麥卡遜 (MCK) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the PSS World Medical fiscal 2009 third quarter conference call. During the presentation, all participants will be in the listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Thursday January 29, 2009. I would now like to turn the conference over to Rob Weiner, Vice President Investor Relations. Please go ahead, sir.

Good morning. Thank you, Shawn. Good morning, everyone. Thank you for joining our fiscal year 2009 third quarter conference call. Today on the call our speakers David Smith, Chairman and CEO; Gary Corless, Chief Operating Officer; and David Bronson, Executive Vice President and CFO. We issued our release last night for the quarter and the release and our financial work book for fiscal year 2009 third quarter are available on our Web site at PSSWorldMedical.com. The financial work book contains GAAP and non-GAAP measures that provide greater detail into each business.

I'll read the forward-looking statement. During this call we may make a number of forward-looking statements regarding revenue, gross margins, operating expenses, operating margins, earnings per share, and other matters that are not historical 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 the forward-looking statements disclosure in today's press release, last night'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 from the Investment Relations section from our Web site or from us here at Investor Relations.

The Company wishes to caution listeners of this call and its replay to not 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 this day made. The Company also wishes to caution listeners that it undertakes duty or is under no obligation to update or revise any forward-looking statements.

Let me also remind that you 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 related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end of our financial workbook and our Form 8-K submitted to the SEC.

For our call today we will follow our formal remarks by a Q&A session as prompted by the operator. We will limit the call to no more than one hour in duration to be mindful of other reporting companies and a busy week. I am now pleased to turn the call over to David Smith, Chairman of the Board and Chief Executive Officer.

Good morning,. Thank you, for joining us. We will deliver a quick informative call this morning. Last quarter, I described how the Chinese believe it is a blessing and curse to live in interesting times. I can think of many other words this week, like fascinating, sad, unpredictable and challenging. We are a company blessed by faith, faith to serve the alternate side health care system and customer. We're blessed by previous strategic decisions to fanatically focus on customer innovations and solutions and have investments in operational efficiencies.

In this environment of pain and unprecedented disruption it is difficult to feel and harder to say, but I like our position. I feel great about our strategic direction in investments. We simply can't feel guilty about doing what we're paid to do, maximize shareholder returns and take care of our customers and people. We simply are making our customers healthier, our people are winning on the streets. And our programs and solutions are effective. We're changing and adapting, relentlessly focusing on customers and people. And we believe we will emerge a stronger company. We have proven time and time again that we're quicker and more nimble than our competition and has clearly run reviews faster. We're removing costs from our business while we're investing in growth strategies and solutions.

Our guidance for this fiscal year is consistent at $0.94 to $0.96 EPS. We have accelerated investments in infrastructure and operational efficiency with capital in P&L spending. We dealt with hurricanes, deflating dollar, rising commodities and gas prices and now to see commodity prices reversed and we're even beginning to see overseas container shipping costs decline. We have seen consumer savings impact office visits and discretionary procedures, matched by our customer need and willingness to listen to solutions that impact the cash flow. Our solutions and programs were built on the belief that our customers will face more economic stress than ever before. These initiatives have not just been timely, they have been critical to the health of our customer, and allowed us to drive a bigger stake into the heart of our competition.

During the call, Gary Corless our Chief Operating Officer will review these programs for both businesses and then David Bronson are review the balance sheet and financial results. My last three topics are position revenue, strategic planning for fiscal 2010 and a Washington update. On the physician's side, we planned on more review in the quarter due to more selling days. We failed to anticipate two things.

First, Christmas and New Year's Day fell on Thursdays, and it seems everyone used the next Friday for both holidays to spend time with the families. Second, Friday after Christmas, New Year's Eve and Friday after New Year's, January 2 were three of our four extra billing days for the quarter. Basically our business was dead for the last two weeks of the holiday -- or the last two weeks of the quarter. However, the week starting January 5, or the next Monday, was very, very, very busy. Winter has cranked up and most likely flu season. Now just the opposite on the Overcare side, where extra days in the quarter represented patient days in nursing homes and day care. Neither were closed for the holidays nor the Fridays after.

Strategic planning for fiscal 2010 has begun. The environmental factors are less clear than any other year I remember at the beginning of this process. However in many ways, for us, it was simpler and more focused. Expect to see continued growth at two times the market in concentrations and focus on targeted clinical and business customer solutions. Operation simplicity that drives efficiency, expansion of our source of depth and breadth, utilization of our capital structure for acquisitions of companies that can expand our customer reach or our product and service expansion in our core business. Ecommerce expansion and a continued focus on compensation alignment. We will reduce costs expenses and investments, they can no longer be justified. We will look to take advantage of market layoffs to harvest talent for the market in specific areas of need and of course, manage our cash flow and balance sheet with enthusiasm.

Now, for Washington report. First, if you believe everything coming out of Washington and the Federal Reserve you can walk to China and back on the spending, money flow, future taxes and potential inflation. It is hard to know what to believe but the next few months should be very enlightening. For the short-term and mid-term, health care does not look like a bad place to be, especially the alternate site. Incite consensus believes general practice physicians' incomes will not be cut.

The SCHIP renewal expansion and changes to qualifications for Children's Health Care is an early indication of spending mentality. The change represents an increase for participants in funding of 54%. Also, a serious discussions in support is building for opening access to Medicare coverage at 50 to 55 at a higher premium rate. This move is seen as a plug in the hole for the coverage on the opposite age bracket of SCHIP.

The new Obama stimulus has an $88 billion bail-out for state Medicaid programs. Early in our planning process we perceived a particular weakness in customer credit worthiness in certain states. The proposed $88 billion is very significant fix. There is another $20 some billion for health care in the plan. There is $2 billion for national coordinator of HIT there's $17 billion for HIT, there's a $1 billion for physician incentives for using electronic formats. However, still too early to understand how this will be implemented or who will get it and when.

One thing is for certain. I am happy our strategic planning will not be completed until March or April. By then, we will have a lot more visibility into these issues and opportunities. Regardless of what changes, or contemplated or made, we have a proven track record and an organization that embraces change and innovation. Ask of we have a significant list of investments and returns that are that are at the ready. So stay tuned.

Now I will go to Gary Corless, Chief Operating Officer to review some of the programs for the quarter. Gary?

Thank you, Dave. I want to thank everyone for your time. I would like to start by asking all of you a question that I asked our people every day. When is it most important to have a good partner? In good times or challenging times? Although this environment presents many challenges it also plays to PSS's strength. A face-to-face and focused partner. I give you a brief overview of key focus areas for PSS and Gulf South and why they are working in this environment. It is the most important time to be in front of the customer talking about his or her challenges with the most complete offerings of solutions. Our approach is to strengthen them by helping them improve their care, grow their revenues, control their cost and improve their efficiencies, which includes collecting cash.

First, I'll cover PSS. Let's talk about how we help them control their costs. One way we're able to do that effectively is through our brand, Select. When faced with the increasing costs of running their businesses they are more open than ever to our in house brand to Select. We continue to strong growth in the quarter coming in at 17%. With Select Diagnostics leading the way at 26%. Controlling costs is important, yet patient care and practice revenue are even more important.

How do we do that? We do that through our equipment and our laboratory diagnostics offering. A good example of this for the quarter is our Rep and customer right here in Jacksonville, Bob Horn, who calls on for all the Nephrology Associates. While discussing their business we learn that their aim was to make their experience with their patients more efficient. It became clear that insourcing the diagnostic testing they have been outsourcing to commercial laboratories would help accomplish that. After adding a laboratory capable of chemistry, hematology, and amino acid testing and the lab information system, they have already seen marked increase in efficiency, patient satisfaction, and income that was previously going to the commercial laboratory.

This is a good example of how our approach and our comprehensive of offering continues to deliver for the physician and our manufacturers partners. We completed our Q3 lab [zone blitz] successfully with $39 million in equipment, still growing and15% growth in branded lab diagnostics. A strong example of the power of face-to-face and focused. Lastly we strengthened our PSS customers by helping them improve efficiency and one way we do that is through our eCommerce solutions, SmartScan and MyPSS. They also help us free up our Reps to sale, as one of our rookies Clarissa [Cardanus] says, If I am taking orders I cannot talk about anything new, it gives me more time to sell equipment and I have double my book of businesses since showing of PSS. Or our customer, Megan, who is a lab technician in Florida Cardiology Associate's in Port Charlotte that says, To do an order takes me 5 minutes, tops, before it took me 30 minutes to an hour. I literally save 3 to 4 hours a week.

As Dave told you in Q2 we hit a year long goal of 35% of the revenues back in September with eCommerce as a percent of revenues. We have continued success by signing up over 4,000 more eCommerce customers in the third quarter and now up to over 38% of our business. They have continue -- these eCommerce customers continue to buy more, place larger orders and grow faster than non-eCommerce customers.

Now for a minute we will talk about Gulf South. Gulf South continued strong growth of over 16% in total with home care leading the way at over 24%. Our home care efforts were focused in the area of point of care testing in our brands. In the area of point of care we fully trained 100% of the Gulf South sales force in coagulation testing and in placed close to 400 meters. Good example of the power of this blitz is our representative Justin [Thickbaum], who showed Harmony Home Health in Chicago the benefits of using the Roche Coagulation Meter and was rewarded with the coagulation business, plus wound care, plus (inaudible) business. Our Q3 brand focus span home care and skilled nursing facilities facilities grew 39%, led by our [Quintet] Glucose meter with over 2,000 placements. A good example is Gulf South sales Rep, Randy [Demott] who lost the glucose business to a competitor eight months ago and with our [Quintet] glucose meter he was able to walk right in and get it back, plus more.

Lastly, our momentum program. Which contributes to our school nursing facility growth of 14% enables our SNIFF customers to leverage the Gulf South purchases for things they value like care giver education. n the quarter we had 138 customers and now we're up to 300 members. Good example is our Gulf South sales Rep, Brian [Stegall] in North Carolina, who has been calling on this competitors account for over four years with no success until we introduced momentum which opened the door, it is different and valuable program.

Thank you, very much. We will continue to leverage our strengths that are more appropriate than ever. David.

Thank you, Gary. And Good morning, everyone. So this morning David talked about our views on the economy and our position in it and how we're adding value to the health care delivery system in the alternate site market. Gary's updated you on our go-to-market strategies and programs and how we're increasing our value to our customers. I would like to talk about two other important elements of our overall investment thesis and how they are creating and will create share holders values as we go forward. First is operating margin expansion. As you recall our operating margin expansion for this 3-year plan consists of leveraging revenue growth. Sourcing and more profitable mix of high quality products for our customers. And becoming ever more efficient in our distribution and back office operations.

In the quarter, continue to make good progress in all three of these areas. And the result was a consolidated operating margin of 6.1%. Which if not an all-time high is certainly the highest in the last 10 years and in our current configuration. This in spite of the fact our overall same day revenue growth slowed somewhat in the quarter. Operating margin improved by 90 basis points from the same quarter last year.

The Physician Business reported 9% for the quarter of operating margin, and the elder care business came in at 5.4%. Consolidated operating income grew by over 30% from prior year. Sales of our Select brand products, grew by 18% in the quarter on a consolidated basis and are up 27.5% for the year. These products now account for 14.6% of our overall revenue mix. We're selling over 1300 SKUs with the Select label, sourced from 10 countries and 69 manufacturing plants all producing these products under very strict quality assurance standards and inspection. We also continue to expand profitability with the branded manufacturers whose products make up the other 85% of our revenues as evidenced by the successes that Gary mentioned in marketing promotional programs. With the help and support of these manufacturing partners we're driving costs out of the supply chain especially in the areas of rebates, contract management and freight. We continue to leverage revenue growth across our distribution infrastructure and corporate overhead base.

For the quarter, 14% of incremental revenue dropped through the operating margin. Year to date in the third quarter, that number is 9%, in line with our expectations. Beginning at our investor day last year and over the last couple of quarterly calls, we have been talking about our business simplification strategy, designed to formalize and recognize the efforts of our organization to improve operational efficiency through a combination of focus and alignment, process redesign, and the investment technologies. Our people have really got behind this initiative and we are seeing some real traction. I recently in the last few weeks visited four of our branches on the west coast. It was very gratifying to me to see the level of involvement and enthusiasm our folks are bringing to this initiative.

I know some of you will be wondering about the impact of fuel costs on this quarter. Remember 90% of the fuel we buy is diesel which is not down quite as much as gas and that our fuel surcharges are also tied to national average prices so automatically adjusts as fuel comes down. However, from Q2 to Q3, we did see a decline of about 400,000 in net fuel costs. Overall we feel that our margin expansion plans for this year and our 3-year plan are very much on track.

Now, turning to the balance sheet. We continue in this environment to monitor very closely the credit worthiness and payment pattern of our customers. Consolidated day sales outstanding or DSOs for the Company came in at 42.4 days, an improvement of one day over last quarter, and two days from a year-ago. These are the lowest DSOs we have had in at least the seven years I have been at the Company and they reflect both the focus and determination of our people to manage this asset aggressively as well as the value that our customer puts on our overall product and service offering. There are much easier credit terms out there from our competition but our customers are sticking with us because of the value that we provide.

Similar to Q3 of last year, we did invest in a layer of inventory in anticipation of product costs increases. This inventory layer will work through the system over the next 3 to 6 months and each individual buying decision in this category meets or exceeds our 30% return on committed capital hurdle rate. This added about a day and a half to days on hand compared to prior quarter, but even with days on hand from a year-ago. The timing of this buy-in along with the timing of the income tax payment in Q3 that we originally contemplated in Q2, resulted in negative operating cash flow of $6.9 million in the quarter. However, today we're reconfirming our goal of 73 to $77 million for the full year. We ended the quarter with very strong cash position at $214 million. Thanks to having completed the convertible debt offering this past summer at favorable terms. Now speaking of that convertible debt, I think most of you are aware that the GAAP accounting rules for convertible debt are changing. This change effects PSS and all other companies that have convertible debt starting in the first quarter of the next fiscal year. For us, it will be the June quarter.

This change requires issuers of convertible debt to reflect in their P&Ls, not the rate of interest stated on the coupon actually paid by the Company but an estimate of what the straight debit market rate would have been at the time of issuance. Now, it is a little hard for me to explain how that improves the accounting but the result is going forward that we will be recording a non-cash interest charge in our P&L and will also be restating prior years, again to increase non-cash interest expense, the new rules require restatement of prior years' results for comparability. The amount for PSS will be as follows -- For fiscal year '08 or our last year will be restated to increase non-cash interest expense by $5.9 million.

Fiscal year '09, this year, will be restating the results when we adopt this change to increase non-cash interest expense by $10.8 million. And the increase in non-cash interest expense for FY'10, or our our next fiscal year will be approximately $7.7 million. Now none of these amounts will be materially impacted by whether or not any of our 2004 bonds are redeemed or called this coming March.

As most of you are aware, holders of those 2004 convertible bonds have a one-day put option on March 15, about a month-and-a-half from now. Subsequent to that date, any bond still outstanding are callable by the Company. We issued the new convertible last summer in anticipation of the old bonds being put to us. We don't know at this time whether that will happen or to what degree. If it does happen, we do have the liquidity. The decision on whether or not to call over the next few months, any bonds that are not put to us in March, will depend on what opportunities are out there to profitably deploy capital, and the relative availability in cost of other sources of capital.

Now just to sum up, before we open the call to questions. I really believe PSS is well positioned to respond appropriately to the unique challenges of these times. I think our focus on this market and the needs of our customers and the flexibility and agility of this organization will allow us to adjust and modify our business strategy as the new economy emerges. I am very encouraged by the continued demonstrated ability of our team to get behind and effectively execute our strategies. Thanks very much.

Operator, we're ready for questions.

(Operator Instructions). And our first question comes from the line of Glenn Santangelo with Credit Suisse. Please proceed with your question.

When you were talking about this slowing same day revenue growth and the physician business you suggested that the last two weeks in December was really slow. I was wondering if you could maybe elaborate on that a little bit more, maybe give us a sense for how big of an impact that might have had. And as a follow-up to that what are you seeing in the physician market. Do you think, there really is a slow down in that market and hence we should -- we should be thinking about, a depressed kind of same day revenue growth rate as we look out into '09, are you seeing any change in the business mix in terms of what you're selling, the physicians? Maybe less equipment, any sort of color would be helpful, thanks.

Okay. We will all kind of chime in where we see appropriate. First, this -- we really did miscalculate something in the days that -- the Fridays after the holidays were -- were completely dead. There was no business on -- of course the holidays, and there was no business done. We were doing pretty well in October, coming into December. And then last two weeks of December, just were a ghost town so what I would tell you, very slow holiday. And then, the next Monday, our printers were melting so all I can tell you is where we picked up in January, kind of, put me back at ease. I was nervous, thinking all kinds of thoughts during the holidays and then, then felt much more at ease once January started. We also had a -- decent winter last year with some flu, some sickness in the quarter. We had pretty healthy year, this year. Winter really didn't even get started until Christmas, when people were going home for the holidays. I think that might have have had something to do with it.

As far as the slow down I would say absolutely where it comes to discretionary spend where people are making decisions to have voluntary procedure, that business is dramatically off. And I would say, when the banking collapse and all the bad news in the market, people were saving money. People went from negative savings to positive savings as the economy -- so Americans are trying to save. But I would tell you the other side of that is people start to worry about losing their jobs and getting benefits and we're going to have updraft from benefit utilization. I would say that they -- I would just say our customers are very, very open to listen to ideas that help generate cash flow and procedures in their practice, to try to make up for anything that they have lost from a discretionary expense standpoint.

I think it will take more time to gain clarity from the trend. And -- we see, some -- trends that contradict the conventional wisdom. In some cases you may see consumables are slower per day. I think at today's point a little more time to clarify, the holiday impact. At the same time, most people are predicting that our equipment business would be flat or declining -- it is actually continuing to grow. To our point about the -- the avenues we have to strength in our physician offices. So it may take more time to gain some clarity from the trends.

Fortunately we're freeing up sales force with with our economic -- so our people have time to talk to our customers. Fortunately we have all this equipment and all these products and programs to be able to articulate to a doctor a way to improve their practice revenue or cash flow, and -- it is working. And -- when I tell you -- when I tell you our competition is retreating in these areas, they're seeing it very difficult and they are not putting resources in it and they are actually going down. We're doing just the opposite 'we're actually going up in some of these categories in some of these areas. Just like you I watch everything every month. December was unusual, at least the holiday portion of it. January appears normal. So I will wait until February or March and then tell you.

Okay. Thank you, for the comments.

And our next question is from the line of Lisa Gill with JPMorgan. Please, proceed with your question.

Hi, it is Arthur [Fraheman] for Lisa. I guess you mentioned the -- the physician revenue did picked up January 5. In light of that you maintain your guidance I think you are waiting for Feb. and March to show up, but is there any way you could perhaps quantify what the depth of demand was starting January that you missed out on and then a second questions is related to the surgery center market that you started targeting. Can you provide any update on how that initiative is progressing and perhaps what the contribution was in the third quarter? Thanks.

Okay. I am not sure that we picked up -- I don't know if we would even know how to track, whether we picked up demand or there were orders that the customer just didn't bother to give us that were sitting there versus its flow from the patients. I don't know how we would begin to track that with 100,000 places we deliver to and -- all the things in the business. It is just not a factor we look at even though that would be beautiful information to have. I wouldn't of know what it was last year to judge whether it was more or less. So -- what I would just tell you is the business picked up. Immediately in January. This second part of that -- Yes, I'm not sure I have the number. Are we hitting our forecast for surgery centers.

I don't have the figures in front of me. I know surgery center business continues to grow, but just with our top 25 PSS Reps for the last few days, and John Hughes up in Virginia says continues to bring it on. I think the trade off is our value proposition in this challenging time matches up extremely well with physician offices and he was talking to me about trade off on his time and thinking -- he could pursue physician offices and probably help him even more than spending time there. It continues to grow. I think a lot of our focus will go to the physician office, especially during these times when we can help more of them than our customers can be, frankly.

Okay, that's great. Thank you.

Our next question is from the line of Randall Stanicky with Goldman Sachs. Please proceed.

Great, thank you, for the question. Hey, guys, on the margins the impact from shipping costs is helpful. Can you just maybe give us a little more color on the relative benefit as you think about some of the moving parts whether it be private label efficiency or as you said, shipping and the second part of that were there any costs that are being -- or might be shipped to the next quarter that perhaps didn't hit in this quarter?

Okay first, the -- the shipping -- container shipping is something we're seeing in the market now. I don't know if we had any benefit of that last quarter. It is just starting to show up and probably for the rest of the year and into next year. So that is very positive. So, we dealt with rising costs everywhere, now starting in -- so I am really happy about -- as far as the costs that would be shifted to next quarter I don't think we ever do anything like that so, if anything, we aggressively are ahead of some of our spend and our pushing things forward to grow the business. So Randall, I would say -- kind of just the opposite, I would say that we're aggressively spending on our initiatives rather than waiting and we would not delay anything. There is probably significant amount of profitability in our inventory line, on the opposite side. So, we probably have a lot of inventory profit sitting in the costing of the inventories that we have. So -- where we may made an investment is just the opposite, probably be storing income rather than storing costs. Is that it? There is another --

No, I was just -- is your question was there anything unusual in the quarter, there was not.

Effectively -- okay, that's helpful. And let me just have one more question, guys on the ATHENA signing, can you give us an update there where we were in the December in the quarter?

Yes, we did 260 closes, that's almost double than anything we have done in the past. Very good run rate there. That product continues to be a very good conversation to have with physicians. We have added support from ATHENA for our field, about 12 or 13 people. The transition we really need to finish accomplishing or make is to have those people be able to sell rather than just ride along with us. So I think -- I think there is great potential to increase the run rate, I think that we're continuing to work together to get to that point. Our doctors are receptive to it. We're really hoping the cash flow those positions so we have very good testimonials. We have even saved doctors from bankruptcy so I think that product will continue to see good momentum.

And the targets towards a thousand are still on track at this point?

Yes I am say we got off to a slow start, no doubt about it in the first quarter, where we're still organizing our people. And that hurt us. Our people are going for it, I don't know if they will quite get to the 1000 that will be the one goal that I am short on this year as far as the number. I think everything else will be ahead of target. That may be one that I miss. But I it is going to be close. We going to push to the end.

Thanks a lot.

Okay.

Your next question comes from the line of John Kreger with William Blair.

Could you just expand a little more on the equipment, sales experience that you saw in the quarter in both segments and -- to what degree is that financed and has that proving to be a challenge at all?

Okay. I -- on the equipment side, on the Physician Business, as David mentioned in the previous calls, it is not like a base rate where it is growth on top of the base, each new transaction is exactly that we -- $39 million worth of equipment on the -- on the physician's side, and, it was everything from power cables to laboratories, not a lot of laser that would be in the down category. So, it was strong -- growth, we replaced every deal we did last year and then some and on the Gulf South side we don't really refer to that as much as equipment wise to be honest with you but Gulf South is moving more into some of the point care testing which is one of the fastest growing categories in the fastest-growing area of home care so the growth in the coagulation knee replacement, the growth in the QUINTET glucose meter placements, I think was a strong start for Gulf South in the point of care testing.

The other part of your question was on financing. The ratios that we have seen historically generally held, we didn't have any deals turned down because of financing. Our tube leasing equipment partners continue to be very interested in support of this market place.

I would say it is probable harder and tighter to get a lease then it was a year ago but it has not impacting out ability to grow our equipment. I think the solutions that Gary's team are providing the doctor, especially in this last latest lab zone, our competitors are retreating from lab and we're attacking lab, because it is a way to offer the doctor better patient care and better cash flow and it is working.

We have to work a little harder to get it done. It is getting a little tighter but we are getting the deals done and then to the point of competitors backing away one of the things we're benefiting from is getting our unfair share of vendor support as David mentioned as competitors back away from this area coming they are coming to us to achieve there growth goals so that helps us in the area of equipment.

Great. One separate question. If you think back to last May when you gave the guidance, the three-year guidance, obviously a lot has changed since then. Can you just spend a minute talking about which of those changes has helped versus hurt your business and how does that all net out as we start thinking more about fiscal 2010?

Yes, and we started that process. And fortunately won't be finished until April or May which is kind of what I was leading to with the Obama and the Congress and spending and trying to sort through, that I think we're a little blind as to how some of those things are going to impact next year. Clearly, a lot of our costs have come -- are coming down on the product side, commodity side which was hurting us from sourcing and distribution standpoint. Diesel and gas, coming down -- I think -- you clearly have lower pressure on salaries right now. And you can find people in the market at effective rates. So the environment itself has -- is improved in being able to control your costs. Your physician customers, revenues, your imposable probably slow down a little bit because of discretionary spend and at the same time their willingness to listen has dramatically improved and our ability to talk to them is dramatically improved because of some of the run rate we have on our eCommerce platforms. So, there is a lot of pluses and minuses, I don't get to reset my three-year plan, personally so I am kind of focused on it.

But what I -- will tell you in we're just getting into the plan. There are definitely pluses and minuses. But the one thing we have going for us is we have people who talk to customers every day. We have people that are considered part of the customers' business and would be -- they would be lost without them. We have an organization that is very nimble, very quick. We're very aggressive, we are very integrative and we don't take no for an answer so I like our chances. I like our positioning. I like our strategy. I like our competent competitive landscape. I like the fact that we have a strong balance sheet and people are struggling around us. So I am kind of fired up by the whole thing. Yet, I have to be very humble because this is a tough time for a lot of people. So, I would just say I'm ready.

One thing I would add is we set the three-year plan with some visibility and some awareness that we were looking at a slowing economy, certainly not what we have seen. If you remember, Dave was pretty bearish at the investor day in terms of overall economic growth and some of that -- a lot of that bearishness got built into not only our numbers but our philosophy and how we approach the business and how we manage head count and how we manage headcount and how we manage investments and hurdle rates that we use so I think that were -- some -- a lot of that was factored in to our three-year plan.

Great, thanks very much.

And our next question comes from the line of Andrea [Beze] with Schroder.

What was CapEx in the quarter and has that changed for the year and secondly, can you give DSOs for you physicians segment and your elder care segment.

We're looking okay as we speak, 5 million for the quarter on CapEx, okay, and what is the target for the year?

25 to 28.

Okay. Are we on that --

Yes, we're at $20 million total for the three quarters.

Which is a big acceleration of what we were originally going to do in to advance some of our development items for operational efficiency for sales force automation, for customer automation, so, we have been taking advantage of this market and our financial strength performance and accelerate these programs so we get some dividends in '010 and '011.

DSOs, by business, I show for physicians business 39.5 for the elder care, just at 49.

Okay. Thanks. And where was Cap cash flow from Ops weaker?

Okay, two areas. One, that inventory billed and layer that we added and remember we did one of these last year. It was -- the one we did this year was a little bit bigger because there was a little bit more opportunity and vendors were offering us opportunities to -- to -- to buy in advance of cost increases. We always do that, at least a 30% return on committed capital hurdle rate. All of these buy ins meet or exceed that. The second area was we had a $7 million tax payment in -- in the quarter that we originally thought would be in Q2, and because of that hurricanes, we had an opportunity to extend that payment, that was a Federal program, and -- we took advantage of that. Just to get the float on the cash flow. I think we -- if not in my prepared remarks certainly in the Q&A last time I talked about that so that was $7 million.

Okay. Thanks.

So, we are on track for the year.

We are on track for the year, we were pulling the right lever and making sure that we will hit the number for the full year.

Okay. And the number for the full year again?

73 to $77 million.

Okay. Thanks.

And our next question comes from the line of Robert Willoughby with Bank of America.

Hi, was there any change in the ATHENA Health stake in the quarter or since then?

Early in the quarter we did sell, on the spot market, I think 30 or 40,000 shares. We saw there was pressure on the stock. So, we stopped that program. What you see in the cash flow I think it is about 0.4 million or 400,000 gain from those sale of those shares.

Okay. And did -- you did you look at your inventory dates, 2004, 2005, you are in the high 30s low 40s, margins were obviously lower, they are now higher but the inventory days are up, is the trend now essentially completed there, is this is a steady state level for inventory days on an annual basis or does that continue to tick higher?

No, I think you will see it come down this next quarter because we will sell off that layer of -- sort of buy-in inventory.

But on an annual basis, though Dave is it sort of low 50s is where it should steady stay on the 12 month basis?

As we have talked about it in the past, Bob, as we have launched Select we wanted to have very high service levels on Select products so we maintained higher safety stock levels on source products. Now both from a critical mass standpoint as well as from a comfort level with the product and quality of the product that we're seeing, I think you will see us be able to trim some of that safety stock as we go forward. I think also as I mentioned in terms of working with manufacturer to reduce supply chain costs there will be opportunities to trim out some inventory. We have not put any quantification on that. But I think you will see us continue to make incremental improvements in our inventory turns.

And when do you envision the restated financials being available?

Well, first quarter of next year, in our June quarter is when we will adopt the standards and -- and so, we will at that time, we will restate results from 9 and 8 and you will see it reflected in our P&L. I think, going forward we will talk about both GAAP EPS and cash EPS to help people compare our numbers to others who don't have converts in their capital structure. Now some of our competitors do have converts and they will probably be doing the same thing.

Is it your expectation First Call consensus will move to a GAAP number or how are you thinking about that?

I don't know. I -- it is -- nobody has adopted it yet. I think that the first quarter of this year, is the first time that calendar companies will be adopting it so we will -- what -- how The Street responds to that, that the people and the analysts that I have talked to say that we will probably be looking at both.

Okay. That's great. Thank you,.

Before we proceed to our next question, ladies and gentlemen, as a reminder to register for a question please press the 1 followed by the 4. And our next question comes from the line of Larry Marsh from Barclays Capital.

(Inaudible) Thank you, for the update. Just one clarification then on -- further elaboration, for you Dave Bronson, on the change in reflecting non-cash interest expense. Put in context what -- what are the implicit interest rate assumption you would have to make to come up with that, what ever it is, 10 million this year and 7.7 million next year and compared to what your actual rate is.

Great question. On our old convert our coupon rate is 2.25 and the implied interest rate at the time that we issued that in 2004 I think is 6.25%.

Okay.

Sorry, I am being corrected, 6.75 on that.

So that is the assumption you're using to readjust your numbers as you provide today.

That's right.

So it is a -- roughly 400 basis points spread.

Yes, on the new convert that we issued this past summer, which, by the way, will be the only one that will affect us going forward is the coupon rate is 3 1/8 and I think the implied interest rate that will be used that we will be using rate is 8.25.

Right, so that would start to impact your fiscal '09 numbers?

The new convert will impact our 10 going forward. The reason the old convert and I don't want to get into (Inaudible) the reason for the old convert doesn't effect 10 is that you amortize that difference over the five years of the non-call. So really by the end of this year, really by March 15 we will be done with that and it won't have an impact going forward even if the bonds are still outstanding.

Got it, right. So the point is, The Streets has got to decided whether you were to raise debt at 8% or is that the right number or 31/2 is the right number or somewhere in between it sounds like.

Yes. Again, I -- it is hard for me to really agree with this. That this is better accounting. Theoretically what you would see is that if in fact you -- if you're going to have a higher interest rate on the debt then you would also have less shares. But that's not the way the new accounting works.

I see, yes. That makes -- makes sense on -- because you sort of think about for guidance, your three year guidance range is based on the general assumptions so under this new number it will be a lot different. And then, since really in my view not a reflection of your of you missing your targets but a reflection of how you are having to account for this converting to the new rules. So thanks for the elaboration. Any flu vaccine in the quarter?

We did. I think we said we would get $0.1 to $0.2 of impact of EPS in the flu and and we had one in Q2. And I think that it is just under $0.2 for the full year.

Okay. So I know that you have said -- I know last quarter you gave us a $1.2 million in revs, at least it was broken out in the Q, I think your goal was to get to 2 million doses this year so it sounds like you met that target?

Just under.

Okay, all right. Two other thing, if I could. I -- it sounds like, for Gary, I know the analysts day you ran through some of the goals, Dave you talked about as well, Select , your target was to grow that 20%, it sounds like that is definitely ahead of plan. I think drug use at 15 to 20% I -- my guess is that is a little low. And the lab equipment and diagnostic up 2 to 3%. Just confirm where you are versus those

Well, I got one more quarter. But you know, lab equipment and lab diagnostics are probably be in line, I think disposables will be a little less than we expected. Because of the economy. And -- and yet, I don't know -- what will be in the fourth quarter. On Select -- are we a little behind? Yes, we're just a smidge behind on Select. And that I would think relate to the disposables being done on the physician side also, so it is very -- I think our forecast or our goal for the year is very, very achievable. I think we're going to be plus or minus on each of those categories and that is kind of what you expect every year that some things do a little better than others. We anticipate a downturn, we didn't see the banking side collapse so that kind of through a monkey wrench into things. And for next year we're going through our planning process not assuming we're changing our expectations. The process has started and I am sure next year I will be saying the same thing. I will have things that are ahead or behind what I tell you in May.

Yes, that's fair. And just -- again, thanks for the clarification on the quarter but just sort of look at what I would define revenue per selling a day was bumping a long to a high in the mid-to-high single-digits. Obviously this quarter is a little less than 3%. And so as you think about the fourth quarter, I know you're not trying to guide to a particular number, but, if, from the standpoint of ballpark, do you think its that sort of that kind of that 2 to 3% range in your mind, Dave, or is it going to be back into your view kind of mid single-digit physician market?

I think December was an anomaly, I think the last two weeks were unusual. I think three of those four days that we got were wasted.

Yes.

Because of just the way things fell. I haven't gone through -- February and March, my guess is my estimate and my expectations and my thought processes, that is why I made the call, the statement on the call that, that Monday in January had been busy, was that I think December was an anomaly so it couldn't be at that level if that was the case. It would have to be higher.

Okay, great. And just to be sure that the message is clear in my mind, in fewer by the day, by the way, basically you're saying, the fourth quarter results, based on your guidance would be down $0.1 to $0.3 versus the year-ago March quarter. Obviously, four fewer selling days versus last year. But -- but, why would it be down so much for -- or is that just you confirming your already given guidance, giving you actually had a very strong earnings number this quarter.

We are confirming our full year guidance of 94 to $0.96.

Yes. It -- it is really a good question. Clearly you have fewer days. It doesn't impact us in a normal time when we have those or don't have those. I don't see the -- advantage in trying to guess is it going to be a penny or something better than what we thought or trying to peg a number. It is better to just stay where we are, keep our heads down, keep moving towards, what we are accomplishing with our customer and know that we have got four less days, know that it is a crazy world out there and just stay with our guidance and make everybody happy.

Got it. Makes sense. And finally just a quick elaboration for Gary on the QUINTET. You had mentioned 2,000 placements in the quarter and you mentioned an example where your sales person pulled back an account, with the introduction of that. Could -- are you sizing, how big of a product is this in terms of added selling price and why would a collaborate pull back their business with the QUINTET meter.

The -- that customer as an example had switched from us to a competitive meter. When our sales person went back in with our QUINTET, the customer saw the benefit to our meter and switched the glucose business back to us just some other business so really just the feature and benefit of the product, I can tell you that we're -- we expect and are pleased to see that the unit is selling at a national brand price. So our -- the -- the reagents and all that is not being sold at a discount but being sold on par with national brand manufacturers, so how big is it? I do not have long-term goals in front of me Larry. But we believe if we didn't have a comprehensive enough offering to really -- to -- meet the needs of this growing diabetes epidemic and thought that by adding our own brand we could not only help our customers we could improve, our -- control of our own destiny and profitability here so I believe this will be big. It is early on but significantly over 2,000 placements and the diabetes market itself is a $70 billion market and just in strips so how much of that can we get? Let's just say we had a really good start.

Larry I was hoping you would get a number out of him because the big fight in here is I think it is 10 times bigger than they are willing to commit to me, so I was hoping you would get a number.

I tried.

I hope things are better than that come on.

Well, Corless is pretty tough so I will give it my best shot.

Mr. Weiner there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Thank you, very much. We're very focused on our forecasted goals. In this world we live in we're very happy that there are customers find value in us and our people are very excited every day at what we're proposing and what we're doing. I feel very good about where we are going I believe we're going to perform very well for our customers, our people, and our share holders. Thank y'all very much for your time and look forward to reporting fourth quarter. Thank you.

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