麥卡遜 (MCK) 2011 Q2 法說會逐字稿

Welcome to the PSS World Medical second quarter fiscal year 2011 conference call. (Operator Instructions). It's now my pleasure to turn the conference over to Robert Weiner, Vice President, Investor Relations at PSS World Medical. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining our fiscal year 2011 second quarter call. Today on the call our speakers are Chief Executive Officer, Gary Corless and Chief Financial Officer, David Bronson. As we announced on our last quarterly conference call, to shorten our reporting process we changed our format for release of our results, and issued our release for the second quarter fiscal year 2011 earlier this morning. This will shorten the process and I think make it quicker for people to analyze what we've reported and move on to the next company. The release and our financial workbook for the second quarter are available on our website at www.pssworldmedical.com.

The Securities Exchange Commission and state laws allow us 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 forecasted. For a list and descriptions of certain of these risks and uncertainties, we refer you to forward-looking statements disclosures in our fiscal year 2011 second quarter press release, and to other information provided in our most recent form 10K and other SEC filings. Copies of which are available from 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 GAAP measures in accordance with SEC rules. You'll find this reconciliations in our financial workbook located in the Investor Relations section of the Company's website and is filed in our form 8K's that we submit to the SEC.

Our management team will be conducting a series of meetings with investors over the next two months, including our participation at the Credit Suisse Health Care Conference in Phoenix on November 11th. We will also be visiting Denver and Kansas City in November to meet with investors. And we are scheduled to make stops in Milwaukee, Toronto and New York in December. Please let us know if you would like to schedule a meeting with our team.

For our call today, we will follow our formal remarks by a question and answer session, as prompted by the operator. We will limit this call to no more than one hour in duration. With that, I am pleased to now turn call over to Gary Corless, President and Chief Executive Officer of PSS World Medical. Gary?

Thank you, Rob. Today's economic and health care environment is for adapters. Slow movers too big to change, or to small to invest, will be challenged further. All will have to prove themselves. If things change, can you? When things change, will you? There are clear and obvious changes going on across industries, business, politics and, certainly, healthcare. There are also more questions than there are answers. What would , or will, the Republicans do? What will an accountable care organization look like? Is this trend of consolidation like the last one, or different? Is what we're seeing in utilization a fundamental or cyclical change? You'll get very different answers to those questions, depending on who you ask.

Here are a few you'll get almost clear agreement on. How crucial is primary care is to any new reform? Very. Do we as a country need to expand our primary care services and practitioners? Yes. Where do we need them practicing? Close to the people in every small town and city. Will they need help adapting themselves? Absolutely.

The process has already begun. HHS, Health and Human Services, has begun to put real dollars into the expansion. In a September 27th release HHS awards $320 million to expand primary care workforce. Money intended to grow MD residency slots, physician assistant training, nursing training, nurse by clinics. Then in an October 8th release HHS announces new investment community health centers, a $720 million down payment from the committed $11 billion investment. All intended to increase the number of patients served from the current 20 million to over 40 million.

And just two days ago, October 26th, HHS announces the availability of up to $335 million to boost access to primary healthcare. Clearly, the companies that are designed to build and have adapted to future focus on primary care are going to be well positioned. Much of this is built into the DNA of this company, and always has been. Because of that, we force off some of these changes and have already begun to adapt.

We've been adapting both ourselves and our customers, finding variable ways to maximize the opportunity in what many have found to be the difficulty. Adapting to a current stabilizing but lower utilization rates than in the past by taking advantage of the openness of once closed competitive doors. Doctors turning to who can help them most. We are reaching them. Adapting to new small entrepreneurial and alternative primary care models full of ideas and resources, yet in many cases dual primary care experience. Adapting with over 100 current IDN customers that we've been doing business with for a long time.

Together we're learning about their new, small, fragmented alternate care offices, and what it takes to operate and maintain productivity. Leaning out anything that is not valued, and investing even further into what is valued today and tomorrow. Beginning to help our customers lean out their practices or institutions. Embracing a cost containment focused customer by strengthening them with an expansing offering of our brands. And leading motivated and fully intact PSS World Medical Team that is focused on our health, as well as the customer's health. Their alignment with the shareholders and customers is what is behind the margin expansion momentum. We are adapting and we are executing. We are confident that healthcare and primary care needs to change and adapt to effectively and efficiently handle the new volumes, either from reform or demographics. We are confident they cannot and will not change without help. And we are also confident we will be there to do so with great value to practitioners, owners and shareholders.

Now, let's look at our results. First, our Reach Strategy continued its success.

In the Physician Business we earned new business from more than 6300 new accounts in the quarter. And in the Extended Care Business we added 427 new customers during the quarter. On a consolidated basis our sales per day grew by 5.3% sequentially from the first quarter of this year.

Secondly, our Health Strategy, which is focused on optimizing profitability in the supply chain, expanded our gross margin by 100 basis points over last year's second quarter, and we're up by 111 basis points year-to-date versus last year.

Third, was a strong performance in our Strengthen Strategy, which is at the heart of our purpose to strengthen the clinical success and financial health of our caregivers by solving their biggest problems.

One example would be our demonstrated ability to address one of our customer's biggest needs, that of cost containment, and do so enthusiastically with our own brands. This meets the clinical and financial needs of our customers, as well as provides a strong return to our shareholders.

Our brands continue to grow at a significantly higher rate than all other brands. Another strong example would be that of our Elder Care Program MDS 3.0 Total Readiness, recently rolled out by Gulf South, designed to help our skilled nursing customers adapt to the significant change in how they file for Medicare reimbursement. MDS 3.0 Total Readiness is a combination of a software answer from the leader in elder care EHR Software, Point Click Care, and people preparedness answer from the top clinical and financial consulting company, Pathway Health Services. This offering puts Gulf South in a unique position to strengthen the financial health of ours and other's customers.

Fourth, our Lean Strategy continues to bring new ways to be more effective and efficient, which has enabled us to achieve our year end goal of 7% operating margin half a year early. All of these led to our achievement of an EPS of $0.35 and our continued commitment to a full year goal of $1.27 to $1.31. I will now turn the call over to David Bronson, our CFO, who will detail our fiscal year 2011 second quarter in greater detail.

Thanks Gary, and good morning, everyone. I'll start with consolidated results for the quarter. Total revenue of $496.2 milliondeclined by 11.7% from Q2 of last year with five less billing days. The comparison is also impacted by the large amount of H1N1, or Swine Flu, product sales we had last year's quarter, about $23.2 million. On a same day basis, and adjusting for the H1N1 sales, revenues were down about .6%, reflecting the ongoing softness in the position office utilization that we've seen throughout the year.

You may have noticed that in this morning's release we highlighted sequential growth of 5.3% per billing day for the Company, 6.6% for the physician business, and 2.2% for elder care over Q1 rates.

Now, we don't normally focus on, or report sequential quarter data, but in this time of rapid and far reaching change in the healthcare distribution market, we're all looking for data points, and we felt like this one was important.

Gross margins continue to improve in Q2 up 100 basis points, as Gary said, from last year directly attributable to one of our core business strategies, Our Health, which we've talked about in the past and which has the full attention and engagement of our -- of all of us in the Company.

A key part of that strategy, as you know, is growth and penetration of our brands including select and other private brand categories which grew by 2.4% in the quarter. Our brands represent 17% of total Company sales at the end of the second quarter. Our ongoing adoption of lean strategies to eliminate waste and find more efficient ways to do business helped reduce G&A expenses by a little over 10% from prior year.

As I commented in our earnings release, we've done this with no reduction in head count or services and , in fact, we continue to invest in programs and technologies that will drive future savings as well. The combination of improved gross margins and lower operating expenses resulted in 7.1% operating margin for the quarter, another high water mark for this company, and the achievement two quarters early of our goal for this year. For me, this accomplishment is even more noteworthy, given this year's revenue growth challenges due to the economy.

Now, we recognize this achievement and we're proud of the organization that brought it to pass, but we also want to point out that we believe we still have a long runway ahead of opportunity for continued expansion of our net margins, and we can see our way to achieving 9% to 10% operating margin in the future, maybe even a little bit sooner now.

For the second quarter, our consolidated earnings per share was $0.35, which was down $0.02 from last year's second quarter, primarily due to the five less selling days and the lack of any Swine Flu sales this year.

We executed well this quarter on our controllable initiatives and programs, and we countered weaker macro conditions with our customer acquisition programs. We've also been both effective and opportunistic managing our cash and balance sheet. Our team continues to do a really good job, a terrific job, managing our receivables in both businesses with 42.8 days on a consolidated basis of receivables, and improvements in each of the aging categories, which further reduces any future collection risk.

Cash flow from operations of $11.6 millionin the second quarter is in line with historical patterns. It was slightly lower than we expected for the quarter, due to timing of a couple of tax items and inventory purchases. But we remain committed to our full year goal of $108 million to $112 million. And our strong cash position funded stock repurchases of approximately 2.1 -- or 2.0 million shares during the quarter at an average price of $19.13.

Finally, our return on committed capital for the second quarter was 36.7%, second only on a historical basis to Q2 of last year and well above our target return of 30%.

I'll quickly cover some of the divisional operating statistics that we normally cover on these calls, and as a reminder, much of this information is all available online, as Rob said, in our investors workbook and our 10Q, which will be filed in two weeks on November 10th.

In the physician business, same day sales were down 6.9% or down 1.8% when you exclude last year's H1N1 related product sales. This result, excluding the one-time Swine Flu sales from last year, is consistent with our first quarter result. Sequentially, we do see some signs of stabilization and utilization in the physician market.

In the product categories, disposable was down 2.8%, lab diagnostics down 17.2%, primarily reflecting lower sales of flu test kits, which was a large part of last year's H1N1 sales. RX, or pharmaceuticals, were down 4% and sales of our brands increased by a little under 4%, 3.9%, in the quarter. Equipment sales of $31.5 millionwere down 9% from prior year, but were up sequentially from Q1 by about $5 million.

Operating margin in the physician business reached 10.8% which, as far as I can tell, is an all-time high.

In the extended care business, same-day sales were up .8%. In the customer segments we saw skilled nursing segment down 4.7. Home health increased by 8.8%. Hospice continues to be the fastest growing segment, recording 52% growth in the second quarter, compared to last year primarily -- or helped by our Medics acquisition in Q4 of last year. Sales of our brand grew a little under 1%. And operating margin in the Elder Care business in Q2 was 5.8%. So just to summarize from the CFO's perspective, kind of a noise but very good quarter.

We've known for a year that this quarter's revenue comps were going to be difficult because of days, and last year's Swine Flu sales. But from an operations and execution standpoint, our core business strategies Reach, Strengthen, Our Help and Lean are all delivering really good results. Profitability is improving in sustainable ways and our financial position continues to be very strong. I'd like to turn it over to Gary for some final comments before we take your questions. Thank

Thank you, David. In closing, I will tell you that we just returned from the PSS National Meeting. And this was led in many ways by a new team. Not new to us or the business, but in new roles. Eddie Dean is in his new role as President, his new VP of Sales Sales VP of Marketing, along with Brad Hilton in his New Chief Officer role, all executed one of the best meetings we've ever had. Highly relevant to the environment and the challenges and opportunities our people face, and appropriately titled Move ad One. Our people left with confidence, direction and tools to do just that. Thank you.

Operator, if you could queue up the questions, we're ready to take them.

Absolutely, sir. (Operator Instructions). And gentlemen, our first question comes from the line of John Kreger from William Blair. Please proceed with your question.

Hi. Good morning, guys. This is Robbie Sidor calling in for John. I just had a couple questions for you. The first one is as you think about the headwinds that you detailed in your press release, is there any headwind from H1N1 in the upcoming quarter? And secondly, when do you think the utilization will start to turn?

I'll take the first part of the question and I'll, this is David and I will let Gary answer the second part. We had -- last year we had about $20 million of sales in the third quarter of H1N1 products

And, Robbie, as far as utilization goes, there are a couple things that can impact it. Obviously a flu season, depending on what happens with a flu season. It seems to be running similar, to slightly better than, or bigger than a two year ago trend. And consumer sentiment, obviously. The election outcome, unemployment, all of those things can make a real impact on utilization. I can tell you that, although, we see signs and some reasons to be optimistic, our improved sequential growth from Q1, we're not counting on improvement and we're not predicting downturn of utilization rates in the back half as well.

Got it. Thanks a lot, guys.

Thank you. And our next question comes from the line of Richard Close from Jeffries and Company. Please proceed with your question.

Yes, thank you. Congratulations, based on the current environment. I was just curious if you could talk about the 9% to 10% operating margin outlook? And you mentioned that you might be able to get there sooner than later. I wonder if you could just give us what you see as the timeline with respect to achieving that?

Yes. You know, Richard, we're in the middle of our strategic planning process now coming up with our next three-year plan. And, as we've said before, when we finish that in the springtime, we'll be able to give you a little bit better feel for that. Let me give you a couple of things. First of all, it feels like to me like we're about a half year ahead of where we might have been otherwise, because of some of the traction we've seen. And I would also tell you, as I have said in the past, you know, 40 to 50 basis points a year improvement is the track record we've been on. It's the trajectory we've been on. I don't see any reason that that would change.

Okay. And then with -- on the second quarter results, obviously, strong on the margins side. Is there anything that you can point out one time that may not continue in the back half of this year, or is it all these strategies that you're implementing? You suspect that it will continue somewhat of a stair step improvement as we progress through the year?

Are you talking about net margins or gross margins?

Gross margins.

Okay. There's nothing one-time in the quarter for gross margins.

We'll continue to execute the strength in our health strategies that have created the momentum and there was nothing one time in this quarter so we are going to continue with, what we believe, is that momentum.

Okay. And then final question here would be, you mentioned some relationships with IDNs. Can you go into that a little bit more, what your strategy is in terms of sort of protecting the customer base or expanding as the hospitals consolidate the physician practices?

Absolutely. Well, obviously, everybody has been paying very close attention to the increased rate of consolidation. We also remind our people to pay very close attention to the 98% of the customers with us, or with our competitors that have not been impacted by consolidation. But I can tell you that our assumption is -- we're operating under the assumption that this increased rate of consolidation will continue. And who knows whether this will be more similar to the '90s or not.

But what we're doing is is working very closely with the many IDN customers that we've done business with over the years that, in some cases, have ramped up an acquisition strategy sometimes in response to a competitive hospital system doing it. Because it seems to be that the main drivers continue to be the protection of the revenue and referral stream. And I can tell you that what -- in talking to them, one thing has been very clear to these IDN's is that the change in ownership didn't change the physical location of the physician office and, therefore, the service needs.

And so, we're working with them to help maintain the productivity of the physician, which is crucial for the success of the acquisition and the intent. So even recently we have seen an RFP from a very large hospital system that wants to move away from its traditional hospital distributor, due to too much dissatisfaction to maintain physician productivity. So that seems to be one of their key drivers, is making sure that the acquisition is a good one . And the best way to do that is to maintain physician productivity. We'll be in there learning with them. We won't win all of them. We're losing some. We're winning some,which seems to be very similar to our business on a day- to-day

Just to be clear on the RFP that you just brought up, is that a situation where the IDN is just putting an RFP out for the physician practices rather than have their hospital, I guess, distributor do that? Is that the case?

Yes. It was due to a growing level of dissatisfaction with just a different model. I mean if we were trying to act like a hospital distributor, and deliver in their volumes to a hospital customer in a hospital building, they would be equally that satisfied with us.. The fact is that what they found is that maintaining the physician productivity was key to them, and that delivering one each to a two or four doctor practice that is somewhere out in the rural areas is a difficult thing to do. So I don't mean -- I wouldn't extrapolate that across all IDN's. What I would tell you is is that one of the drivers is productivity for the physicians. And that's why we're working very closely to have -- with the IDN customers that currently have to even gain those that we don't.

Okay. Just final. On the new accounts, the Reach Program. Any update in terms of how many are continuing to buy from you? I think you've thrown out the stats previously.

What I can tell you is that we continue to maintain the 50+% retention rate. So -- I don't have the math in front of me, but we're pleased with the retention.

Over the course of one -- two to three quarters after we get them, we get down to about a 50% retention rate.

I've got the numbers that I can go over with you offline, Richard.

Okay. Thanks, Rob.

And thank you, Mr. Close, for your question. (Operator Instructions) Gentlemen, our next question comes from the line of Eric Coldwell from Robert W. Baird. Please proceed with your question.

Thanks much. Good morning. You clearly blew away my revenue model here. So congratulations on that. I know July started absolutely in the tank, and August was probably a little better. But you must have had a very strong close in September. And I'm just curious if you can give us some better sense on the month-to-month performance, and if there was anything unique about September that helped you get to the full quarter results?

Eric, there was nothing unique. September was better than August. August was better than July. The only thing that gave us a little bit of tailwind in the quarter was that we got our flu vaccine early and shipped it early. So some of the revenue that normally would have come in Q3 for flu vaccine happened in Q2, but it's a small amount in terms of the total.

It's an especially small number, Eric, because of the way that we recognize revenues for vaccines different than others because ours is an agency agreement we're pleased with. No up the inventory risk, but it also means we record a lower revenue .

Right and I know that McKeston talked about a better flu sell through. And my view was, given the nature of your contract and how it operates, that it would not be a big driver of revenue. Were there any ancillary sales related to the flu vaccine or anything else associated with it that, while you have an agency model there and get a few million of revenue,is there something else that came associated with that that would have been a kicker?

No, nothing out of the normal, Eric. There was nothing in September. It was a typical kids go back to school in September, like they have every September since the beginning of time. And there wasn't anything particular there that you could look to.

Okay. Shifting gears following up on Richard's question on the Reach Program. Could you just remind us the total number of Reach new accounts that you've had since beginning the program, and then maybe a follow-up on average order size?

Do you have that, Rob?

We're fumbling, Eric.

Kind of like my Chicago Bears, Rob, fumbling a lot. While you're looking for that let me shift gears again.. Athena Health, we know you completed your contract renewal there. There was a couple of changes. I was hoping you could address those changes and what it means going forward?

Okay, absolutely. We'll start with the fact that we had a very good quarter, a record quarter for us, an HIT standpoint. Very pleased. Increased close rates. Continued increased participation of a sales force.

We did resign the agreement with Athena. Very little change in economics. I can let David speak to that, but I will tell you an improved agreement. It opens us up to sell to any customer including, IDM's where we couldn't before. They separated their EHR from the revenue cycle management so that unbundling is very positive for us. It's non exclusive now, which expands opportunities for both parties. So we're real pleased and have a very good working relationship with Athena, their folks in the field and folks in their corporate office.

Okay.

Just circling back on the Reach. It's about 23,000 total customers since we started the program. And that breaks out half and half, 11,000 in FY10 and 10,000 so far this year.

Okay, great. I might have a follow-up in a second, but I'll jump out and let others get in. Thanks, guys.

Thank you. Gentlemen, there appears to be no further questions at this time. Mr. Corless, I'll turn it back to you for your concluding remarks. Thank you.

If we have no further questions, just thank everybody for joining. It was a very busy morning, a lot of reporting. And we wanted to thank you for spending the time with us this morning. And, Rob, if there anything else?

We're available for follow-up. We can get some of those stats to fill in the blanks, as well as we're here for any follow-up questions. Thank you.

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