's only the first quarter, nothing has surprised us or changed our view on the 19% three-year growth goals or our $0.94 to $0.96 earnings goal for fiscal 2009. We're very focused on the well-being of our customer and people. Our investment strategy and programs are now more timely and important, not less in the current economic climate and I'm more positive, not less, in our strategic position and in our future. Now David Bronson will talk about the quarter.

Thank you David, and good morning. Our first quarter was as David mentioned was marked by solid growth in revenue and profit across almost all categories. Consolidated revenue grew 7.6%, with Physician revenues growing 8.2% and Elder Care business showing growth of 5.8%. Let me share a few details of that growth.

In the Physician business, select brand grew to almost 23% in the quarter. Pharmaceutical products grew by 12%. Total branded products grew by over 6%. Equipment declined slightly, a 2.5% decline from prior year. On the Elder Care side, our revenue growth in Q1 was 5.8%, skilled nursing growth of 4.7%, overall home care growth of 7.6% and as Dave mentioned home many health agencies up 13% with several hundred new customer signups and select brand in the Elder Care business grew 23% in Q1 as well. Growth in all these categories combined for about $33 million of new revenues over prior year, with almost 11% of that number dropping through to operating income in Q1. This produced 24.5% growth in income from operations with consolidated operating margin growing by 52 basis points, the Physician operating margin grew 66 basis points and Elder Care improved by 43 basis points.

Our model of leveraging our cost structure with revenue growth while working hard to lower our cost to deliver through improvements in operations continues to provide returns despite us being in a period of increasing commodities costs. And as Dave said a big challenge for our team has been the fuel cost increases. Fuel that we purchased for our delivery fleet has gone up by almost 45% from prior year first quarter and we spent about $2.2 million on gas and diesel in Q1 but we're able to largely offset those increases with improvements in our warehouse and delivery operations while maintaining our high service standards. Aligning our incentive compensation programs with our strategic objectives at all levels in the organization continues to unleash creativity and innovation in our distribution organization as well as our back office and corporate staff areas. We have pay for performance plans where employees can earn higher incentives based on measurable productivity gains and they've been rolled out throughout the Company.

Finally, earnings per share of $0.17 for the quarter grew by just under 31% from Q1 of last year. Cash flow from operations was $13.7 million in the quarter, a good start to our goal of 73 million to $77 million of operating cash flow for fiscal year 2009. Overall working capital turns continue to improve in particular in accounts receivable with consolidated DSOs of 43 days. We're managing receivables very carefully given current economic conditions. Our internal hurdle rate for investment decisions remains 30% return on committed capital. This is how we establish a return benchmark for anything that we do, any of our initiatives, whether it's an investment in a new product, technology, an acquisition or a new service offering and return on committed capital for the consolidated Company in the first quarter was 20.4%, 220 basis point improvement from last year's first quarter.

We also track and we know you track our globally sourced inventory. We had about $31 million at the end of the quarter. This has added about two-tenths of a turn or about a quarter of a turn to our consolidated inventory but has return on committed capital which is a multiple of our 30% hurdle.

At our Investor Day a few weeks ago Brad Hilton, our Senior VP of operations talked about operation simplicity. We're set on a path to make the lives of our customers and suppliers easier and less complex by simplifying the way we conduct our business. Much of this work is reshaping how our employees fill and deliver orders for customers and how we interface with each other and our customers and suppliers. As I said before, our first step is to align compensation. Pay for performance programs are in place in our warehouse operations and are starting to have effect. One area in particular has been reduced turnover and improved quality metrics in our warehouse night crews. This is important cost savings for us. This program rewards top performers, not only monetarily but also with recognition and advancement opportunities.

Now, let me wrap up with some discussion about strategic investments. As you are aware, our acquisition strategy has been and continues to be focused on fold-in acquisitions, distributors that are in the same business we are that are 10 million to $15 million in revenue. We will also evaluate and acquire companies that are more strategic in nature and during the first quarter we made one that straddles both the fold in and the strategic categories. We announced the acquisition of Cascade Medical Supply up in the Pacific Northwest which fits the fold in description because its Medicare Part B billing and that piece of it will be folded into our existing ProClaim business. It also has competency in the Medicaid billing services and the supplies it provides to the assisted living market which has historically been their strength. We're excited about the prospect of leveraging this competency across our national book of Elder Care business.

Cascade will also help us leverage our ProClaim billing services unit which is part of the Elder Care business and expand our scope to Medicaid services and increase the scale of our offering to the assisted living markets. We're very pleased that the principle owners of Cascade will be staying on with us to help us accomplish that goal.

There are a number of other M&A opportunities currently being evaluated. Most of these are fold-in businesses but we're looking at several strategic deals as well. The economics of these transactions have to meet our internal hurdle rates, however, we're not going to overpay. Our approach will be a balance of strategic and cultural fit while providing appropriate return for shareholders. This is a very good time to have a strong balance sheet with capacity to take advantage of these opportunities.

And just in conclusion, these current conditions, they do provide challenges and risks for all of us but we believe they also present some really good opportunities if you are able to combine the right business strategies with adequate financial and people resources. We believe we have that and we remain confident in our ability to reach our one year and three year financial goals. Turn the time back over to Rob for questions.

Operator, if you could prompt the group for questions, we can begin the question-and-answer session.

Absolutely, sir. Ladies and gentlemen, we welcome your questions and your comments. (OPERATOR INSTRUCTIONS) One moment, gentlemen, we'll be taking our first question. Our first question comes from the line of Eric Coldwell of Baird. Please go ahead, sir, your line is open.

Thank you. Can you hear me?

Yes, go ahead.

Good, good morning. First question, a little bit small, maybe insignificant, but in your financial work book we noticed that you have a new revenue line called corporate shared services and I'm just curious what that line might entail and whether this is something that we should be building into our model going forward or if it's a one-off event?

Yes, Eric. We have said that there are probably other markets that would benefit from our select products to help build the pipeline and our cost position. So it's really early in the process. I don't know if the model should change yet. I think we need some more time to build some of those relationships. But I do expect us to have opportunity to sell our select products in other markets that don't compete with our current channels and our current customer base and that was to one customer who is selling the product in South America. So I don't know that I would build your model yet. It's a little early. But that is what that product line is.

And Dave, so am I correct in assuming that this doesn't cannibalize anything out of Physician or Elder Care, it is unique, stand-alone business and targeting perhaps alternate site markets in international? Is that the read?

Yes, that's exactly right. It doesn't have anything to do with our Physician or Elder Care or home care customers. These are going to be markets maybe Canada, maybe a different industry in the US or South America and that -- the healthcare system's a little different there, it's a little more mixed than it is here in the US. So you wouldn't be able to say alternate site for South America. It actually ends up in hospitals, clinics and physician offices and all kinds of offices in South America.

That's great. And any profit from that, would that be a reduction to the expenses in corporate shared services?

Yes, that's correct.

Okay. Second question, very good job on the DSOs in both segments, and I know you have a pretty tight leash on credit quality with your customers but we did notice that your Elder Care bad debt jumped roughly $1 million versus where it was last year at this point. Anything specific, any take-aways?

We had one customer bankruptcy that actually happened just after the end of the last quarter. It was not material but we recorded that this quarter and that customer is in bankruptcy. We expect to get some recovery there but that's what affected that.

Okay. Understandable. And finally, a little more of a strategic question. We have seen a lot of price inflation in supplies going into some channels of the med surge market, gloves, converters, gowns, drapes, et cetera to hospitals. Hearing more and more talk about manufacturers taking price hikes and in some cases hospitals and GPOs not pushing back as much as they historically would have because they realize that the manufacturers need these price increases. Are you seeing this with your branded suppliers? If so, to what extent and what impact does it have on your model?

Great question. First, I would tell you, it's a little early in the year. A lot of people are trying to figure out what they're going to do. Or it's a little early in the process and manufacturers are trying to determine what they're going to do or how much they're going to do. I think we're alone in this one. I think, we haven't seen other distributors do this. We contacted our largest vendors -- we contacted all of our vendors actually eventually but we went to them and said look, customers we don't believe can absorb a lot of price increase right now. We think that their economics are already under a lot of pressure. We need to do something different, which is how can we change the supply channel between the two of us. We gave a menu of concrete supply chain savings. We gave a menu of marketing opportunities. Because if one branded manufacturer goes up, another one may not and there may be opportunities to change market share. We gave opportunities to participate in some of our solution programs that attack the efficiency and cash flow of the customers, so that they can afford a price increase. And if you can help them make money, you can raise prices.

And then the other thing is we're building the select portfolio which when a branded manufacturer goes up, if we're not going up then there's a big conversion opportunity. So we're kind of attacking it across the front and then all that really doesn't matter for some raw materials and you mentioned latex and vinyl. There's clearly a supply problem, not because there's less supply but because there's more demand. What's happened is non-healthcare demand for those products have gone through the roof. And there's also regulation in healthcare where the product specificity has to be much tighter. So manufacturers would rather meet the demand in other markets with latex and vinyl because they don't have to meet the regulatory requirements of the FDA and healthcare.

Then you've got products like pulp and plastics. Plastic resin and pulp which goes into a lot of different products. Not just table paper and things that you would expect, roll towels, but even things like diapers and underpads, there's pulp and plastic in both of those. So those product lines we've seen a lot of pressure and it's those manufacturers that we're doing the most creative things to try to mitigate as much of the price increase as possible because we want to be able to represent to our customer that the price increases that are coming are the ones that have to come. The rest of it's been taken out through various strategies or here's a solution that helps generate profitability or cash flow to offset some of this price increase. That is the environment we're living in. That is the conditions. We do expect pricing to go up but we expect it for us to go up less and differently than it's going to for other parts of our competitors and our markets.

Dave, thanks very much. That was a very thorough response. Congrats on a good start to the year. I'll jump out.

Thanks.

Ladies and gentlemen, thank you for your question, Mr. Coldwell. We'll now return to the Q&A. We now have a question from the line of Randall Stanicky, Goldman Sachs. Please go ahead, sir.

Hi, this is actually Bob Jones on for Randall. I want to talk a little bit about the Athena Health changes. I know you recently made a few changes to the Athena Health product, how it's marketed and sold in terms of some of the additional specialists you hired. I think you said it was 13. I was wondering if you could talk about what you're seeing as far as early results from this product and maybe share some feedback from the field on this.

In addition to the 13 Athena specialists, we retrained 160 of our folks, Bob, and we just didn't have the right formula of support and connectivity between Athena and PSS and as a result, a lot of the channel of leads that we had built up just kind of went away. So I would tell you that we had the same number of leads six months or a year ago, it's just that these leads I believe are going to turn into sales. Our customer is very receptive. Our customer is probably more receptive than ever in this economic environment to these conversations and they're a lot easier to have today than they were a year ago when we first started to market the product. And what I would tell you is we have a pretty big pipeline of leads. We have a pretty big pipeline of excitement on the customer and the salesforce side. We're going to continue to train our salespeople and the retraining process and in one way it's disappointing that we weren't able to do this a year ago but in another, we've learned a lot. I think the two companies have figured out how to market the product and how to effectively service the customer and close transactions and I expect a pretty significant change in the number of closes and I think our goal is 1,000 docs this year. We did 54 in the quarter so that alone just tells you the kind of ramp-up that we expect to see just from the expectation we gave you all, not our expectation internally. Does that answer your question.

It does. Actually, speaking of the ramp-up throughout the year, thinking about the EPS, obviously your guidance assumes a pretty steady ramp in earnings from here. I was wondering if you could just discuss some of the key risk factors to that earnings trajectory? And then also, maybe how we should be thinking about share buybacks for the balance of the fiscal year? Thanks.

I'll let you handle, or you can add to it and talk about the risk. I kind of spelled it out in my opening comments, what's on my mind and in the beginning of the year you've just got so many moving parts and we've added a lot of head count, we've done a lot of early investments and you just don't have traction yet on a lot of your initiatives. So it's all around execution, because everything that I've seen tells me that we had exactly the right plan in place. There's nothing unexpected or unanticipated. There's just some areas that because the economy, have to work a little your harder at. But to me, I don't see -- I think we're in a stronger position than we were even at the beginning of the year with the economy from how it ties into our programs. I don't see any holes, what I see is a lot of execution, a lot of work that has to be done. But I feel very good about the goals and the plans. But it's early. So I'm happy with the results. I'm happy with the solutions and the programs. I think our people have done a hell of a job. I feel good about going forward. It's all execution risk in my opinion at this point. David?

I would agree with that. I think the strength that we saw across all of our product lines and with both divisions performing, kind of gives me comfort that we have, gosh, if not all the cylinders firing, certainly most of them are firing and I think we've got some pretty good momentum. As far as share repurchases, we did buy back a large number of shares in the fourth quarter. We wanted to wait and see what our cash flows were going to look like for this quarter because we had some accrued incentive compensation on the balance sheet at the end of the year that we knew we were going to pay out in the first quarter. So we did not purchase any shares in the first quarter. I think we've said that our goal is to certainly at least offset any dilution that we see from either option grants or exercises as well as anything that comes from our current convert. So you should expect us to be active and opportunistically looking for openings to buy some shares.

Great. Thanks. I appreciate the question questions.

Thank you, sir. Continuing on, our next question comes from the line of John Kreger of William Blair. Please go ahead, sir, your line is open.

Hi, good morning. This is actually (inaudible) in for John. I guess given the high cost of gas that we saw relative to last year, to what extent are you able to pass those costs along to your customers in the form of a surcharge?

I mentioned that what we actually bought for our own trucks was up about 45%.

Right.

We were spending around $6 million a year. That's jumped up to closer to $9 million a year. Certainly our first priority, as Dave said, our customers it's hard for them to accept any kind of a price increase, whether it's a fuel surcharge or a product price increase. So we're very reluctant to do that. We do that very carefully and cautiously. I would say that the more important is our ability to work with our customers and also work with our operations teams to find additional efficiencies in how we deliver product, how we use the vehicles that we have, and we have lots of creativity in our organization around saving money on gas. But -- and I would also say that, certainly the cost of increase that we saw in the first quarter was not unanticipated. We had the benefit of being -- having some visibility into that when we set our plans and expectations for the year. So I would say that this does not have -- at this time, I would not characterize this as any kind of major risk to our EPS goals for the year but we're certainly watching it very carefully.

And actually a follow-up to that. Are you seeing your competitors implementing a surcharge and if so, has that kind of helped your ability to gain share?

I think the whole market is struggling with similar issues and yes, both our suppliers are giving us and our competitors fuel surcharges on incoming freight. And our manufacturers as well as passing them on where it makes sense and where it's feasible to the customer.

I don't think this is a strategic competitive advantage from a gaining share. I think the solution programs, I think all the other things, maybe this is one piece of it but there's a lot of other things that go into taking share. Our growth has been pretty consistent through this process. So if anything, I would argue that it hasn't impacted, which is a very positive thing, our relationship with our customer and we've been able to grow share twice as fast as the market and a lot of competition because of our other programs, not necessarily this one.

Thank you very much.

This is a strength, not a weakness.

Great.

Thank you for your question. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Lisa Gill from JPMorgan. Please go ahead, Ms. Gill, your line is now open.

Hi, thanks, it's [Arthur Frahim] in for Lisa. Just a couple questions on the outlook. As we look out the next couple of quarters, move into the flu selling season, could you remind us what your -- what's included in your numbers around flu and how early orders perhaps look like, if possible?

Now, remember, we don't -- aren't like the rest of the market. We don't have and we don't want a contract that requires us to buy flu and sell flu. So we're not going to be like your other comps with other companies. So you have to just not even think of flu season as a variable for our numbers. So you won't see revenue really change at all for flu for us. But you will see some impact on the margin line. We are an agent to represent a market, flu vaccine. It will be very small this year. We will be much more aggressive next year. We entered the market late from our contract standpoint. So it really is not something that's going to change your model for us. And I think we announced or said that we included $0.01 or $0.02 in our numbers for the flu product and you can kind of work back to the gross margin line and drop that in.

Any idea on the number of doses you're planning to sell through this agency relationship?

Yes, I would prefer to just tell you it's early in our relationship. We entered the market late with our contract and we don't have big expectations for this year. It's more next year that we'll give out doses and volumes and expectations and that kind of stuff. It's just not material this year.

Okay. And then on the fuel side, that's been a -- that's definitely an increased cost there. Any changes to your fleet that you're making that might reduce expenses?

I don't think we could have cost of delivery go down for the last five years without a lot of changes to our fleet, our automation around our fleet, our routing system, our customer relationships, our customer delivery models, our customer ordering cycles. There's 50 things that we're doing and we've been doing for the last couple years that's caused us to have decreasing cost of delivery in the face of gas prices that have gone from -- when I started talking about this a $1.50 to $4.00. So we've been very effective at dropping cost of deliver and continuing to do so and it's not about changing a truck, it's about changing a whole bunch of things.

Okay. I -- any increase in CapEx--?

I'm sorry, go ahead with the question.

I was going to ask if there was any incremental CapEx that we might expect specifically associated with controlling fuel costs?

That's what, actually what I was going to talk about. Our fleet is leased. That gives us a lot of flexibility when fundamental things in the market change and I think that that's a good way to approach that. So no, I would not expect any large capital expenditures as a result of responding to changes in fuel costs.

Okay. That's great. Thank you.

Thank you for your question, sir. Gentlemen, it appears that there are no further questions from our audience. I'll turn it back to you once again to continue or for your concluding remarks.

There's one thing I was surprised we didn't get a question on and we mentioned that equipment was down a little bit. I think the normal connection would be that it was economic or some kind of economy driven event and it was not. It was -- because I asked the same questions when I saw we were off a little bit. It was that we couldn't get product from one of our suppliers on hematology and our supplier on laser was reorganizing their salesforce. So I didn't see any weakness in equipment as it related to the economy. In fact, we saw some strength but we had two vendors who were having a tough quarter. So in general, I would say the economy is interesting. Nothing unanticipated. Feel good about our plans and look forward to reporting next quarter. Thank you all very much.

Thank you, gentlemen. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again. Have a fabulous day.