麥卡遜 (MCK) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the PSS World Medical fiscal 2010 third-quarter earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded Thursday, January 28, 2010.

I would now like to turn the conference over to Mr. Rob Weiner, Vice President of Investor Relations.

Thank you Frank. Good morning everyone. Thank you for joining our FY 2010 third-quarter call. Today on the call our speakers are David Smith, Chairman and CEO, Gary Corless, Chief Operating Officer and David Bronson, EVP and CFO. We issued our release last night for the third quarter. There is also a financial workbook on our website for the third quarter. It's at www.PSSWorldMedical.com. It provides greater insight into the businesses and contains GAAP and non-GAAP financial measures.

Now I will note that the Securities and Exchange Commission and state laws allow for the use of forward-looking statements which we will make during this phone call to provide listeners and investors with greater insight into our businesses and our future goals and expectations. The forward-looking statements we may make today and in the past involve a number of risks and uncertainties that could cause actual results of the company to differ materially from what is expressed or forecast. For a list of descriptions of certain of these risks and uncertainties we refer you to the forward-looking statement disclosures in yesterday's third quarter press release and to other information provided in our most recent Form 10-Q and other SEC filings, and 8-K filings that we make with the SEC. And they are available at the SEC, on our company website and directly from our investor relations department.

We may reference certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the related to GAAP measures in accordance with SEC rules. You will find these reconciliations in our financial workbook, again located in our investor relations section of the company's website and as filed on Form 8-Ks that we submit to the SEC.

For those of you listening to the call or webcast who may be interested in meeting with our team, our upcoming investor relations activities include investor meetings in Houston and Dallas, Texas in February and then a presentation of meetings in Orlando, Florida in March at the Raymond James healthcare conference. Please contact our IR department if you'd like to schedule a meeting with our team.

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. Please limit your questions on the first go around to allow time for others to pose their questions.

I'm now pleased to turn the call over to David Smith, PSS World Medical's Chairman of the Board and Chief Executive Officer. David?

Thank you Rob. Good morning. Our results are very good and we're proud of the team. We're ahead of plan and consistently demonstrating traction on our strategies and initiatives. We're positioned to achieve our original and revised objectives. The company's momentum is very strong and we continue to possess and execute the most unique and innovative programs in our markets.

Today we're in the middle of a strategic planning process for fiscal 2011 and look forward to investor day on May 27 in Chicago and Q4 results on May 12.

We believe our environment and market have stabilized, but with new realities. Unemployment remains high, credit tight, both of which are factors that impact utilization.

Physician offices have stabilized. Physicians are seeking solutions that help their businesses evolve. HIT and HITECH requirements are more defined. Physicians are searching for practical answers to automation that improve their efficiencies and patient outcomes. The MGMA confirms it is a top three concern for all practices along with costs and reimbursements. We are rolling out a very focused customer HIT education and service program. Athena has mobilized their forces with ours to launch this program.

We're also expanding and improving our own customer automation tools while adding to our menu new products for physicians who only choose to start with or add certain components as they began automation.

The skilled nursing facility customer market is stable with no real change. Our credit and collection quality is very good. The skilled nursing facility business, biggest issue after patient care and cost is adapting to new regulatory changes in care quality measures like the five star rating.

We have partnered with and are developing long-term relationships with service providers to expedite in facilities education and adoption in combination with our service offering. Our early initiatives for this business were focused on improving our own health in areas like credit quality, margins and contract administration, and the results show great progress.

Home care and hospice will continue to be in the crosshairs of reform because they are the fastest-growing segment of healthcare and its budget, regardless of the fact that it is the least expensive site for patient care. Home care and hospice providers are clearly looking for ways to adapt to future changes and our programs are positioned to help them do just that.

The biggest unknown in our markets was and still is healthcare reform. What form does it take, when does it happen or even if? Regardless of the outcome of that issue, we believe we understand the most important and consistent market fact for the last two years, today, and for the foreseeable future which is the clinical and business needs of our customer.

Our relentless focus on the customer's needs is the investment we're leveraging today for the customers' benefit in our results. Our customers are more open to new solutions. Our people are embracing our initiatives and challenging our original direction with new innovation and execution.

We represent a truly unique voice and approach in the market and our people are inspired by the mission. We see a long-term and productive runway in our current programs and we're genuinely excited by the strategy and these early results.

We have focused and executed on two major internal strategies this year -- lean and our health. Gross margins, operating costs and operating margin results are direct indicators of our success. This performance has created dry powder to invest and accelerate new internal programs and is funding extra resources to drive for our two external strategies, reach and strengthen. Both reach and strengthen are long-term transformational strategies.

For me personally, recently working through this planning process on these strategies, I had a few aha! moments that I believe we will facilitate maximum effort on existing customer solutions while clearing a path for new customers to use those same solutions and enjoy the benefits. In other words, these programs are good and it's very fertile ground for a whole new menu of solutions and runway.

The planning cycle has also brought great clarity on a topic of importance here, which is new products -- which ones to invest resources in and/or partner to develop and launch in concert with our solutions. These changes facilitate for us principles that will speed up the development to execution processes at the company. Both sets of internal and external strategies are long-term with solid runways of opportunity and are enabled by our passion to solve our customers' biggest problems.

Now, Gary Corless is going to give you some real world examples of reach and strengthen, and then Dave is going to review the financials and include the details of lean and our health, which are the four strategies we been talking about. Before I go to them I just want to close with this.

We're a company capable of turning on a dime. Our past investments in our own products, exclusives and customer solutions gave us the opportunity to protect our people and culture while they innovated new efficiencies and we developed new solutions and strategies. I'm very proud of the team, feel great about this year and excited for the future.

With that I'll turn it over to Gary Corless, Chief Operating Officer.

Thanks Dave. Let me start by saying that it's good to be needed, but it's better to be needed and prepared. Our customers' need to be strengthened has not diminished and our opportunity to bring new customers in this environment to PSS has not lessened. In fact, they have both grown. Therefore, our paths are clear.

As Dave said, we must reach and we must strengthen. Our team is motivated not because it's easy, but because we believe we're in a position to help more customers and to help customers more. I'll share a few recent examples of how our key initiatives are doing just that, first at PSS.

Our strategy to help more customers we call reach, an aggressive campaign used to combine strength of our unique offering and the industry's largest and best trained sales force to bring us new customers to help. Our aggressive reach focus brought 4574 brand-new customers to PSS in just the third quarter. An important early finding is that half of all the customers who give us just one try are continuing to order from PSS and that is very encouraging. We will continue to penetrate those accounts as well begin our focus on the other half.

Additionally, our profitability in our new accounts continues to improve as (inaudible) share the power of our full product offering. We've greatly surpassed our goal of 7000 new accounts for the year, and that has not in any way satisfied our hunger. In fact it has only made us hungrier.

A good example of the power of reach is PSS rep [Rene Torres] in San Antonio. He approached an allergy lab that had been with a competitor for over three years. The account was having difficulty getting the supplies they needed in a timely manner. Our unique service offering would be our advantage.

After must much persistence, Rene's reach paid off. The buyer, Amanda, agreed to give PSS a try and loved the service our model provides. As a result, Rene now has 100% of the business in their 50 clinics and has been providing new solutions to the practice such as our brand of products as well as our inventory management solution, SmartScan.

Another example is PSS rookie rep [Adam Feltz] out of the Carolinas. This example highlights the power of the uniqueness of PSS's product offering. Adam had been calling on this dermatology account, a six to eight doctor practice in Greenville, North Carolina and was getting nowhere.

Utilizing an innovative and exclusive new product, the ExiClip, an alternative to traditional skin biopsy punches and suturing, Adam got the attention of the physician assistant of the practice. The PA immediately walked Adam over to one of the doctors. They both loved the innovative new product and the all-important door had been opened. Those are a couple of good examples of helping more customers through reach.

Now let's look at how we help customers more through our strengthen initiative. We're working to reset the expectation of the distributor because it's to the customers' advantage first and our advantage second. Deepening the relationship by helping them improve care, improve efficiencies and improve their financial position is a win for all.

A good example of our commitment to strengthen is PSS rep [Troy Izquierdo] in North Florida. Troy and his leader were summoned to meet with one of his large cardiology customers. Cardiology practices as a whole are experiencing reimbursement decreases and the meeting was created with the intent to have PSS decrease their medical supply [practice].

When Troy walked into office, the doctor immediately said I'm getting hammered on reimbursement and I want a 30% discount on all my medical products. So what you have for me? Troy and his leader began by utilizing a new business tool, our customer business review. They addressed the mutual opportunity to help control costs utilizing our brands and alternative brands, but pointed out that that alone would not be enough.

They then began to share opportunities to increase practice efficiencies and improve clinical and business outcomes. By the end of the business review they had follow up for Athena Health's revenue cycle management solution and the chance to share some of our internal lean business practices. All of this then led to a conversation about a new 24 room expansion of his office. The next day Troy received an e-mail from the doctor thanking him for the time and looking forward to these solutions that PSS is presenting to his practice.

One more brief example of our ability to strengthen is [Mel Underwood] in Phoenix. Mel and his sales leader [Michael Bush] had a business review with East Valley Internal Medicine in Arizona. During the review they discussed exploring ways to improve patient care and financial outcomes. They discussed the benefits of in-sourcing their laboratory testing which led to the sale of an Alpha Wassermann chemistry analyzer and an Abbott CELL-DYN hematology instrument.

Now let's briefly cover what is going on at Gulf South. Unlike PSS who has been focused on reach and strengthen all year, Gulf South has just begun those initiatives. We started later because we were in the middle of another key initiative called our health, which is a focus on account profitability that requires the full attention of our sales force and is worth that investment.

Let's take a look at how reach is beginning. Although early on we're beginning to see positive results, a good indicator for us is the level of rep penetration. In other words, what percent of our sales force has begun to show positive results? At this point, over 60% of Gulf South reps have brought on new customers through our reach initiative. This is early and encouraging.

Our initial focus for reach is the skilled nursing facility customer and our approach is a little different than that of PSS. That is because the customer has different buying behavior than that of a physician office. A physician office will often give you a try, a foot in the door that you then work to leverage. An interested nursing home, however, will then begin an evaluation process of you as a supplier, therefore moving slower at first but then moving more business at once. We like what we see so far and we will continue to update you on our progress.

A good example of early reach success is that of Gulf South rep [William Stewart] in the Southeast. William was challenged by his leader to reach an account in Kentucky that seemed impossible. They were a very loyal customer to a competitor of ours. William had called into this account for three years with no luck at all. The reach initiative motivated him to try again.

This time he approached the facility with different questions identifying their needs for caregiver education and Part B reimbursement and applied our solution's momentum and program. The reach and strengthen program got him refocused and energized and we now have a new and happy customer.

Our strengthen initiative offers Gulf South the same opportunities that PSS had to help customers solve some of their biggest problems. Evidence of this is Gulf South [Becky Tucker's] experience in New England. This long-term care facility that takes care of special needs children and has a long history of purchasing from Gulf South. The facility consistently enjoyed a four or five star rating and one might think that they would not be good candidate for our Pathway Health Services solution. However, that was not the case.

After discussing with the administrator the importance of their five-star rating on their facility it became clear to both the advanced five star solution package would help them maintain their excellent rating. The fact that they could access the program through their membership in Gulf South's Momentum program was all the more rewarding. For this very successful customer, solving one of our biggest problems meant giving her peace of mind.

Another good strengthen example is [John Boudreaux] in Louisiana. John recently strengthened a customer using our Pathway Health Solutions for survey preparedness and response. His customer, a living center, had had a complaint survey conducted in their building. This then led to a full survey of their facility. It was devastating for the home. They were in dire need of help as they were being threatened with the loss of their Medicare license.

The administrator remembered a recent conversation he had with Gulf South rep John Boudreaux being able to help with such big problems. Within days two Pathway representatives were in the building. Over a three-day period of assessing needs and conducting a mock survey, they provided the customer with a much needed plan of correction. That is truly the essence of strengthen, helping customers solve their biggest problems and in turn changing the nature of competition.

In closing, I will tell you that our opportunity and responsibility to strengthen and reach new customers is real and the path is clear. We're both highly motivated and highly focused. Thank you, and I will now turn the call over to our CFO, Mister David Bronson.

Good morning everyone. This morning I would like to take a few minutes to review some of the highlights from our third-quarter then spend some time on updating you on two of our core business strategies. Gary and Dave both talked about reach and strengthen. I would like to do a lean update, which I have done before if you recall, and also mention one of our core strategies that we've talked a little bit less about this year, which is our health.

First, a solid and very satisfying quarter from a profitability standpoint and, as you've heard already, certainly from a strategic traction standpoint.

We did have five fewer days this quarter than Q3 of last year and we continue to operate in a lower growth market overall. Yet both of our businesses achieved our internal earnings goals and both had double-digit growth in operating income. The Physician Business had per day growth of 6.9% led by 31% growth in lab diagnostic products. We estimate the incremental sales associated with H1N1 products to be about $20 million for Q3, a little bit more than we expected.

Sales per day of our Select brands rose by 19%. Rx declined by 3% but gross margin grew as we continue to shift the mix towards generics. Equipment revenues were $31 million, about the same as Q2, but again lower than prior-year by about $8 million.

Operating margin in Physician Business improved a little bit over 100 basis points from prior year and year to date is up 200 basis points. By the way, year-to-date comparisons this time I think are particularly useful because there's the same number of billing days in each of the nine-month periods both last year and this year. And they also help demonstrate the consistency of our progress through the full year.

In Elder Care, sales per billing day for the quarter were essentially flat, actually down 10 basis points. And as you've heard, our focus for most of this year in Elder Care has been to improve the profitability of our existing business and only recently have we begun to reemphasize growth through the reach strategy.

By customer segment, nursing home revenues were down 3%. This is on a per day basis. Home health was up 5% and hospice sales were up 19%. That focus on profitability has been rewarded with 120 basis point improvement in operation operating margin in Elder Care both for the quarter and the nine-month period.

Consolidated operating income through the first three quarters is up a little over $18 million. Operating margin at 5.9% for the nine-month is up 90 basis points. GAAP EPS at $0.30 for this short quarter was up 11% and year-to-date at $0.89 is up 43.5%.

Operating cash flow for the quarter with $14 million was a little lower than we expected due to our continued investment in flu-related inventory and seasonal buy-ins in advance of announced cost increases. We continue to have confidence that we'll achieve the increased goal of $96 million to $102 million of operating cash flow for the year.

Our strong cash flows financed in acquisition this quarter in the hospice and palliative care segment of our Elder Care Business. This company that we acquired has a unique value proposition with which they been very successful in the hospice segment in their geography. The opportunity that we and the owner both see, who -- the owner is staying with us by the way, is to expand those capabilities into new geographies and accelerate the growth of that business model.

We also repurchased a little over 900,000 shares during Q3 at an average price of $20.58.

Let me now turn to the two business strategies that I mentioned as I opened. Our health, meaning the health of our business, is a strategy that we haven't talked about as much this year but that has been very successful. In a nutshell, it has to do with taking actions that improve the margins in the business that we are ready have. It encompasses continuing to improve our offering and our account penetration of our Select brands. Two, working with our branded manufacturing partners on supply chain efficiencies. And three, focus and disciplined in how we extend credit and manage receivables risk.

In the physician's business, we've made investments in our systems to make it easier for our sales reps to manage their book of business more efficiently. The average position rep has well over 100 buying accounts, buying thousands of different products. By making it easier for sales reps to give their customers the right products at a competitive price we've seen remarkable improvements in sell side margins.

The tools have only recently been rolled out. But we've already seen some of our top sales reps improve their gross margin by 150 to 200 basis points using the new technology, while providing their customers with a better tailored mix of the products that they need.

The tools also facilitate the migration of pharmaceutical products from branded to generic, giving customers quality alternatives at a better price with better margins for us.

In the Elder Care Business, our health strategy has helped us to stabilize sell side margins this year which had been declining in prior years. Buy side margins have improved through the continue penetration of Select and [as to related said] brands of high-quality, private label products such as Repara wound care, Nightingale incontinence and Quintet blood glucose. These products all give providers a better price, same or better quality and better margins for us.

Also in elder care we've invested in technology that helps us better manage credit risk, extending the right amount of credit and managing receivables more professionally resulting in less bad debt, better aging and better DSOs than we have ever seen.

In our corporate shared services, our health has taken the form of investing in technology and training to reduce lost rebates from manufactures due to untimely filing. We've also significantly reduced lost cash discounts in accounts payable through implementation of BDI and a more focused management process. It's hard to quantify exactly the total impact of our health this year, but I would say that especially in this period of lower market growth up to half of the growth in operating earnings in Physician Business, and two-thirds of the growth in Elder Care this year, in earnings, are the result of having a healthier overall P&L.

I'm very proud of the way our organization stepped up to the challenge of Save 300 this year. As you recall this initiative was designed to identify and target savings of $15 million to $20 million without a reduction in headcount. Through nine months we are well ahead of this plan. We could not have done this without the diligent efforts and creativity of all of our people.

Finally as you know, we've adopted lean as and ongoing philosophy of management at PSS. All of our leaders and most of our employees have received lean training. Everyone is challenged and incented to submit and then drive lean ideas through their part of the organization and throughout the company.

We've mentioned this before and last quarter gave an example from one of our branches. Here's a couple from our corporate shared services. In general accounting we have a long-time general accounting person up there who, after our lean training, decided to really go through and challenge and rationalize the number and the type of reports she was sending out to our operations team. And by doing that, she was able to rationalize those reports and she's saving now dozens of hours each quarter.

Centralized purchasing, working with our operations excellence team, standardized purchasing and replenishment of distilled water. It's a high velocity product [code] for all of our branches. Annual savings -- tens of thousands of dollars.

Shared Services credit and collection. Here, the idea was to automate cash application of customer finance charges. Instead of going in and trying to figure out every one of these every time and check came in with a customer finance charge, they automated the process. Saved a whole week of work that could be eliminated. This is just a few examples that show that lean is becoming a way of life for our people and an important part of our corporate DNA.

I will turn the time back over to Rob now. Let me just finish by saying we're excited about where we're at in the year and we look forward to reporting our final full-year results in May, too.

Operator, if you could begin the queue for questions we'll begin taking them.

(Operator Instructions) Eric Coldwell, Robert W. Baird.

A ton of detail on the call; I really appreciate it. I guess the first question that is probably on everybody's mind is with the continued upside through the year and another $0.03 [bead] on an adjusted basis, your implied guidance for the fourth quarter would suggest that you're going to come in below the Street. Is there anything to that, anything you want to share? I certainly didn't pick up anything on the call that would suggest a disappointing close to the fiscal year.

You're right. There is a lot of momentum in the business. Our strategies have a lot of traction and are working very well. There is always a little friction between the Street and us on our guidance and our goal is to always achieve and hopefully beat anything we put on the Street.

So, yes, our internal plans are always ahead of our Street goals. The goal is to also not to get you guys ahead, because it is a tough environment out there. We had a lot of things going on. We're investing in a lot of things for next year and we feel very confident about driving very strongly through the year with our strategies.

So it is not an intentional message. This is the way we operate the business. If I remember right, you guys were unhappy with me after the first quarter because we weren't raising guidance and we didn't do it until the second quarter. I feel that tension today. And yet, we feel this is the right place for us to be with our goals for the year and we'd like to continue to finish the year strong and invest next year and go on about our business.

All fair, all fair. It sounds -- it feels to us like maybe you're saving some cushion for some growth next year but very strong results so far.

My questions really are around physician same day growth. If we adjust for the incremental numbers you quantified on swine flu since the year began, I believe your growth on a same day adjusted basis excluding swine flu would be basically 60 bips in the first quarter, 1.8 in the second and about 70 bips in the third.

Is there any take-away here we can get? Because the fact is you brought in well over 10,000 accounts now in the reach programs for physician. I'm trying to figure out what the real growth is in the market place, because it seems like the growth would actually be negative on a same day basis if it weren't for these new account opportunities.

Great question and it's the number one question here as we are in the middle of planning. What I would also tell you about this quarter, though, is those holidays fell in the middle of each week, both Christmas and New Year's. And it was a ghost town here during those holidays. So that had some impact on that same day growth. You're right it was just under 1% for this quarter.

We see two things in the market. We see reports from other reporters, lab reporters and other people, other reports in the market that say the market is flat. We see other reports in the market that tell us it's down a little bit. So, it's hard for us to judge in that we just -- like equipment sales, we just did what we did last quarter in equipment and last quarter was a great quarter. So equipment seems to have rebounded and getting better from the standpoint that customers are looking for solutions.

Branded products are up. Our Select products are up. Where we lost some business was our immunoassay product that Abbott is pulling out of the market on. So we see gains in the market, but we don't see any report that tells us the market is growing. So I would tell you it's the number one thing we're focused on. It's the number one thing we're looking at.

And yet we see stability in the physician market. We see a very open customer for new ideas and we think we're going to do pretty well in this environment. It feels to me like it's flat or negative out there. I can't argue with that. And we continue to grow. So Gary, I don't know; do you have any thought on that?

Honestly I think you covered all the different bases.

If I can jump in, Gary you quantified the reach additions in the quarter, the 4574. Was that all Physician or does that include some of the Elder Care?

That was all Physician.

What is the total year to date on that?

The total year to date on reach (multiple speakers) is close to 10,000. That is those that are continually buying. So what we found is we brought on about 5000 per quarter and about half of those continue to buy once they've tried us. So you can add that up; half of the 5000 in Q1 and Q2 plus the new 5000 in Q3 is about approximately 10,000.

It's 9600.

9600 have continued to buy?

Yes.

Can you quantify the dollar impact of that for us?

I think not on this call.

You've given us so much information so far. I was reaching there.

(multiple speakers) By the way today's a reach day. All of our people in the market are reaching today.

Last question and I will let others jump in. I might come back to you though. The acquisition, I'm just curious if you could give a little more detail on that, the margin profile. Are there any integration costs here in the March quarter and what is the revenue stream?

Okay. The acquisition was completed I think in early December. This is a company that really focuses on hospice and they have a very high touch and high value added service model. Because that model and how they take care of that customer is -- we want to learn from that, we're not going to immediately integrate that business. So there is no integration cost this quarter or last quarter.

And really the focus is going to be for us to learn from that team and then use the Elder Care distribution infrastructure to expand that model to customers across the country. (multiple speakers)

And I'm sorry; the revenue stream?

It's about $13 million.

Annually?

Yes.

John Ransom, Raymond James.

Just forgetting about guidance for a minute, the $0.27 sequential earnings that are being applied, is there a structural reason why earnings would be wouldn't be up sequentially? Is there something going in the March quarter we're not thinking about?

Actually the December quarter is always a relatively strong quarter because of the -- a lot of the vendors are December, so some of the programs end and some of our vendor incomes are trued up at that point. A lot of our lab zone blitzes and things like that are going on in this quarter.

Other than that, fourth quarter also has where all of our internal programs end. All of our incentive compensations are determined. So there is internal motivation to drive the business. So it seems like third and fourth are pretty similar.

They are. The one thing from a cost standpoint that is different about fourth quarter is it's the first calendar quarter. And so some of our payroll costs, FICA resets and those kind of things, so payroll taxes tend to go up a little bit. But as far as structural things, that's what is out there.

(multiple speakers) The only seasonality that we see is flu. And this year's normal flu season will be less than the last two quarters, H1N1 season because that was an unusual event. So, historically, will we see a flu season this year as big as last year? Last year was medium. I think this year will be light, but we don't know. We won't know that until after February and the beginning of March what it'll actually look like. So there is some unknown only on seasonality as it relates to normal influenza season.

Okay, that's all I needed. Thank you.

John Kreger, William Blair.

This is [Robbie Espada] calling in for John. You did give us a lot of detail on the call, though I didn't hear any metrics around Athena for the quarter. Can you update us on how many additions there were there?

Okay, we had a really, really solid quarter with Athena. We were -- over 125% of our internal objectives enclosed (multiple speakers) -- are we actually going to put the number in? It's 375 is the number of units closed.

And there is a new day because of the high-tech regulations are starting to be more clear. Granted they're not finished until spring of 2010 at some point in time, but you have better visibility into them. Athena has taken the position that their EHR will meet and customers who are on that system will be able to receive the income. The income starts in 2011.

They've made a guarantee that any customer that goes on, they will get that money or they will reduce their revenue stream to accommodate that customer for the high-tech money. So, we're aligning our forces right now. And I don't want to go into too much detail about the program right now, but we're going to aggressively educate the customer and we're going to aggressively position products that the customer can take advantage of to take advantage of the funding that's out there in the market.

And we're going to do it in a way that improves their quality of their business, improves the efficiency of their business and not just adds new complexity or new burdens to them. And Athena is definitely a product that allows us to do that. So I see a long-term viability of that product. We had a very good quarter and we're aggressively starting a new campaign here to drive education and services to the customer and Athena has mobilized their forces with us to do that.

That's great. Thank you. My other question was about corporate expenses. They seem to be trending well above last year's levels and I know part of that is increased compensation. I know in the previous two quarters you had disclosed what the increase in comp was. Can you do that for us this quarter as well?

Yes. It was about the same as last quarter and all the increase -- without that, our corporate expenses actually would be slightly below prior-year.

Mickey Schleien, Ladenberg.

Good morning gentlemen. I wanted to ask you about the Select line. If you could, give us some color on any product lines you are considering launching in the near-term. And what is the outlook for Select as a percentage of the business and the impact on the margins that might have?

Okay, that's a really good question. I probably would prefer to answer that in May, but suffice it to say we have some nice products. We had one delay on a product because the FDA slowed down, but we've got some products that we're going to be launching. As far as SKU count, Kevin any thoughts on SKU count increases next year or right now?

I see next year accelerating in terms of new product launches. We have a number of new products that that we're evaluating right now that will come online next year. We've been running around 100 to 200 new products each year. I think we'll continue that pace, possibly overachieve that next year.

As far as the percentage of profit, we haven't updated that goal. Our goal was, I think we -- 25% is what we put in the market as our -- was our revenue goal or mix, the Select. Do you remember, David? Was it 35?

30.

We had an internal -- never mind, I don't want to talk about our internal goals. So our external long-term is 35. This year we're approaching --

We're in the teens, mid teens on the Physician and little over 20% in Elder Care.

And no change in the outlook for the impact on your margins from that mix?

No. If you're referring to the impact on our overall operating margin that we've been talking about, the 200 basis points over the three years, I think we're still on track with that.

But the Select products definitely have a higher margin and they do have upward pressure on our margin. We have other products that have downward pressure on our margin and is balancing the revenues of those that -- we've been able to maintain our margins through the last several years.

My last question is any change in your outlook on improved profitability from the lean? You talked a lot about lean, but I didn't hear any metrics around improvements in operating margins or EBITDA margins around that. Any changes there?

Again, we've seen good progress there. Over the three years our goal was 100 basis points of operating margin improvement coming from lean and efficiencies. And we are tracking probably a little ahead of that.

Appreciate it. Thank you very much.

Lisa Gill, JPMorgan.

It's Atif Rahim in for Lisa. I guess David, could you perhaps clarify what the collective impact of all of the one-time or nonrecurring items has been? The flu, the compensation, catch up, athenahealth shares. I'm just trying to get a better picture of what the operating earnings growth should be next year and what it was this year.

We'll probably have to circle back with that [key account] on the plus and minuses. We have to get them all front of us. We don't have that right now.

We disclosed every quarter -- we've laid out for you every quarter what the H1N1 impact was and so it's readily available. We've had 43% growth in GAAP EPS. There's no doubt that H1N1 had an impact on that and in the previous quarters we've laid that out. This quarter it's $20 million of revenues, about $0.03. So you've got to back into that.

Let us come back to talk to you individually about that if we could, because we need to do a little prep on that.

Okay, no problem. What about on the equipment sales? Anything you could shed light on there, what kind of [sale, lease] -- I think you highlighted some of them, but any more color on what equipment [offerings or specifically buy-ins] that improved your productivity?

Gary, chime in. I would tell you that on equipment, still tables and chairs and those kind of replacement products are still slow of down. Those kind of products we don't see picking up in the short term.

The products that are picking up our ones that provide clinical solutions to the customer that allow them to provide quicker or better patient care and deliver cash flow to the practice or improve the cash flow that they are receiving by doing it another way. Those products continue to do well.

Another product that has not been doing well is the very high-end products like a laser that requires patients to take money out of their pocket. So kind of the two ends of the equipment market have declined; the high-end where patients have to take money out of their pocket or the physician has to, on the low end, replace something that looks maybe a little bit worn in the practice.

So those two ends of the market have declined but the middle is strong, which is bringing solutions to the customer that help them with their efficiency. Bringing solutions to the customer that help them with their patient care. And as far as specifics on those I'll have to look to Gary.

Really, Dave, you said most of it. What I would say is inside of that you would see chemistry, hematology of all different levels from the moderate/complex down to the placement programs we have with the waves. So, I think in that traditional laboratory we see pretty good strength because of the opportunity of improved care, the clinical and the financial outcome. So I think that is the full answer.

Would it be fair to say that within that middle the margins are the highest on the equipment?

No. Equipment margins are pretty similar across the board. They are lower. I would just call it out and say it's about 1000 basis points lower than our normal margins. Reagents are closer to our normal margins. They go through that equipment.

Now the box is always the least margin product that you sell and -- because it is a high ticket item. And then the higher margin products are the reagents that go through it, the razor and the razor blades.

In fact, those things that Dave mentioned that are slower at this point like aesthetic procedures like laser and box tables are those that don't come with a reagents trail as well. So the things that are selling are things with a reagent trail.

(multiple speakers) Same-store sales growth, it doesn't break our hearts that we're not selling those. From the standpoint that the customer can't improve revenues in their practice it's not healthy.

All right, got it. Thanks a lot. Appreciate the color.

Larry Marsh, Barclays Capital.

This is Adam calling in for Larry. I'm just back to flu for a minute. I guess could you comment on what you've seen from H1N1 volumes thus far in January, and maybe what your expectations are for the coming quarter?

You know, our thoughts at this point in this quarter is you can't really tell or you don't know what is H1N1 versus what is normal flu. So in January kind of have to put it out of your mind as whether you'll ever be able to delineate between the two products any longer because the flu test kits are similar.

So what I would say is we are a little above in the beginning of the quarter. We're about normal right now. We just don't expect there's going to be a really big flu season this year. There's no indication of that, maybe to the more normal or light season. So there is no way to track and H1N1 from now on, until maybe the summer of next year if there is anything that shows up.

And remind me, you guys are already through your normal flu vaccine sales, right?

We sell that -- actually we are just about completed selling next year's right now. And so there was maybe $300,000 or something in the quarter. I'm trying and remember the number on the page. It was (multiple speakers) 260 -- it was about $300,000 in sales. So no, there was no sales, very little.

Elder care for a second, you guys talked about you're moving these strengthen/reach programs, kind of focus on that segment. With that being the case, when should we really start seeing some improvement in I guess organic sales growth in that segment?

Great question. I think next quarter we'll be able to give you some highlights on the reach program. Gary walked through how we really got started there and the cycle is a little longer, but the excitement is absolutely there.

It's a great environment to go out and provide solutions to customers. It's a great change of pace for a customer to hear how you're interested in solving their problems and not just trying to sell them something. So it's a great environment for it.

We just began the program. Next quarter we'll talk to you about our results and the runway we see, which is perfectly timed for investor day and kind of mapping it out for the rest of next year and beyond.

Tony Perkins, First Analysis.

Good morning. I just had a quick question follow-up on the Elder Care business. The revenue was down a little bit and below our expectations, but the operating margin seems -- stayed pretty high and beat our expectations. Is it fair to conclude that greater penetration with the Select line in that segment was a main contributor?

I think the main contributor was a strategy that we've been talking about, which is really focusing in on our health. Focusing in on the credit quality and collections process, which improves the quality of the balance sheet and then any reserves that you have or costs that you have associated with accounts that go bad.

It's improving simple things like contract administration, pricing administration, supply chain management with the vendors. These are not sexy things, but they sure show up on the bottom line. It took a full court effort of our sales force and our operating teams and our IT teams to really tackle some of these from a pricing standpoint, from a customer relations standpoint, from a vendor relations standpoint, an IT contract management standpoint. So all of those things were the focus of this business and the results show. We have good margins, we have low costs, we have good [gross-in] and operating margin in the business.

Now, we're changing gears. We're still going to get runway from those efforts. They'll still be going on. People are still focusing on them. But now, the focus is on reaching and strengthening the customer. So it's a little more of a time lag from the standpoint of your seeing us change gears in midstream on the revenue side, but we do see upside on the revenue side from the standpoint of reaching new customers and strengthening customers and getting revenues from that.

Okay, so you are strengthening really your foundation in that business so when you launch or I guess accelerate the reach strategy, we should see the upside?

Yes. You don't want to build a house on a poor foundation. It wasn't that the foundation was poor; we just think it needed to be better. There was an opportunity make it better, so now when you start building the walls up on the house you feel good about it.

Richard Close, Jefferies & Co.

This is Dana Hambly in for Richard. Could you repeat, on the business lines in the Elder Care, what the selling growth was on a per [dated] basis? I think I had 19% for hospice, 5% for home health. Was it down 3% for [the hospice]?

That's correct. The hospice was impacted by one month of that acquisition we had, which was in the hospice business.

And you said that was $13 million annually, so little less than $1 million in the quarter?

That's about right, yes.

And just to stick on the margins for a second here, they were a good bit higher than what we were looking for. I know you just went over all the drivers there, but I just wanted to see if any of that is being driven by a mix shift to what I understand is a higher-margin home health hospice business?

It's really not. Even though, yes, as we sell more hospice and home care we will improve margins, but you're asking about this results and these results last nine months. It's really about those internal strategies, just making the business a healthier, higher-quality business and not about the revenue side. Even though I can't argue with you that as we grow that business and as it grows, it improves the overall look of the business.

Okay, great. Lastly, the reach; is that specific just for the nursing facilities, not home health and hospice?

That is where we started, so we wanted to make sure we had a very focused approach. So it is for this time period right now, but it will extend across all home health and hospice.

Eric Caldwell, Robert W. Baird.

I just couldn't give up. Is there -- does the company have the ability or take the time to quantify the impact on revenue from (inaudible) generics in the drug business or the mix shift in Select from branded?

Yes. I'm not sure we kind of put it out there, but there is definitely a downward pressure on revenues as we convert because the products are less expensive but higher-margin. So, I know in the pharmaceutical side it actually hurt revenues this quarter as we improved margins, as we moved from generics to branded. I don't know if we have that in the workbook or not, so I'm afraid to say numbers.

We used to talk about unit volumes and we've gotten away from that. Maybe we can dig that up and get that to you, Eric.

That would be great. I think it would be useful exercise because obviously the revenue is less important if it is a mix shift issue, and we know it is. We just would love to be able to quantify it.

The Physician Business had a really good Select or our brand quarter and that had an impact on the revenues.

Two final follow-ups. You made a sizable donation to the Haiti relief efforts, and I think over $1 million. The question is does that impact the P&L here in the March quarter? How does that run through the model? And second question is could we get an update on penetration of the e-commerce channels, either myPSS or SmartScan.

I'll answer the last question because it's top of mind; 45% and about 44,000 customers. So we're continuing to make really nice progress there. And a majority of our sales reps are now engaged in converting their business and realized boy, this reach thing is going to be really hard if I don't have my customers on automated tools because I need the time to go reach. So it's making sense to everybody that all these strategies were really linked up and that we can't really execute them all unless everybody's doing all the parts. So we've got good momentum on the e-commerce side.

As far as Haiti, our whole goal here is to help the caregiver on the ground. We first looked at a couple -- there were miscellaneous and the sundry people going down there, and we're definitely helping physicians who donate their own time to go down or nurses who donate their time to go down and help with products and things like that. But we decided the Red Cross was where we could make the biggest impact the fastest, and we were able to get a pretty good-sized load of product on the ship that left Miami a week or so ago to get down there and provide wound care products and surgical products and things like that. As far as the quarter, that was through this one I think.

It will flow through this one, yes.

John Ransom, Raymond James.

Sorry to keep beating the sequential horse, but could you help us understand the impact that you have more selling days in the March quarter than you do the December quarter? How does that impact how we should model G&A? And again with kind of a flat sequential maybe trend, why wouldn't simply the math of the increased selling days lead to higher sequential earnings?

All of those are theoretically correct. I think we've confirmed our goals for the year and we're comfortable with that.

We don't have any H1N1 in this quarter that we are planning, John.

I'm pulling out $0.03 getting to kind of the $0.27. So you're kind of implying flat sequentially even though you have more selling days in the March quarter.

(multiple speakers) We're implying that were comfortable with our year.

(multiple speakers) I'm not successful in getting you guys to confess that you're sandbagging. I'm trying, but I'm not going to be successful am I?

No and I appreciate the natural pressure that is between the two forces here, and just respect the fact that we're in the business of putting out numbers and hitting them or beating them.

Sure. Thank you.

Mr. Smith there are no further questions at this time. Please continue with your presentation or closing remarks.

I just thank everybody for their time and attention. I know it was a very busy calendar with other companies reporting and look forward to talking to you on the 12th and 27th of May.

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. Have a great day everybody.