麥卡遜 (MCK) 2009 Q4 法說會逐字稿

Telcom to the PSS World Medical's year-end 2009 conference call. We will conduct a question and answer session. (Operator Instructions) As a reminder, this conference call is being recorded Thursday, May 7, 2009.

I would not like to turn the conference over to Mr. Rob Weiner, Vice President Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Thank you for joining our fiscal year 2009 fourth quarter and year end conference call. Today on the call, our speakers, as usual, from last quarter are David Smith, Chairman and CEO; Gary Corless, Chief Operating Officer; and David Bronson, Executive Vice President and CFO. We issued our fiscal year 2009 press release last evening. If you need a copy, please contact us. The release and our financial workbook for fiscal year 2009 are available on our Website, also, at www.pssworldmedical.com. The financial workbook contains GAAP and non-GAAP financial measures that provide much greater detail into our businesses.

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 facts. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from what is expressed or forecasted today. For a list and descriptions of certain of these risks and uncertainties, we refer you to the forward-looking statement disclosure 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, from the the investor relations section of our Website or from us in investor relations.

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. The Company also wishes to only caution listeners that it undertakes no duty or is under no obligation to update or revise any forward-looking statements.

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 their related GAAP in accordance with SEC rules. You'll find reconciliation charts at the end of our financial workbook and in our Form 8-K, submitted to the SEC. Thank you.

Let me take a moment now to alert our listeners to upcoming investor events, where our management team will be meeting with investors and making formal presentations. On Tuesday, May 19 we'll be hosting our annual investor day at NASDAQ market site's facility located in Times Square in New York. Please contact us here if you're interested in attending this event. Additionally, we plan on attending the Goldman Sachs 30th Annual Global Healthcare Conference in New York and the William Blair 29th Annual Growth Stock Conference in Chicago on June 9 and June 10, respectively. We also plan presenting at the Jefferies Conference, the Annual Healthcare Conference in New York on June 17.

For our call today, we will follow our formal remarks by a Q&A session that's prompted by the operator. I'm now pleased to turn the call over to David Smith, PSS World Medical's Chairman of the Board and CEO.

Good morning. Thank you for joining our year end call. And we look forward to seeing you again on May 19 in New York for investor day. I am compelled to start this call with a thank you and congratulations to our officer leadership teams, field leadership teams, sales, operations and shared service teams. You performed masterfully, serving our customers, each other and shareholders. Thank you. We're proud to have accomplished our fiscal year 2009 goals, when so many others have not. But more importantly, to have done so; investing in the future, improving customer satisfaction, creating exciting new programs, improving the trust and culture of the Company, while not sacrificing any of our principals and commitments.

John F. Kennedy once told his Cabinet, the Chinese word for crisis has two characters. The first represents danger and the second opportunity. This crisis was economic. However, the danger was more than any of us needed to see or experience in a lifetime. But for the Company, if the crisis had to happen, it occurred at a very good time. We already believed the economy was in trouble and customers would be under intense pressure. Our original strategic plan contemplated economic hardships and was built on strategies to improve our customers' health, create innovative solutions and drive efficiencies and increase productivity. The strongest head winds were evident and timed accidentally but perfectly with our strategic planning process.

We had the time to recalibrate for the economy, identify and invest in new solutions, plus engineer new and improved efficiencies and cost savings. All this, while our competitors have fired thousands of employees, lost focus and deteriorated the morale, trust and confidence of their people or reduced services and offerings for their customers. We have been moving forward. We will aggressively attack now. Attack our customers and their customers' biggest problems with new solutions at a time when competitors are less able to respond.

It took us time. But we now see, feel and believe confidently in this new opportunity and more importantly, in our execution of the plan to win. And win in a way that strengthens the trust, culture and performance of this Company for our customers, each other and shareholders. The net result is that we beat year one. We are reconfirming year two of our three-year business plan. And year two goals for EPS are $1.13 to $1.17 or about 20% growth in earnings. Today, Gary Corless will share some examples of what is working and David Bronson will review our financial results, after I make a few comments here on the year.

We finished 2009 with $0.96 of EPS, driven by stronger than planned momentum and traction in margins and balance sheet discipline, producing record cash flows. The physician business experienced some head winds with the decline of same day sales of 2% in the quarter and growth for the year of about 4%. Without two items the business would have seen about 2% growth. First, about $8 million of flu test kits less were sold this year than last. There was little to no flu this last season. Second, there was $11 million of equipment sales that were delayed or cancelled until customers could get a better feel for the economy.

Now, for April, the physician business turned back to growth. This April grew compared to last April and last April was part of a very good growth quarter. For the month of May, which for us began on April 27, we expect the H1N1 flu bug to have a short but positive impact on revenues. We have seen a flurry of sales in masks, gloves, hand sanitizers and flu test kits. We have pandemic inventory stockpiles and have been able to fill all customer orders but turned down nontraditional orders from Mexico that would have depleted traditional customer needs. So regardless, with or without H1N1, the physician business has turned to growth.

For the year, the physician business had a record 15,000 customer sign ups for our e-commerce platforms, bringing the total to 38,000 e-commerce physician customer accounts. 40% of the physician revenue came from e-commerce in the quarter. This progress gives me, personally, great confidence in the availability of customer facing time and bandwidth that our sales force has to provide solutions to our customers and attack our competition. If there were economic head winds, the elder care business sliced through them like a hot knife through butter. They had 10% same day sales in the quarter and 8% for the year. Home care now represents 35% of revenues and is growing the fastest, 22% same day sales growth in the quarter and 15% for the year.

Elder care Select and specialty brand sales grew 31% in the quarter, with heavy growth in new products like the Quintet blood glucose monitor. We launched this product in September and already, 80% of the sales force is successfully selling the product and most of these sales are new sales and not conversions. For both businesses, our brands hit a high water mark and totaled 15% of revenue. We have many new products again for this new year, including higher margin and more complex product launches. For elder care, we are confident in the alignment of our solutions and programs to the needs of this market, including expected potential changes in reimbursement. So now, before I blabber on too long, let me turn the call over to Gary Corless.

Thank you, Dave. While the economy is causing challenges for many of our healthcare providers, they are not entirely new challenges. They are, in fact, in effect another layer of problems they and we are very familiar with. As we have told anyone and everyone that will listen, for the past three or four years, doctors and particularly primary care providers have been facing real challenges to their businesses. They have increasing needs for solutions that will help them improve their care and their financial position. Our offering will help them do that by expanding their ancillary services, controlling their costs and increasing their efficiencies. That is why this environment positions us well to help our customers and those customers currently with competitors that do not have the necessary solutions to get them through these challenging times.

Here are a few real examples of what I'm talking about. Last week, I was making customer calls with one of our sales reps, Jennifer [Avanda] in south Florida. I found that the best way to see how things really work or don't is through unfiltered direct customer feedback. Over and over I witnessed a continued shift in customers' willingness to try any and all of our brands, Select, consult, et cetera. In fact, when customer Dr. Jose [Chemoro's] year end chemistry analyzer went down, our rep Jennifer unplugged it, replaced it with our PSS brand instrument, in-serviced it and walked out. No questions asked. The quality rightfully assumed.

Another example is in Texas, where customer Sandy Pearson from Complete Healthcare, recently agreed to a trial of a few of our own brand products. And was so pleased, she now writes sub whatever you can to Select products at the bottom of our orders. The reality is that physician offices are busier than ever, doing more with less and therefore, depending on our rep and our brands even more. These examples help explain the 14% growth in our brands in Q4. Ancillary services continue to be an important area of opportunity for our physicians. A good example as a single doctor oncologist from Central Florida Care Center, who has been working harder and harder for years trying to stay ahead but to no avail. Our rep, Ron Cox, was able to help him improve patient care and the practice's financial position through new ancillary services that enable him to insource testing, he had been sourcing, chemistry, hematology, immunoassay. In a sense, a full lab.

As for the importance of running an efficient healthcare practice, I'll point to you customer Cynthia Steen, registered nurse and Clinical Director of Carolina Asthma and Allergy. Who thanks us for making the ordering of supplies for her eight offices manageable. She claims that our e-commerce solution, MyPSS, has made them more effective and more efficient. Similar experiences have led to over 40% of our revenues coming in through e-commerce in the month of March.

Lastly, Dr. [Rashat] of Salt Lake City, is a strong example of the necessity to have real HIT solutions built for the small private practitioner. Dr. Rashat was using a local billing company. It took him up to five months to get paid and he got very poor information reporting. After consulting with his PSS rep and adopting our Athena health solution, he stated, "Thank you for bringing Athena health. It is the best business decision I have made in 10 years." He, along with other 165 physicians, adopted our Athena health solution in Q4.

Let's talk Gulf South. Gulf South's current double digit growth is due to the past several years of our organization's commitment to building a comprehensive and differentiated offering for regional and independent nursing homes, as well as home care. This includes proprietary products, programs, technology and services. Our people and our customers' enthusiasm for our offering shows in the results. A strong contributor to Gulf South's overall Q4 growth was our 22% growth in home care. This in turn, was driven by 28% growth in home health agencies and 20% in hospice. A good example of how we achieved this growth is a decision made by a new customer in cental Wisconsin. Community Care decided to purchase from Gulf South once sales rep Steve [Wante] presented our core home care program that helps them achieve improved clinical and financial outcomes.

And another is Melissa Smith, Gulf South's rookie rep, who picked up Craven County Home Health after showing them the value of our patient home delivery program, our Gulf South online technology and our answers program that rewards them for achieving efficiencies. Gulf South rep Brian [Stagal] sold Albemarle Home Care on the value of our patient home delivery and our technology to secure this new business for Gulf South. This account had been a longstanding and loyal account of a strong regional distributor.

Hospice customers are reacting positively to our offering as well. As evidenced by new customer, Crossroad Hospice's, decision to switch to Gulf South when sales rep Mike [Sherry] showed them the value of our hospice formulary, our own brand of products, Select, Nightingale, et cetera and delivery service via our own trucks. Our skilled nursing facility business growth of 10% has been strengthened by our focus on the breadth and equality of our own brands. This is the reason that after a recent evaluation period, one of our largest skilled nursing facility customers Care One, chose our gauze, irrigation kits and respiratory plastics over national manufacturer brands. They are now converting 67 homes to these brands. Examples like these drove over 31% growth of our brands in Q4.

Lastly, it would be a miss not to share the defensive power of our offering. As others try and reach our customers, they bump up against the years of our commitment to strengthen them. Sales rep Paul [Bombaski] recently utilized our momentum program to defend his account in Nottingham Village from a price attack by a competitor. The strength of the program changed the customer's focused to the value of our complete offering. But at Gulf South or PSS, our PSS World Medical offering has become increasingly more of a necessity for healthcare providers. And therefore, increasingly valuable to our people and those that put their confidence in us. Thank you. And let me turn the call over to David Bronson.

Thank you, Gary and good morning, everyone. This morning, I'll make a few comments on our results for Q4 and we'll spend the rest of the time recapping our full year performance. First, though, let me echo the sentiments you've already heard from Dave and Gary. We've just completed our business planning process for fiscal years '10 through '12 and we're looking forward to sharing the details of those plans with you at our investor day. But I can't think of a time in my tenure here at PSS when we've been better positioned from having the right business strategies, plenty of capital to execute those strategies and a highly focused and motivated team of people, with a well developed culture of execution. I think all of these are reflected and validated in the highlights for the quarter and the full year.

For Q4, consolidated revenues of $470 million were down just under 5% from prior year, with four fewer billing days. On a per day basis, revenues grew by 1.5%. With a decline of 2% in the physician business, offset by an increase of 10.3% in per day revenues in elder care. The bright spots for the quarter, as you've already heard, were the growth of our Select, our private label brands of 14% in the physician business and 31% in elder care. Our continued success in driving this strategy in our markets, along with very good execution of buy side and vendor relations programs, drove a 30 basis point improvement in gross margin from prior year. Fourth quarter per day growth in nursing home business was 10%, with 22% for home care revenues.

On the down side, the traditional flu season was very light. Sales of diagnostic flu kits were below prior year. Also, equipment sales in the quarter were down due to a combination of less demand for cosmetic lasers and a slowdown of a replacement of laboratory diagnostic equipment, both areas that are heavily influenced by the economy. Operationally, as we said in the press release, we are very pleased with the momentum of our business simplification and lean strategies, which drove historically low cost to deliver results in both business these quarter. The number and the quality of the ideas, the initiatives and the enthusiasm related to these efforts is, I think, a reflection of the strength of our culture and of our field and shared services leadership teams. This momentum resulted in improved operating margin for both divisions and gives us added confidence in achieving the future goals that we've outlined.

During the quarter, holders of the 2004 convertible notes, put back essentially the entire issue to us, as expected. The outlay of about $150 million of cash to redeem that debt was offset, to a degree, with much better than expected operational cash flow in the quarter of over $44 million. Leaving us with a strong cash position going into the new year. We also repurchased 1.2 million shares during the quarter, using about $17 million to do that. There really were no other unusual items effecting either the earnings statement or the balance sheet for the quarter. Net income and earnings per share comparisons to prior year are, however, impacted by last year's sale in the fourth quarter of a portion of our stake in Athena Health. The after tax gain on that transaction was about $2.8 million or $0.04 a share.

Now, let me summarize what I think are some important takeaways for fiscal year 2009. And I'll do this in the context of the key business strategies we've been pursuing for some time now. The strategies that drive revenue growth, operating margin expansion and cash flows and return on committed capital. Gary has talked already about a lot of the successes we're seeing in our go to market strategies. I'll just recap some full year performance metrics in this area. Overall revenue growth for the year was 5.2%, with physician growing 3.7% and elder care growing 8.7%.

Despite a slow down in the overall market growth due to the current economic environment, we continued to grow revenues and to leverage that growth. On a little under $100 million of new revenues, we grew operating income by almost $9 million or about 9% drop through. And that's very good performance in the first year of a three-year plan, which is the year that we make our investments in long-term initiatives. We continue to see opportunity to leverage both our distribution infrastructure, as well as our shared services platforms.

Sourcing is another leg of our margin expansion strategy. For the year, growth in sales of Select products was just over 20% and now represents over 15% of total revenues. Select sales grew by 15.2% in physician and 28% for elder care. New products continue to be added, customer acceptance continues to gain momentum, as you heard Gary say. And I can tell you that the overall profit contribution from our global sourcing efforts exceeded our internal plans for the year.

We also made significant strides with improving efficiencies with branded manufacturers this year. We tracked performance in this area with a number of metrics such as freight costs, purchasing efficiencies, inventory adjustments, all of which improved over prior year. One of the most important metrics is in the area of rebates and contracts. This is a complicated set of processes that can result in significant profit leakage if not executed well. This year, we saw 65% reduction in lost rebates or rebates denied. This is the result of investments we have made in leadership, training and technology. These improvements remove a potentially big area of friction between us and our suppliers, allowing us to spend our time together with them, in much more productive conversations about taking their products successfully to market.

I've already talked about the momentum in our business simplification, our lean strategy, as represented by historically low costs to deliver results in both divisions. There's not time today to go into a lot of detail about all the specific programs that are moving forward in this area. And we'll do a lot more of that at our investor day. The net result is that the physician business improved operating margin by almost 1 full percentage point over the prior year. And elder care operating margin improved by almost 0.5 point. Consolidated operating margin improved by 19 basis points to 5.2%. Operating cash flow for fiscal 2009 came in at just under $90 million, far exceeding our goal of $73 million to $77 million.

I'm particularly pleased with our performance here. which reflects very good management of working capital in fast changing market conditions. In markets where the overall creditworthiness of customers is increasingly challenged, we improved overall DSO's by more than one full day, while continuing grow revenues faster than our competitors. Reflecting the value our customers see in our overall product and service offerings. Bad debt write-offs were favorable to plan and to prior year and our aging metrics improved as well. This is some really impressive execution by both divisions in this area. Capital spending for FY '09 came in at just under $27 million, in line with our goal for the year. And about 2/3 of this went towards IT projects that will expand or improve our distribution technology platform, continuing drive our business simplification initiatives.

Share repurchases for FY '09 totaled 3.4 million shares, including 1.2 million shares in Q4. The Q4 activity completed the existing share repurchase authorization and the Board has now authorized another 5% repurchase program going forward. In closing, it has been a year that none of us is likely to forget, with unprecedented upheaval in the financial markets and the overall economy. Head winds continue but this management team, to a person, believes more than ever, that our core strategies are exactly what our customers need. And that we will continue to perform and achieve our goals. Thank you. And now, we'll turn the time over to Rob for Q&A. Operator, if you could queue people up for questions and we'll take them as they queue.

(Operator instructions). Our first question from the line of Randall Stanicky from Goldman Sachs. Please proceed with your question.

Good morning. It's Alex Beckler for Randall actually. A couple of clarifications. First on the expenses, it seems like for full year '09, it seems like the corporate expense line item is up 50% for the year, with segment margins meaningfully up on both segments. So I'm just curious if there were any expenses in '09 that were moved from the segment to the corporate line?

We didn't have any reclassifications. I will remind you, Alex, that last year, we had a fairly large favorable item in terms of a bonus -- a decrease in our bonus accruals for last year, which was the third year of our three-year plan. And also, this year is the first year of our new three-year plan. A year that we historically make investments in some of the new initiatives that drive returns in the out years. So, I think it is a combination of both of those things. I'll tell that you expenses came in booked favorable to our internal expectations and also, that our overall operating margin improved.

Got it. And so, the $10 million corporate expense in the quarter, should we expect that to trend down over the course of 2010?

It's a little bit impacted by the number of days in the quarter but I think it's a decent run rate, yes.

Okay. And final clarification. Should we assume that your fiscal 2011 guidance remains intact or should we wait until the investor day for clarification here?

Yes, all we're addressing is this next fiscal year. Clearly, the management has the same three-year business plan in mind but we feel like going out one year is the only thing credible that we could do right now. And we'll flush out a lot of that kind of stuff at the May 19 investor day.

Fair enough. Thank you.

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

Hi, thanks. It's Atif Rahim in for Lisa. Dave, you had mentioned that you've seen an uptick in the physician business starting April. Could you provide any color on where that's coming from? Would it be the equipment sales, which had, I think, it was an $11 million or so in sales that was delayed or cancelled? Do you see an uptick in that or was it more related to the flu issues or something else?

Okay. Just to reiterate. April ended on actually the 24 and we begin May on the 27. And the flu, H1N1, really started at the end of April and the beginning of May. So any impact from H1N1 would be in May and not April. And what I said in April, is that we've turned to growth. And what I would tell you is we're seeing, across-the-board things, just activity. We're seeing positive reaction to our programs. We're seeing our sales force positively react to our programs. People here really like what we're doing. And it's all focused on solving problems for the customer.

And as far as getting into any granularity we go through a process here that flushes out all of our numbers. And we haven't been through that process. So I don't feel comfortable trying to articulate a particular area of growth. But what I feel comfortable with telling you is that it's very important for me to see the turn. I didn't know what month it would happen. It happened. And our people are very fired up by our programs and we're making progress.

Okay. And then, on the guidance that you've provided for fiscal 2010, just to clarify, how does the convertible accounting play into that? Is that factored into your guidance given the fact the vast majority of the '04 convert was put back to you?

I'll just reiterate what I said, I think on the last call, which was -- first of all, to specifically answer your question, the $1.13 to $1.17 does not contemplate the new convertible accounting. We will implement that with our first quarter results. That's the timing for us for us to implement and adopt that accounting. And what we've said in the past is that that convertible accounting would have about an $0.08 impact in FY '10. And our FY '09 would be restated and it would have about $0.11 impact in FY '09.

So as strange as it is, the accounting will actually speed up the appearance of our growth and we'll guide people to the real growth that we're experiencing, which we believe will be about 20% for this upcoming year.

Okay. Thanks. And finally, could you clarify any impact from flu benefit -- I'm sorry from the fuel expenses going down? Usually you talk about that but there's no mention this quarter?

It was not a material impact. As you'll recall, when the fuel prices changed, one of the things that changes is our surcharges as well. And so, the surcharges have come down and gone away with the fuel coming down. And also, it did not have a material impact on -- relative to our targets for the year.

Okay. Thank you very much .

And our next question come from the line of Richard Close from Jefferies. Please proceed with your question.

Yes, on the rebate stat that you gave, I was just curious, in terms of the 65% reduction in lost rebates, how much more can you go on that? What are your thoughts on 2010 with respect to that area?

We're at a historical low level now for lost rebates. It's a pretty small number, even if we didn't lose any of this it wouldn't have a super material impact on us going forward. I think the more important thing is that this now very much facilitates better conversations and better interactions and relationships with our vendors. And we made a fairly significant investment in training and in technology and people to get to where we're at. We will be rolling out some new technology this year, which will automate some of those processes. But it also significantly improves our sales rep productivity, in being able to have the right costs and the right pricing, according to the most recent contract with those customers. So, this is good in a lot of ways. And essentially, we've gotten rid of a problem.

Okay. And then, with respect to the Select, nice performance for the year, where do you see Select going in the new fiscal year? Obviously, it's a great environment to have that offering. And just was curious whether you see the growth that you achieved in the fourth quarter continuing throughout 2010?

Actually, it's a really good question. I want you to ask me on May 19 because I will lay it out for you. But suffice it to say, we expect it to continue to grow. We've got a lot of new products and we've got some launches of some pretty interesting products this next year. Some ones that we launched this last year like the Quintet blood glucose is doing well. So, we've got some new, more complex, more margin related products, as well as some basic standard products that will help our customer. So, I'd say, come, on the 19th and we'll lay it out for you but I would expect it to continue to grow.

Okay. And then, final question here would be on home health. Obviously, doing really well there. There's some questions in terms of reimbursement with the budget coming out here soon and being debated. Are you hearing any feedback from your customers in that area, in terms of overly concerned and how that's going to impact them? And trying to gauge what the potential impact is to you guys, if there's major changes on the reimbursement front?

This is Gary Corless. I want to answer your question. In talking with the customers, I can tell you that we have had a number of those conversations. Not a ton of them but we have had those conversations. And not to try to turn everything into a positive but honestly, it walks us into the very solutions that we have built for them, so our core formularies. And so, the things we have there really would help them in any environment but I think are even more important to them if they foresee a change in their reimbursements. So, it certainly hasn't stopped them from buying, as you can tell from the results. I think it plays to our strategy well.

Okay. Thank you very much.

And our next question is from the line of John Kreger from William Blair. Please proceed with your question.

Hi, thanks very much. A couple of questions on the physician business. David, could you just give us a bit more clarity about what your customers saw in recent months? When did the slow down really seem to kick in? And did that show up in the form of fewer patient visits or perhaps some other sort of trade down? And just again to be clear, so the rebound, did you really see that in the month of April?

Okay. We've all participated in the loss of about $5 trillion. Between our our mortgages -- I mean our value of our homes, our 401-K's and stock accounts and all that. So we all have been cutting back, whether it's going to different restaurants, not buying dessert, going to different places for vacation, et cetera. And that translated in the physician office to, elective procedures were down. Plastic surgeries were down. Even preventative maintenance was down. So patients looked at every way they could to try to save for a period of time until they figured out what was going on in the economy and the world.

So you could almost look at the savings rate going from negative 2% a couple of years ago to 6% or 7% today. Less effected by unemployment than the savings rate because unemployment has a way of activating some of our utilization rather than declining it. So, what I would say is, in November, we saw a big slow down. We were doing fine in October and then all of a sudden, in November, it -- you could just see everything falling off. So we didn't lose share. Our customers lost utilization and they bought across-the-board. And then, I would tell you in pediatrician accounts, they're just as busy as they ever were because everybody takes their kids. In parts of Florida and other places where it's all Medicare, it's just as busy as it ever was because nothing has changed. It's for us in the middle, that were bread winners of our families trying to save money and not take care of ourselves while we figured out what the economy held and try to save some money.

So in April, understand, that we go through a process here to really dig through our numbers before we put them out. So I'm a little bit hesitant to give any granularity but what I would tell you is that we saw utilization increase at the same time, we rolled out all of our new programs. And our sales people are pretty fired up. Our operating teams are fired up. People are doing very well here and feel good about the direction of the business. So some of it is the attitude they carry with them. Some of it is the utilization of the customer. And some of it is new programs that we've launched. But we did see the turn in April. I didn't know what month it was happen in but we went from negative to positive.

Great. Thanks. A second unrelated question, what's your thinking about acquisitions in this environment? I'm guessing asset values and prices have come down a bit.

John, we continue to have a pretty full pipeline. The valuation and expectations have not come down as fast as you might think but they are slowly coming down. I think that you'll see us get some transactions done in the next few months and certainly the interest is there. A lot of our smaller competitors are feeling a lot of pressure. And they are looking for exit strategies and we're trying to pick the best ones.

Great. And then lastly, Dave, any changes to your bad debt assumptions in the quarter?

You mean going forward?

No. The your allowance in the March quarter.

No, no changes in the methodology. As I said, our aging buckets look sort of better than ever. Our bad debt write-offs are way down. We continued to monitor the creditworthiness of our customers very carefully, both on the physician side and on the elder care side. But we don't have any justification or rationale to change any of our accounting methodologies around that.

Great. Thanks.

And our next question is from the line of Robert Willoughby from Bank of America Merrill Lynch. Please proceed with your question.

Thank you. David, any plans, you may have mentioned it, for the short-term debt on the balance sheet, $50 million or so, will there be any effort to pay that out or is that something we will just see you term out? And then secondarily, just looking at the share gains in the home care business, quite impressive here, where do you see the share coming from? Are you doing business with any of the larger chains at this point? And when do you realistically expect to see some sort of competitive response there?

I'll answer the debt question and I'll let Dave answer the home care question. On the debt, that was a swap we did to lock in some interest rates about two years ago. I think there's six months left on that. It's with our bank group. And so it will get -- when it expires, it will go away.

Okay.

Gary, why don't you answer where the share is coming from?

I would say that there really is a mix. Certainly, we're getting some from some of our larger competitors. But we're also seeing a willingness for people to look at new solutions that wasn't there before. So as I mentioned, one of the examples coming from a very loyal, long standing customer of a very strong regional competitor in the northeast, open to switch to Gulf South because of the program. So we do -- we have a mix of customers, from small to relatively large and some of the larger customers are growing themselves. So, it's really a pretty broad-based mix of growth and we like that. And it also actually reduces the threat of a competitive response. So it's growing the way we like it.

Bob, does that hit it?

Yes to some extent. You've seen Walgreens rolling up some of the smaller infusion therapy providers? Do they emerge as a competitor for you or -- in any way shape or form?

We're kind of in the not so sexy area of the business. We actually sell gauze and those kind of products. And what I would tell you is, if you had to plot out on a graph what the sexiest, most highly reimbursed or what the biggest growth reimbursement potential service or provider area was; you wouldn't pick our area. So we are grinding it out in the least sexiest part of the market. But the most uncentralized, unconsolidated, with the customer that needs the most logistical and systems and formulary and just everything help. And I don't see that customer going away. I see regions and nationals do grow and consolidate. I see a the lot of runway here for the next five to 10 years because of the government forcing patients into this field and the need of the provider. So, you can't look at respiratory or infusion or those kind of consolidation plays and assimilate that to our strategy and our customer and what we do for our customers. It just doesn't it doesn't quite fit.

And I would think then, given the opportunity, Dave, is this the crux of the acquisition focus? It would seem to me you're in an open field here then.

Yes, if we're going to grow 20% or something like that, I kind of have a hard time buying it, unless we see a company that's just really solid from a quality of the rep or quality of service or something that we don't have. But right now, our solutions are pretty innovative and our people are pretty excited by it. So, if we need sales people, should we grow them or buy them? If we need a service, should we grow it or buy it? And those are the kind of decisions in the home care area that we're looking at. And we're taking share from a whole bunch of people, not just one. So it's pretty wide open. And I would say the deal has got to be the right deal from a brand, from a service, from a value, from extending our strategic plan faster than we can get there and the kind of people that we want to bring on the Company.

That's great. Thank you.

(Operator instructions) And our next question comes from the line of John Ransom from Raymond James and Associates. Please proceed with your question.

Hi, good morning. I saw you sell Select was 15%. What is the long-term ceiling on Select as a percent of your total mix?

Well, what we've talked about in the past is 25%, is what we think we will accomplish and that's based on the complexity of other products that we sell, the strategic relationships we have with vendor partners and the R&D effort in a product, the brand recognition, those kind of things. So we went through a filter. We went through a look at the strategic relationships we have and the complexity of products and we identified about 25% of our COGS that would eventually be in our own brand or specialty brands. And so we're just constantly making progress towards that goal. If we update that, it will be on the 19th, as to what that overall goal is, but t I think that's a pretty solid objective right now.

Okay. And second question was, just given the whole change in Asia from inflation to deflation, and to a lot of lot of manufacturing overcapacity, have you seen anything change on the cost curve there?

Well, I'll tell what you, one of the biggest change is the container costs. Kevin, what's that gone from?

We've seen about a 40% reduction in the bunker fuel and that's a pretty significant portion of that overall cost.

So, it's gone from like 4,000 to 3,000 containers?

Yes, that's about right.

So container costs have come down. Raw material costs, like plastic, resins and things like that have come down. We're always six months to nine months behind from the standpoint of, when prices will go up, we've got six to nine months of orders in the system, production going on, containers on the water, inventory in our RDC's, inventory in our branches kind of thing. And then, when the prices go down, we're the same amount of time behind from the standpoint when that starts flowing in. So, we're just starting to see us work through inventories that are -- the new inventory coming in is cheaper than the one we were selling. So, it's just a cycle and we're seeing now reduction in pricing.

So, is it material then? We should see some tangible margin gains over the next couple of quarters?

May 19th, brother. We'll walk you through it.

You're really trying to get people to that meeting, aren't you?

Absolutely. We are a sales company, man. We want you to hear the whole story before you make a decision.

And my last question, this is a softer question. But as you have worked through your revenue cycle, joint venture, is there anything you know now about how to position that and sell it, that you didn't know 18 months ago? And do you think -- is there a potential as you -- as time moves on that there might be a step function change or should we just look at that to be more of a linear progress?

Okay. We are kind of going through that step process right now. Momentum is really picking up, where both organizations have been learning from each other. We clearly, have a few things that we need. We need decision makers in the field with our people in order to make the next kind of leap but I think we've made great progress to this point. I think the product is a very good product. I don't think we'll get to the next step without a person in the field that's capable of making a decision but I think that progress is being made.

The question is, it's really hard to get in front of doctors. You see these four detailers sitting in the lobby and they might get five minutes with a doctor a year and they get screened by the nurses. Given where you are on the food chain how do you break through to that level and how do you have credibility with that sale? And are you doing anything different to try to engineer your way in front of the decision maker that's different than just kind of the feet on the street and keep slogging away?

Well, fortunately, we get to walk by that person that's sitting and dinging on the bell and waiting to get in the back. We either come in the back door or just walk through the front door, as we say hello to the nurse or the office attendant at the front. Because we service that whole account. We've been taking care of that account for 10 years or 15 years or two years. And everything they want or need, we take care of them in a no hassle, service oriented way. And we've been building through disease state management tools, solutions that the doctor has never seen before.

And so, they want to hear what we have to say. It's not just that we're taking care of their needs, they actually are interested in what we have new or what we have to say today. So for us to bring up the topic of, "you're not making as much money as you should," we have to actually step back because they talk to us for 30 minutes. And we have to listen for awhile before we start talking to them about potential solutions. So our problem is getting them to see that this product is better than that product, at a time where the rules aren't even written for the new EMR reimbursement.

Right.

So, it's more about confusion from the government and new product, which product to pick, than it is from the topic and our ability to get in front of the decision maker and have a good conversation.

Well, I don't know if you saw this but Cardinal just had a headline out, they're going to offer the Allscripts electronic health record. They just announced that at 9:09 this morning.

Yes, we saw it.

Okay. All right thank you.

This is Gary. I would say that, in order to answer this conversation, it certainly helps if you have a history of those higher end conversations with the physician prior to bringing up something like an EHR system. So the fact that we've talked to them about full laboratory immunoassay and chemistry and all of those different areas of their practice and ancillary services; sets us up well to then have a conversation. And say, "Let's talk about how you're doing in these areas of the business." If you've purely been selling gauze or doing the tonnage business of supplies, it certainly would make it more challenging to then walk in and have the credibility of that type of conversation.

Thank you.

Mr. Smith, there appears to be no further questions at this time. I'll turn the call back to you. Please continue with your presentation or closing remarks.

Thank you. I'd just like to end the call with a quote from Oliver Wendell Holmes. "Put not your trust in money but your money in trust." We believe we've earned and will continue to earn the trust of our customers, each other and our shareholders. We look forward to executing our plans and reporting to you the results. Thank you for today.

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