麥卡遜 (MCK) 2010 Q4 法說會逐字稿

Welcome to the PSS World Medical fiscal year 2010 fourth quarter 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) I would now like to turn the conference over to Mr. Rob Weiner, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Frank. Good morning, everyone. Thank you for joining our fiscal year 2010 year end conference call. Today on the call our speakers are our Chief Executive Officer Gary Corless and our Chief Financial Officer, David Bronson. We issued our fiscal year 2010 year end press release last evening. The release in our financial work for the fourth quarter and year end are available on our website at PSSWorldMedical.com. The financial work book contains GAAP and non-GAAP financial measures that provide greater detail into our businesses, and this year end work book also has reconciliations of certain events that impacted our results in fiscal year 2010.

Now, I would point out the Securities and Exchange and state laws that allow for the use of forward-looking statements, which we will make during this 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 and descriptions of certain of these risks and uncertainties, we refer you to forward-looking statement disclosure in our fiscal year 2010 year end press release and to other information provided in our most recent Form 10-K and other SEC filings, copies of which are available from the SEC on our company website and directly from the company's 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 GAAP measures in accordance with SEC rules. You'll find these reconciliations in our financial work book located in the Investor Relations section of the Company's website and is filed on Form 8-K that we submit to the SEC.

For those listening to the call or webcast who may be interested in meeting with our team, our upcoming Investor Relations activities include our annual investor day in two weeks at the W City Center Hotel in Chicago on Thursday, May 27. We will also be presenting at the Goldman Sachs healthcare and William Blair growth stock conferences as well as conducting investor meetings in Minneapolis in June. Please contact our IR department if you would like to schedule a meeting. For our call today, we will follow our formal remarks by Q&A session, as prompted by the operator. We will limit this call to no more than one hour in duration. I'm now pleased to turn the call over to Gary Corless, our CEO and President.

Thank you, Rob. To let everyone know, we're actually coming from Orlando today versus Jacksonville because we're here for our elder care businesses national meeting in Gulf South to kick off the initiatives and we'll have our full team here within the next day or so. Want to thank you for your time this morning. I look forward to sharing with you our FY 2010 and Q4 results while providing some color and context, as well as our goals for next year. On today's call, we'll cover our environment, market, customer, healthcare reform, our performance, our transition of key roles, our position, our plans and our goals.

Let's start with our environment. The year presented many questions to those entering, with few answers coming out, specifically healthcare reform which I'll touch on later. It presented opportunities to those willing to acknowledge new realities, make necessary changes, and aggressively execute. In general, the slowdown in healthcare lagged the general economic slowdown coming in and it will coming out.

Lower utilization and higher consolidation resulting in customers buying less and less customers buying significantly impacted market growth rates and will again this year. Customers' access to capital, along with the general uncertainty regarding healthcare reform caused many customers to postpone the capital decisions. It was a very important time to be aggressive and we were. Our reach and strength in initiatives helped our team and our customers offset many of the new challenges.

Our reach campaign aimed at aggressively adding new customers, brought in business from over 19,000 new customers to PSS in FY 2010, over half of which almost 11,000 continue to purchase. Gulf South began this campaign later in the year. It was still labeled at over 240 new skilled nursing facilities. It is still a very important time to be aggressive and we are.

Entering this past fiscal year, we could all see the impact the economy was having on healthcare. We knew two things clearly. We would face the new utilization and consolidation head winds, as well as customers diminished access to capital, and we were well positioned to help struggling customers improve the care they provide and the businesses they run. Reach and strength and as well as our health and lean were the right strategies in this environment and contributed greatly to this past year's results.

So how did we perform? I'm proud of how our team planned and executed, overcoming the head winds and maximizing unforeseen tail winds. For the year on a consolidated basis, we grew revenues 5.2%, grew operating income 20%. Cash flow exceeded $100 million and we grew EPS 38%. Both divisions grew gross and operating margins significantly. PSS grew gross margin 90 basis points and operating margin 150 basis points to a 9.5% operating margin. Gulf South grew gross margin 30 basis points and operating margin 110 basis points to 6.2%. We did this without laying off any of the people that take care of our customers and shareholders every single day.

Let's talk about our transition. We obviously had some major changes and some key roles during the quarter. When I began as CEO early in the quarter, my immediate focus was to communicate, stabilize, and then refocus our team. The combination of my 20 year history with our people, partners and customers, the full support of a world class Board of Directors, and a proven high quality senior management team enabled us to effectively, quite efficiently move from what just happened to what do you want me to do? We completed the creation of our three year business plan, as well as a new purpose and mission statement. We will touch on that today and share the details with you at the upcoming investor day.

We improved our structure to include the new two division presidents, both proven and seasoned veterans that are in place and in full execution mode. Our team is focused and excited about the future. The Kool-Aid is still flowing. I will now turn the call over to our CFO, David Bronson and then I will return and share some additional thoughts, as well as our goals for FY 2011.

Thank you, Gary. And thanks, everyone, for joining us today, and good morning to everyone. In our press release yesterday, we reported good operating results for Q4, and I think standout results for our full fiscal year 2010.

Despite a very recessed economy during the year with high unemployment, which drove marked slowdown and provider utilization as Gary had talked about in both markets, we overachieved the financial goals that we set out at the beginning of the year and also overachieved the higher revised goals we established at the halfway point and then confirmed again during Q4. As I said in the press release, the business strategies we laid out at the beginning of the year were both timely and appropriate for the environment. Having the right strategies is only half the answer, and I would say maybe the easier half. Our team's focused execution throughout the year on each of these initiatives is really what aloud us to report record earnings per share growth, operating cash flow, and earnings, or return on capital for fiscal year 2010.

Now, we had a few things that favored those results, some that we know about going in, some that we did not. I'll detail those out for you as part of my presentation this morning in the spirit of continued full transparency to help us all get on the same page as to the impact of each of those when you compare results versus prior year, as well as looking forward to our FY 2011 goals. Let me start, however, by reviewing the results by business. In the fourth quarter, the position business grew by 5% over prior year with five extra days on a per day basis, actually decline of 3%, driven by very light seasonal flu season, compared to last year.

Despite that, our successful efforts to improve gross margins and good expense control allowed the physician business to grow operating income in the quarter by 4%. Elder care per day revenues also declined in the fourth quarter by 1.6%, with total revenues growing about 6.5%. Again, improved gross margins which has been our year long focus of the elder care business along with some really steller results in accounts receivable management, resulted in operating income growth of 25% in Q4 over prior year. On a consolidated basis, despite a slight decline in per day revenues, operating margin improved by 10 basis points from prior year, and EPS of $0.28 for the quarter grew by 23%. We generated about $35 million of operating cash flow, ending the year with about $53 million in cash on the balance sheet.

During the quarter, we repurchased 1.8 million shares in open market transactions for about $20.70 a share. Let me stop here and make a couple of comments about our balance sheet. You know, it's never been stronger or better managed. Consolidated DSO's are down two days from prior year. Thirty-eight days in position, 48 days in elder care. Inventory days, despite a fast growing international sourcing business, with a much longer supply chain, and higher safety stock needs are flat. Accounts payable days are lower, but lost discounts are near zero.

Since even before I joined the company in 2002, we've had a goal of getting our return on committed capital to 30%. At that time, we were a little under 12%. Every business decision we've made since then and that we continue to make has a financial return hurdle of greater than 30% return on committed capital. Now, committed capital for us consists of inventory, receivables, working liabilities, and the hard assets of our distribution and support infrastructure. The pretax return on that capital is, in my opinion, the right way to measure overall profitability of a distribution business. 30%, and again in, my opinion, is world class.

And I'm very pleased and proud that PSS in FY 2010 reached 33.5% return on committed capital for the full year. Now, I know that some people would like to continue to saddle us in measuring return with intangible good will that was put on the books 12 years ago and and two CEO's ago in a very different capital market and under different accounting rules. Some of these people think there might be something wrong with this Company's overall profitability and prospects.

For my money, a team that is making day-to-day decisions that generate 30% pretax return on the working assets that produce revenues and serve our customers, is a team that's doing a lot of things right. I would like to spend a couple of minutes now recapping the highlights of the full year results. Consolidated revenues grew by 3.2% on a per day basis, at the higher end of our goal of 2.5% to 3% for the year. Physician growth was 3.9% and elder care was 1.4% up.

In early March, we crossed the $2 billion mark in revenues for the first time. Sales of our brand products under the Global Select brand grew by about 15% this past year and are now 16% of total revenues in terms of mix. Growth of select was 18.5% in position and about 10% in elder care.

Equipment sales in position declined by almost 13% in FY 2010, resulting from, as you would expect, a very tight capital and leasing market, and the overhang of potential reimbursement cuts to physicians. Lab diagnostics growth was 20% in the year, driven mostly by the increase in H1N1-related sales of flu test kits.

And elder care, by customer segment, our home care revenues grew by 9% and grew by 22% in hospice. That was helped by the hospice acquisition, company acquisition we did at the end of Q3. Nursing home revenues in contrast, were down 1% for the year. FY 2010 was a very good year for us in terms of progress and increasing our profitability as measured by operating margin. Consolidated income from operations grew by 20% and operating margin improved by 72 basis points to 5.9%. Both businesses improved their operating margins by over 100 basis points this year, position to 9.5%, elder care to 6.2%. Full year operating cash flow of $102.4 million also beat our increased goal of $96 million to $102 million for the year.

We spent $26 million on capital spending this past year, about $16 million went towards project that will drive future operational efficiencies, two of the largest of these were a new rebates processing platform rolled out last fall and our new warehouse management technology which is being rolled out this year in several of our large branches. We're counting on these projects, as well as others, to help us continue to leverage our cost structure and drive growth and profitability and customer satisfaction. The two large ones that I mentioned are key components of the lean contribution to ongoing margin expansion.

GAAP EPS of $1.18 was $0.01 above the high end of our upwardly revised goal of $1.15 to $1.17. EPS growth for the year was just under 39%. Now, let me quantify that EPS impacts this year with a few things that taking them into account will give perhaps a clearer picture of this year's growth, as well as the growth implied by next year's goal.

We had a pickup of about $0.04 a share from the first quarter sale of the remaining Athena shares we held. $53 million of incremental H1N1 revenues this year increased EPS by about $0.08 a share. The five extra billing days we had this year increased EPS by about $0.02 a share, and then finally, going the other way, acceleration of long-term stock and cash compensation accruals to match our performance overachievements reduced our EPS this past year by about $0.07 a share.

In our financial work book that we include on our website for investors, we have included a table which summarizes these impacts for those who might want to normalize, if you will, EPS growth rates for FY 2010 and FY 2011 goal for any and all of these factors. Before I turn it back to Gary, let me close by saying how proud I am of our entire team at PSS for delivering and overachieving on pretty much all our goals for the year, in spite of some significant challenges. And we all look forward to continuing that track record into FY 2011.

Thanks, David. The environment poses both challenges and opportunities. And while we certainly recognize the value of efficient distribution, healthcare providers need more than the efficient moving of boxes. We have the opportunity and the offering to do more.

This is the essence of our advantage, not a customer that wants more, but a customer that needs more than most can deliver. That is why we, our senior management team, has spent the last few months as part of our planning period, taking the time to redefine our purpose, mission and commitments. Regardless of the many environmental unknowns, there is clarity available to those who are close to the customer. The profitability will be reserved not for those who can see it, but for those who can see it and execute on it.

The value of any purpose is clearly knowing who you are, yet equally valuable is knowing who you are not. Focuses and guide strategic decisions, as well as investment decisions of time, talent and money. Our new purpose to strengthen the clinical success and financial health of caregivers by solving their biggest problems tells our people, our suppliers, even our customers who we are and will be. It is current, yet also aspirational. It was a major planning in the budget process we just completed. Decisions became easier, quicker and clearer.

One example is the structure that we just put in place with the two new division Presidents, a Chief Service Officer, and Chief Sourcing Officer. More on this at investors day. Let's talk about our goals. The current environment is challenging. Our current plan is challenging as well, and it is achievable. Our initial goal for fiscal year 2011 is earnings per share of $1.27 to $1.31 per diluted share, including $0.09 of noncash interest expense.

Despite a significant slowdown in market growth, this goal is the same goal we issued three years ago in 2008, adjusted for the inclusion of the accounting change for convertible debt interest. We see many strong positive signs out there. However, we are not counting on any of them this year. We are not counting on improvement in utilization to achieve this plan, yet we are encouraged by positive signs in job growth. We are not counting on significant improvements in the economy, improving customers' access to capital, or increasing patients and elective procedures.

However, we do see the GDP growth and optimistic predictions. We are not counting on improved utilization due to the impact of healthcare reform and the addition of 16 million to 30 million people to the healthcare system. Yet we all know that it is coming. We are not counting on significant improvement in the lending environment for our customers, yet we see positive trends in denial rates.

We are not counting on an improved situation for our primary care customers, yet we do see the new intense focus on the value of primary care to the healthcare system and the ensuing plans to increase compensation to these positions, as well as expanding the overall number of primary care providers. We are not counting on and easy environment for elder care providers, given the cuts identified. Yet the final changes for nursing homes and home care were less than we and many expects, less than the house had suggested, and in some cases delayed.

We will execute on our key initiatives, like reach and strengthen that enable us to offset today's many head winds, while we create our own tail winds with our help and lean. We will continue to expand our operating margin by leveraging our current momentum, our continued investment, and the visible runway. We will then be leaner, stronger, and even better positioned when this market returns to growth through an improved economy and return to past utilization levels, further boosted by the new increased access of the previously uninsured. Thank you. Operator, we have time to take questions.

(Operator Instructions) Our first question comes from the line of Larry Marsh from Barclays Capital. Please proceed.

Thanks, and good morning, Gary and Dave and Rob. Let me ask two I guess key things. One, in your prepared remarks, Gary, you implied that you're not anticipating any real pickup in utilization as you think about your budget for this year.

And I know you are going to be more specific in your expect expectations for top line thoughts at analyst day, but to me that would imply you're still thinking about sort of a flat same-day selling environment on the physician side. Are you in a position to comment on that and kind of what draws your thinking, given this environment?

Good morning, Larry. We anticipate the market being within the minus 1, plus 1 flat range. So my comments are about utilization and consolidation, are really specific to what we believe market growth rate to be, which is about flat. Does that answer your question?

Yes. I know historically certainly under Dave and now get your comments, you've always sort of thought about your business as being able to grow faster than market. Is that still pretty consistent with your view?

Yes, it is.

Okay, and then second thing, just want to make sure I understand kind of the framework on your biggest take-aways, Gary, in your seat couple of months, obviously named Eddy and Mark to be division Presidents. Any other particular incremental take-aways of key focus areas that you didn't address in your prepared remarks? And then, you know, in terms of, as we think about that $1.27 to $1.31 for this year, is there any particular seasonality we need to think about that would cause Q1 to be any less or more as a percentage of total earnings this year than past years?

Larry, let me ask the second question and I'll let Gary think about the first part of the question. You know, our calendarzation of our earnings will follow the historic patterns, and the way that we budget them, the way that we budget throughout the year is largely based on selling days per quarter.

And we've provided I think selling days per quarter out on our website. You can get that. That's how we budget. Remember also that always in the first quarter, you know, that's when we're making the investments for the year, the investments related to our new plan in terms of people and programs. So you've factored that in as well. Other than that, the calendarzation should be very similar to prior years.

And Larry, speaking to the first part of your question, the first focus was obviously the communication and making sure everybody understood, you know, where we are and where we're going. The second was getting the right people in the right roles. So that was really the heavy focus in the last couple of months, and that is to execute on, you know, our purpose and the initiatives that you're familiar with is in reach and strength in our health in lean that we really see as a very positive contributor to offsetting some of the lower market growth rate and our ability to continue to expand, you know, gross and operating margins.

Okay. All right. Very good. Then are you commenting about cash flow expectations for this year, Dave?

At investor day.

Okay.

-- expected to sort of grow with the earnings.

Very good. Okay, thanks.

Our next question comes from the line of Glen Santangelo from Credit Suisse. Please proceed.

Yeah, thanks for taking my questions. You know, my first question was on elder care. I understand kind of the revenue weakness on the physician side of the business, but could you maybe comment on side of the business, but could you maybe comment on the same-store sales in elder care? I think it looked a little bit lower than what I was kind of modeling. I'm just kind of curious the reasons for that.

You know, I would say that it was lower than, than we were modeling. And so, you know, what we've done is we've taken some actions there to make sure that in addition to the new divisional president, that we have right people in the right roles and the senior sales positions there. They are proven performers within the business, and believe that the reach and the strength and our health in lean are the right strategies there and takes the right people to execute on them. So -- position.

Okay.

I'm sorry, Glen.

Okay. So it wasn't any one specific thing?

No, I wouldn't point to any one specific thing. I would say we believe we've got the right strategies and tactics there and it's a proven team and now we have the right people in the right roles and the ride leadership there.

You know, I think last quarter we talked about how the focus in elder care had been on profitability improvement and, you know, lot of our incentives, a lot of our programs were designed around gross margin and operating margin improvement, and were very successful. It's, you know, it's time to get that division back to growing.

Okay, and Dave, maybe if I could ask you a follow-up question. SG&A probably came in a little bit higher than what I was looking for. I think you guys maybe donated some money to Haiti in the quarter. Is there anything around Dave's departure, anything that would contribute to that SG&A being higher than I would have thought?

Yeah, there's a couple of things. And you hit on one. That was a small one. I would say also that, you know, remember that sort of every year, and this is kind of a pattern for us.

If we see our way clear that we're going to get to our number in EPS, we will start accelerating some of the investments that are required to drive future earnings. So things like, as you might expect, the naming of those two division presidents caused some dominoes down lower in the organization, some relocation, some moving some people around to give them some developmental opportunities, so there's some relocation costs that we accrued in the fourth quarter.

There was also some rollout of our warehouse management technology, some rollout expenses that we kind of sped up a little bit, and there was also I would say in the quarter we had a little bit higher medical benefit costs than we had projected, by about $1 million in the quarter. Couple of, two or three large claims that came through in the quarter, just unusual timing for that.

Okay, thanks for the comments, guys.

Thanks.

Our next question comes from the line of Eric Coldwell from Baird. Please proceed.

I didn't dial in fast enough. Glen actually touched on my main question, which was the G&A, and maybe just a follow-up there, which is, it was -- we would not expect as much leverage given the revenue issue but it was up nominally. How do we think about that G&A line as we look over the next four quarters? Should we be modeling this more on a nominal basis or can we get back into a mode of seeing some leverage against revenue? I'm just trying to get a better handle on how many of these expenses will continue.

Okay. Well, the ones that I detailed, you can kind of decide whether you think those are one-time or continuing. But -- we will continue to--

I'm sorry, David. I need you to tell us if the management relocations and the shifting around is behind us or not, you know.

Okay. That, that part of it is. The -- we will continue to leverage our G&A costs, as well as our warehouse and distribution costs. That graph isn't -- the operating margin expansion, that isn't changing. We have aggressive goals around both taking real costs out, as well as leveraging our costs across the growth.

Thank you. That's great. The, the other thing, just a small issue, on the balance sheet, other, other assets, the other line in other assets, up about $20 million, and the liability section, other noncurrent liabilities, up about $30 million year-over-year. That's about a 50% increase. Could you give us a sense on what that relates to? Is it part of the debt paydown or something going on there in terms of something we should be thinking about in terms of these increases on the balance sheet?

No, Eric, both of those are related to our nonqualified deferred comp program. The asset side, are the underlying assets that support the participant balances that grew during the year and the liability is the other side of that. So the increase is related to the asset and the liability for our deferred comp plan. And I'll just mention that our deferred comp plan goes deep, much deeper into our organization than most do. It includes most of our leaders and field management teams.

Okay. Great. Final question, in terms of the accelerated compensation accruals for the long-term incentive plans were a headwind to fiscal 2010, in fiscal 2011, the assumption we've been working with is those costs should be coming down year-over-year. Is that accurate, and could you -- based on your initial guidance here, could you perhaps quantify for us the year-to-year change in those long-term accruals?

Okay. That's the $0.07 that we're talking about, is sort of the one-time catch-up piece of that. Obviously our total incentive compensation was a bigger number than that, but, but the other -- the piece that goes beyond the $0.07 is related to overachievement of the current year. So to the extent that we overachieved our goals in FY 2011, we'll have a little bit higher compensation accruals.

But the $0.07 really is the, sort of the, it's catchup from prior year from moving our accruals from five years to three years in terms of the vesting period, and it's, it's the overachievement of our long-term plans. Does that help? So the $0.07 is the piece that won't repeat, the rest of compensation expense will depend on how we do in the year.

But we are -- you are suggesting that if you, if you achieve your guidance this year, but don't exceed it, then we would have a $0.07 favorable Delta year to year in, that number.

That's correct.

Approximately, right. Okay. Thanks so much.

Our next question comes from the line of Richard Close from Jefferies & Company. Please proceed.

Yes, thank you. Could you talk a little bit about the new accounts and the new divisions, you gave us an update there, 19,000 for the year. So well ahead of the initial expectations, and if you look at -- the decline in the physician business in terms of revenue on a same-day basis, if you X out the new accounts, what do you think that same-day revenue number would have been?

I don't have in front of me, Richard, if we didn't bring on the new business and how much that offset some of the head winds, like utilization consolidation. I can give you detail. I believe in the fourth quarter we brought on close to the, on the position side, close to 4,000 new accounts, again, very strong performance from the team there, again, totaling the 19,000 for the year and continuing a little over 50% retention rate.

One of the opportunities that we have this year that we will be taken advantage of is the continued penetration of those accounts because, again, when they start with us on the physician side of the business, they may start with a small order and then we work to penetrate the rest of the account. On the elder care side, I don't have the specific quarter -- I know we've got about 240, 270 new skilled nursing facility accounts, as we've mentioned before, on the elder care side of the business, they take longer to come on because they won't just give you one order, they're really evaluating you as a supplier going forward and a little short of our expectation there, as we mentioned, with the performance on the elder care side, but very important strategy for us going forward.

Okay, and then just as a follow-up to that, if you look at the new accounts, you know, that you added in the first part of the year, because the first and second quarters were I agrees pretty strong, and understanding that I guess you're saying 50% rate is coming back to you for that second and third order, how, how have the initial accounts, you know, if you could characterize, how have those improved in terms of I guess wallet share within those accounts? Any metrics you can throw out to us other than maybe that 50% number that, you know, these guys are coming back to you for, not just coming back to you for small purchases, but, you know, you're increasing the penetration there?

We'll get you that stat, Richard. I will tell you, as you mentioned, the 50% retention. The new customers that started with us in the first quarter, the 50%, you know, applies to them as well. So half of them are still purchasing from us quarters later. And the more, the more recent stat I had seen, I noticed that each -- that we're seeing an increase in margin, gross margin in those accounts as we hold on to them. What I need to get you is, and get everybody, is the increasing penetration.

Let me give you -- let me just remind you of some macro numbers. We do business with about 110,000 accounts, or practices. There's 230,000, or 240,000 in the country. So we're doing business with somewhere around half of the accounts in the country and yet we have a market share of about less than 20%.

So our average penetration, you could look at it as somewhere around, you know, 40% of share in an account. And it takes anywhere from, you know, one to three years, depending on the competition, depending on the aggressiveness of our sales person to get to that level of penetration. So, you know, I think that that's -- if you want to model reach in terms of the financial impact of it, those, those hold true kind of time after time.

That's a fair representation.

Okay. Thank you very much.

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

Hi. Thanks very much. Couple questions about the environment, particularly in the physician office side of the business. Have you seen any competitive response to your reach efforts? And specifically, have you seen any deterioration in the pricing environment?

We haven't seen -- John, I would say, specific to our reach campaign, what I will tell you is I'm sure our competitors are seeing the same things we're seeing, so they are being impacted by the lower utilization, consolidation. So, you know, we'll get aggressive in their own accounts, for that very specific reason versus, you know, our aggressive campaign.

Again, because, you know, this new business gets spread out across many, many, many competitors and customers, and we may just be getting our foot in the door for some of these orders. So I don't know they are feeling it as much as we feel the positive impact, I don't know that they are feeling the negative impact. I will tell you that we see people fighting to hold on to their business when we get our foot in the door and they will, you know, do what they feel like they need to in order to get their pricing right. And I will tell you that a lot of the tools we're using to get our foot in the door is -- makes it difficult for them to compete with.

So if we're able to introduce our brands and it's a smaller competitor that doesn't have their own sourcing, it's difficult for them to compete. So obviously we're using the advantages that we bring to the office that are tougher for them to respond to.

Okay, great. Thanks. And another environment question, can you help us understand better the impact that you saw in the March quarter from flu and tough weather, and as we move beyond that quarter, can you get back into a positive same-day sales performance within physician?

Yeah, I would say that the minus the flu and some of the things in the quarter, we feel that it's a, you know, it's a flat market, down 1, up 1, right in that range, and as we said earlier, believe that we California outperform the market growth rate as we have in the past.

And how about weather, Gary? Were you able to quantify the impact of weather in the quarter?

Wasn't material, John. We did have, you know, a couple of branches that were shut down for a day or so. Dallas and in the Carolinas and probably some customers that were shut down for a day or so and obviously that's business that doesn't come back but we haven't been able to quantify any material impact from it.

Okay. Thanks. And then a final question, can you give us an update on your IT initiatives within the physician business? How's the Athena relationship working out and how did your new physician sign-ups go?

From the performance on the Athena side, we have a record quarter from the number of transactions, and I want to pull it here. So 59 transactions, which is a high mark for us in transactions, and 130 providers, and this year versus last year, from number of transactions are up 30% and the number of providers, you know, considerably more than that.

So we'll say that even in the, even with sort of the challenges of high tech, which was supposed to be a help and really wasn't, we still continue to penetrate the, our sales force as number of people that are competent to do this. And working closely with Athena to do that. As we've said before, the HIT sale, as you know, as you follow everybody else, is not a simple sale to a small doctor's office. It's really, you know, wondering, wondering about meaningful use and wondering about return on investment, but we feel confident that we've got a good solution and one they are ready for, we're right there.

Great, thank you.

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

Actually Bob Jones in for Randall today. Thinking about the select medical line, can you share any details on how growth of these lines that factored into guidance and what impact that could have on margins?

Yes, Is it Bob?

Yeah, this is Bob.

Sorry. Our -- in our investment presentation, which we've been using for a couple of years now, we have margin expansion slide, and our sourcing is shown to contribute about 100 basis points of margin improvement over this three-year plan and half of that comes from penetration of our own private label products and the other half comes from better economics from branded manufacturers. We are absolutely on track with that, if not slightly ahead, both from a number of available SKU's and as well from a penetration of our accounts, our elder care business is slightly over 20% of that mix is private label and physician is in the mid teens.

So about 13, I guess. So we are on track with that. The profitability that we assumed coming from that is if anything were slightly ahead of that in terms of the profitability differential between our brands and the branded manufacturers brand. So it's -- just to remind you, it's about 1,000 basis points better gross margin we pay slightly higher commission rate on it, but it definitely improves our profitability significantly.

All I would add, as a distributor, if you've done the years of hard work of building up, you know, a full offering of quality alternative brands, as in our brands, then this is actually a very good environment to grow gross and operating margins, because the customers are extremely interested in seeing what we have to offer, especially with the reputation that we have with our brand offering.

That's helpful. Might have to wait for in the investor day for these, but I was wondering if directionally you could comment on what the share purchase assumption is relative to guidance and maybe this year, maybe even directionally any color on tax, tax rate this quarter was a little bit below where I was, just trying to figure out looking forward if that's sustainable or if things maybe return to previous levels.

Those are two really good questions. On the share repurchases, we've said that we're going to buy enough shares each year to offset the dilution factor from our convertible offering and from any new grants. So we think that's somewhere around a million shares a year that we have to offset that and not grow our way.

So from time to time we may buy more than that if we have available cash and if it looks like a good investment to us or a good return to shareholders, and we did a little of that this past year, when we saw a dip in the stock price in the quarter, we went out aggressively and completed our last authorization and had a new authorization that was approved by the board during the quarter, of another 5%, or about 3 million shares. Now, as far as tax rate, yeah, the tax rate was a little lower in the quarter. We had -- I don't know if you know what FIN 48 is.

It's, it's an accounting pronouncement that deals with tax accounting positions and we were able to unwind one of our reserves that we had for tax position related to the timing of the deducibility of compensation expense, so it was -- that was probably half or 0.7, 70 basis points of tax rate in the quarter.

Going forward, the only thing that will change our statutory tax rate is the amount of international sourcing that we do, because we do have a tax structure in the Far East that shelters some of the income that's derived from our sourcing efforts and as that grows, as part of our business, it will have an increasing effect on our tax rate. But it's not going to be huge year-over-year. It's just slight increases. So I think, you know, you know, mid 37's to close to 38 is a good tax rate to model for us.

That's really helpful. Thanks for the questions.

(Operator Instructions) Our next question comes from the line of Richard Close from Jefferies & Company. Please proceed.

Thanks for letting me ask another one here. Maybe if you guys could talk a little bit about how the March quarter progressed in terms of I guess the utilization or -- and then how April seemed to trend, if any different from the March quarter in the first part of May.

Well, won't comment on April and the first quarter, Richard, but we'll tell you from a utilization standpoint, I think if we look back into the quarter, I think February was probably the toughest month of the three.

Yes.

Okay. So February was the toughest month, but -- so you saw some improvement in March and then April, you know, maybe continued to see improvement off of March?

-- -- I would tell you that February was the worst. March was better.

March was better than February.

All right. It's worth a try, worth a try.

-- flu season this year, Richard, so that February result probably matches up with that pretty closely.

All right, thanks.

From a comp standpoint, yeah. Comparable.

Go look at the CDC graph for flu and it will give you a clue.

All right.

Thanks, Rich.

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

Hi, thanks. Just to come back to the gross margin, I think the number you put up in the quarter was the highest you've put up in years. Anything in particular driving that and do you feel like that type of level is something that you can sustain going forward?

Hi, John. Here's what I'll tell you. Of the four major initiatives, our health is about gross margin expansion. So we spent a significant amount of energy, you know, in that area, and it's a key part of our strategy going forward. So our health has everything from our brands to, you know, from Rx conversion to generic, to tools and training and technology used to, you know, put realtime information in our hands, as well as an aligned compensation plan that drives them to do it. So it was a concerted effort, focused initiative that will continue on this year that we feel very good about the runway.

Yeah, and I would just reiterate and emphasize that our new compensation sales incentive compensation plan for the PSS sales force is just now going into place and is heavily driven. They can see on a day-to-day, transaction-by-transaction basis the impact on their paycheck from decisions they are making on product and pricing.

Great, thanks. And, Gary, just to clarify one thing you said in your prepared remarks, I think you said something like you updated or finished a new three-year plan. Can you elaborate on that? Did you update? I think this fiscal 2011 starts year three of the current plan. So have you come up with a new three-year plan? And if so, can you elaborate on what you concluded?

I would point to you investor day, John. We'll take you through what we have laid out for the organization, for you know, strategies in place for the next three years.

And remind you, John, that we update a three-year rolling plan every year. We just announced the three-year plan to the street in three-year increments.

Okay, great. Thank you.

Does that answer your question?

Yes, it does.

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

Thanks. It's Atif Rahim for Lisa. Just trying to draw some correlation on the comments you made about flat earnings, sorry, flat sales growth in the physician segment for the market, and kind of the same-day sales growth being down, 2.9% and added about 4000 customers in the quarter. So is this something going on with the penetration rate that you have, or some segment that we're missing that market, the market growth that you mentioned?

Here's what I would say. If, you know, we're comparing this past quarter with pretty strong fourth quarter last year, especially around flu. So even though the market was starting to slow down last year, it was a big flu season and so the comps are a little bit tilted or difficult this quarter because of that. And I would say that.

Gary mentioned and talked about the overall market is probably not growing right now, and it wasn't growing, you know, last year at this time, but we had, you know, other than flu. So that seasonal flu does play a pretty big impact in the comparisons, which is what we compare, the same-day sales versus prior year quarter.

Right. So if you back out the flu impact this year and last, do you have an estimate for same-day sales growth this year.?

We got to get back to you on that and tell you what the same-day sales growth was. I don't have it right down here in Orlando in front of us.

Okay. Understood. And then on the healthcare IT sales, can you remind us how that -- how those transactions flow through. Did you get all the payment on the current quarter or is that something that flows through in future quarters there?

There is a tail on it, so for the Athena product, you know, whatever Athena gets, we get a percent of that. Athena -- software is a service and as the doctor uses, or the practice uses the software, they pay a percent of the revenue that flows through the system some, where between 4% or 6% or 7% of revenues goes to Athena and we get 7% of what Athena gets for as long as the practice is using the system.

Okay. Any way you can break out what the contribution is in total for you guys right now?

Yes, we can. It's not material right now. It's probably, you know, $1 million or $2 million of gross profit this past year.

Okay.

But it's all gross profit and we pay a commission on it, but for us it's, you know, there's no cost of sales. It's just a revenue line.

Okay. That's great. Thanks very much.

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

I would just like to remind everybody, our investor day in Chicago on May 27, we look forward to seeing everybody there. If you need to get signed up for that, please contact Investor Relations. We do have an online registration page as well. Hopefully we'll see everybody out there. Thank you very much for joining our call.

Thank you very much.

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.