麥卡遜 (MCK) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the PSS world medical 2012 earnings conference call. (Operator Instructions). I would now like to turn the conference over to David Bronson Chief Financial Officer. Please go ahead.

Thank you, Jennifer. And good morning, everyone. Welcome to the PSS World Medical teleconference, where we are talking about our results for the second quarter, which ended September 30 th , 2011.

Joining me today on the call is our Chief Executive Officer, Gary Corless. Before we get started, I want to let you know, that Robert Weiner, Vice President of Investor Relations, who usually opens these calls, has left the company after ten years to pursue other opportunities. We wish him the best. We have a search for a replacement well underway.

In the meantime, if you do have any questions in this area, please get in touch with me directly. SEC and state laws 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, have involved a number of risks and uncertainties that could cause actual results to differ materially from what is expressed or forecasted.

For a list and a description of certain of these risks and uncertainties, we refer you to the Forward-looking statement disclosures in our fiscal year 2012 second quarter press release, which went out this morning. 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 web site and directly from the Company's Investor Relations department. We may also reference certain non-GAAP financial reference 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 reconciliation charts in our financial workbook located in the Investor Relations section of the Company's web site and as filed in our form 8Ks that we submit to the SEC. In November we will present at the Credit Suisse Healthcare Conference in Phoenix. And have also scheduled time for one on ones at that conference. We will also do our annual investor trip to Europe at the end of November and the beginning of December with stops in Zurich, London and Dublin.

Contact me directly with any questions on either of these events. For a call today, we will follow our formal remarks by a question-and-answer session, as prompted by the operator. And with that, I'm pleased to now turn the call over for Gary, our president and Chief Executive

Good morning, David. And thank you, David. Good morning, everybody. You'll remember back in Q1, we outlined the environment and the economy as we saw it. As well as the accompanying challenges and some new assumptions. We shared the strong performances of our key strategies, reach, strengthen, our health-in-lean, as well as the slow start of our Elder Care Business.

And we said we in the industry were not moving fast enough when it came to addressing our nation's caregivers most pressing problems. So what's happened since then? What's changed and what's the same? How do we perform overall by strategy and by business? How with we addressing ours and industry slow reaction, the responsibility and opportunity to help the nation alternate care providers, and what does that mean for our backhalf at full-year results? But what has changed and what hasn't?

What has not changed, it's still a tough environment. Utilization is sluggish and uncertainty is the norm. Unemployment, debt commissions, healthcare reform in the courts, new cuts to skilled nursing facilities, and consumer confidence at the lowest levels since March of 2009. So what has changed?

Our more aggressive and head-on approach to all that hasn't changed and won't change anytime soon. More on that in a minute. How did we perform? First as a whole, we achieved earnings per diluted share of $0.37. We showed a strong operating margin and had our second highest return on community capital ever at 38.7%, now by strategy.

Reach. We had a record number of new reach accounts in both businesses and since the program's inception, reach accounts have brought in over $430 million in revenues. We continue to learn a great deal from our reach to anew and growing list of IDN or hostile and practices. They have identified our competence and service model, designed specifically for a physician practices both valuable and necessary.

We brought on 15 new IDNs in the quarter. We are also learning and growing with our community health center, CHC business. We brought on 74 new bill-to accounts in the quarter. Lastly, an important component of reach today and tomorrow is our sales force expansion at PSS. We added new sales reps in the quarter and are on track to reach our goal of 20% growth over the next three years. Our health.

We grew our brands at the fastest rate in over a year, contributing to gross margin expansion in both businesses. Our strengthing in strategy was very successful and PSS had it's best equipment quarter in two years, and Gulf South through it's Pathway Health Services had over 1700 caregivers participate in the webinars designed to assist them in preparing for the Medicare cuts.

Now by company. PSS's strong revenue growth, as well as growth in operating margin expansion. Gulf South continues to leverage its expanded offering to gain new wins and expand gross margin but was unable to offset prior losses with enough new business. Now how are we addressing our industries slow reaction to the responsibility and opportunity to help the nation's alternate care providers.

This quarter we launched a new mission to our entire organization, that, A, ties in with our purpose to strengthen the clinical success of financial health of care give by solving their biggest problems, and B, boldly states our commitment to the customers number one concern the financial viability of the practice home or agency. Our new mission is to improve caregivers' financial performance by 20%. Although reducing expenses is important part of of our offering, this is not just about savings.

This is much more comprehensive approach to their financial health. And put in context,Medical supplies are approximately 3% of our customers' total expenses and 2% of that 3% of is our cost of goods sold. Another way of saying, if we sold at cost, it would only reduce the total expenses by 1%. They need much more than that and we can and will do much more than that. Well, many are left to commiserate alongside them, we will enthusiastically live up to our purpose and mission and provide these customers with positive, substantive actions to take.

By utilizing new technology tools, we start by addressing the revenues, by identifying appropriate opportunities to provide value-added services that improve care and are reimbursed by point-of-care diagnostic testing, in office dispensing to name just a couple. We then move to look at how we will reduce expenses through alternative products and programs. Our own brands, as well as generic medications, and our proprietary purchasing programs all can make a significant impact. Lastly we focus on helping them approve efficiencies, a key component of their effective delivery of quality care. Practice management, EHR, patient scheduling and revenue cycle management to name just a few. We have done the homework.

We know the profiles of these caregivers and we know what it takes to affect the positive change that is necessary. The successful execution of this purpose and mission requires the unique foundation that we have laid over 28 years. The largest highest strain sales force with the most comprehensive offering utilizing new technology tools and training and a service offering that creates deep and lasting relationships with providers and their staffs.

This is a full organization mission, with full participation and tactics by department, including IT, HR, training, supplier management, sourcing, and of course, marketing and sales, just to name some of them. We are going on record and we are taking a stand. In our words, in our daily practice, and now in the nation's newspapers, as recently evidenced by our full-one page ads in the Wall Street Journal and US Today, we believe that healthy patients start with healthy practices, homes and agencies and we are concerned with our countries caregivers' future.

We believe that everyone is counting on these caregivers to be there when they need them, should stand up for them today. This highly focused, purposeful, relevant and energized approach combined with a successful momentum of our key strategies will drive continued success and the achievement of our goals for the year. I'll now turn the call back over to our CFO, Mr. David Bronson.

Thanks, Gary. I am going to walk you through our financial and operating results for the quartergiving you some details on our core business strategies, as we usually do. And also some of our normal metrics for balance sheet and cash flow. Let me start with revenues. Our physician business grew revenues by 9.7% over prior year.

Aided by the acquisitions we have done in the physician dispensing space. X acquitions revenues grew by about 4%. By product line, for the physician businesses disposables grew 3%, lab diagnostics, 2%, equipment sales grew 8% to $34 million,and RX products grew by 5.4%. Elder Care revenues were down 5% from prior year, although it has seen customer wins, they have not yet made up for the customer losses in Q3 and Q4 of last year. By customer segment, skilled nursing facilities revenues were down by 3.8%,

Homehealth was down 41/2%, Hospice revenues actually grew by 3%. Our Reach Strategy continues to be a successful. During the quarter, we added 5600 new physician accounts, and 255 new Elder Care accounts. The year-to-date totals for Reach now through two quarters are 11,300 for physician and 414 for Elder Care.

As we've said before, these new accounts represent a big opportunity for us as our reps go back and turn, a foot in the door into a preferred supplier relationship with those new customers. And that brings me to our strengthen strategy, the main idea of which is to build deep, trusting relationships with our customers, by solving their biggest problems through active and productive dialog, or as we call them, business conversations. Year-to-date our physician reps have had over 11,000 documented business conversations with their customers and our Elder Care reps have had over 1200.

Now to facilitate and improve these conversations, we have recently equipped all of our sales reps with iPads, preloaded with an interactive business conversation app, that we designed to both direct the conversation, as well as showcase the breathe of our offering of productions and solutions. Gross profit is a percent of sales improved in Q2 by 30 basis pointsprimarily as a result of growth in sales and penetration of our brand's product. Physician growth in our brands was 11.3% in the quarter and Elder Care grew our brands by 8.3%. Overall the Company grew this category by over 10%, and it now represents 18% of our overall mix. As we talked about last quarter, in this first year of our three-year plan, we are making significant investments to advance these strategies, as well as investing in resources to go after what we call emerging markets.

Namely, community health centers and integrated delivery networks or IDNs, and as Gary said during the quarterwe added 74 new CHC accounts, 15 new IDN relationships, which covered 96 sites. We are finding that these customers readily see value in our product offering and our service model. G&A expenses in the quarter were up by $9 million, $8 million of which was related to acquisitions done in the last three quarters.

Our lien initiatives continue to offset to a large degree the impact of the strategic investments we are making. Consolidated operating margin was 7%. The physician business reported operating margin of 10.3%, and Elder Care was 5.1%. And earnings per share, as Gary mentioned, $0.37, meeting our internal expectations. Speaking of M&A.

Year-to-date we have completed four acquitions so far, totaling about $40 million of annual revenue, which was our external goal for the full year. However, the pipeline continues to grow and this still represents an excellent use of capital. It helps us expand our geographical footprint, add sales reps, and add new competencies. And I believe you will see us continue to add both bold-in and strategic acquisitions in the back half. The other area where we have deployed capital is in share repurchases.

During the quarter, we repurchased in open market transactions a little over 1 million shares, bringing the year-to-date total to just over 3 million shares. Last quarter I said we had try and do a better job of reporting the share count impact due to our convertible debt. In the first quarter, the convertible added about 2.6 million shares to our weighted shares outstanding, in Q2 with our lower stock price for most of the quarter, the delusion was 1.2 million shares.

Operating cash flow for the quarter was $22.6 million and year-to-date we have generated $57 1/2 million, on track for a full-year goal of $115 million to $120 million. And we saw really excellent results in working capital management in Q2 by our full team. Consolidated receivable days went down by 1.6 days, inventory days went down by 1.8 days and consolidated payable days improved by 2.8 days.

And as Gary said return on committed capital for the quarter was 38.7, the highest we have seen in any second quarter of a fiscal year and second only I think to Q4 of last year, which was I think 39%. Our team is very excited about and committed to the new mission that Gary talked about. We believe that improving our customers' overall financial performance by 20% is the right thing for us to do. And that we have a unique capability to achieve it. We also believe that our shareholders will benefit from this strategy in the form of faster, more profitable growth. Now I will turn it back over to Gary for any closing comments.

Thank you, David. It's halftime and we are reconfirming our guidance. We will need to accelerate the things that are working and challenge investments that are not providing a return or helping to us reach our goals. Our people are fully engaged and appropriately focused. As was recently said, dealing is an art, medicine is a profession and healthcare is a business.

And I might add, if you're purposeful part of the solution and a transition to the healthcare of tomorrow, it's a really good business. With that, I'd like to turn it over to our operator, Jennifer.

(Operator Instructions). Our first question comes from the line of John Krueger from William Blair. Please go ahead with your question.

Hi, good morning, guys. This is actually Robbie Sidor in for John. You guys talked a little bit about utilization continuing to be quite weak. Can you give us a little more on that. How did it trend throughout the quarter?What have you seen since the quarter ended?

Yeah. Hey Robbie. This is Gary. We saw no improvement I would say in utilization. I don't know that we saw a specific dropoff at any point or increase. I would just say it was still depressed or sluggish and our expectation is that it will remain that way for the balance of the year.

Got it. What do you think it will take to see an improvement there? Is it increases in employment? Is it consumer confidence? What do you think is the key metric to look to?

Robbie, for probably the past two years, Dave and I have been pointing to two things, leading economic indicators for utilization. You just hit both of them. It's unemployment or employment, so the more people that have jobs, have insurance. So I think seeing an improvement in employment, will help utilization and consumer confidence is absolutely the other piece. So, you know, both of those, not being where we want them to be, and we don't expect great improvement in either one for the balance of the year. So, you know, when that happens, we'll be ready.

Great. Thanks. If I could just squeeze one quick one in on the sales force additions. I know you have the goal of 20%. Could you give us how many were added so far this year?

Robbie, we're not giving that for just market reasons. But just rest assured, the size of our sales force, you know, which is approximately, you know, between 650 and 700. Our goal of 20% is for a three-year period. And if you break that out across the three years, of which we're halfway through the first year.

We did say at the Investor Day that it would be sort of frontend-loaded to sort of get ahead of it. We are on track as we said. But as Gary said, it is very competitive for sales reps. And so we do not want to be too specific there.

Understood. Thanks very much.

Thank you. Our next question come is from the line of Larry Marsh from Barclays Capital. Please go ahead.

Hi. This is Kip Davis calling in for Larry. How are you doing?

Good Kip, how about you?

Good. Just a quick question. I know, obviously the Elder Care Business is still, you know, somewhat challenging with some of the customer losses from the prior year. I know we have seen margins come down a bit as well. Just kind of wanted an update on the general strategy there, as well as with the 11% cut to SNIPS, you know, discussion about homecare cuts, etc ... how are you folks responding with your initiatives in that space, whether it's pathways or some of the other stuff that you guys have been doing there.

Well, Kip, thanks for the question. There is no doubt, that the Elder Care has suffered the brunt of the cuts at this point. So it's got our customers extremely focused on their financial viability, which is the other reason why our purpose and now specifically our mission is extremely relevant to them. And being well received.

So what I would say is that as we said before, the Gulf South operating wasn't as competitive as it needed to be, up until approximately this past year,and they're bringing on new wins and they expanded their gross margin in the quarter. But we have got to bring on enough wins to offset those Q3 and Q4 losses. But they've got a sound team and a sound strategy. And a mission that is extremely relevant to the environment that you just described.

Got you. And make sense. One other quick one then. On the corporate expenses, they seem to be pretty much flat year-over-year which is always great to see. Just kind of curious. Is that -- either do you feel like that's, you know, those cuts are sort of sustainable, or do you feel like that's coming at the expense of other initiatives that may be makes more sense to put on hold given the challenging environment right now.

Yeah, Kip. We are full speed ahead on all of the initiatives that we talked about at Investor Day and last quarter. So the sales force adds, which really some of that is in G&A. But some of it is in selling expense,

Right.

The improvement. Our customer experience and online experience, the investments we're making there, the investments that we've made in leadership and marketing and go to market kind of capabilities for the CHCs and IDNs and emerging markets. They're all full speed ahead. We haven't cut back or dialed back any of those investments at this point. And don't expect to.

And as I said, in my remarks, our team and kudos to them, our shared services team here at World Med or at corporate headquarters and also out in the field, have just done a remarkable job of holding the line on cost increases and innovating to take costs out and waste out.

The only thing I would add to that, is the clarity of our purpose and mission points to us where we should invest, which David just highlighted. And it also helps clarify for our people what's not core. You know, from an investment standpoint. So that's helped our people.

Great. Thanks very much.

Thanks.

Our next question is from the line of Robert Jones from Goldman Sachs. Please go ahead with your question.

Hi, thanks for the question, guys. Hi this is Stefan calling for Bob. Just had a question on the Elder Care Business. Have you seen any additional client losses from larger accounts this quarter? I know you mentioned some last quarter.

No. No, Stefan. We haven't seen -- a little bit of the normal trading paint that happens in business, where we bring on some loose. But nothing like that we described from last fiscal year, leading into this year.

Okay. And more broadly, given the continued economic pressure, can you talk about your cost structure a little more and how specifically you plan to continue to drive margin expansion, especially with 17 CHCs and 15 IDNs added. I assume some additional spending might be needed to help in the infrastructure side here. Or am I off?

No. There's not really any infrastructure needed. I mean, we'll use the same distribution infrastructure to get to those customers. And remember that we're really serving the providers in the IDN. So we're not going into the hospitals. We're serving physician practices that are owned by IDNs and in the CHCs that just looks like a large practice to us.

Right.

There's not any infrastructure needed for emerging markets. And I would also say that in terms of leveraging our distribution infrastructure, all of the fold-ins that we're doing, do that and we shut down their operations and folded into ours. and that leverages, too. So in terms of margin expansion as we've said in the past about half of that will come from gross margin improvements and penetration of our brands.

The other half of it will come from innovation and that we're doing what's lien, our warehouse management system that's going in. Some of the other technology investments that we're making that will drive savings or fore stall us, adding costs as our volume grows. And then finally just the leverage you get from revenue growth.

Great. Thanks for the question, guys.

Okay.

(Operator Instructions). Our next question is from the line of Jeff Elliott from Robert Baird. Please go ahead.

Good morning. Thanks for taking the question. My first question is on select growth. Pretty nice growth in the quarter at 10%. Just curious if you could provide any color on that, in terms of how broad based that growth was. Was there any new products that you launched in the quarter that may have contributed to the growth?

Yeah, we're continuously launching new products there, Jeff. This is Gary speaking. I would tell you it's a broad-based growth. It really has to do with the purpose and the mission and the three legs of the stool of the mission, which is everything from revenues to expense to efficiencies and when we get to the expense conversation, and the impact on the accounts financial viability, it's big part of our conversation. So it's just -- it's a growing acceptance, based off of the quality and the breath of our offering. And it's a growing need, based off of the pressures that our customers are seeing and those things are all coming together.

Great. Shifting gears to capital deployment. Sounds like you're kind of on target for the full year for your M&A goals. Just wondering if you could give an update on that, as well as thoughts on share repurchases in the second half.

Well, what we've said -- let me take the second one first. What we've said, is that we always want to offset any dilution from either our financing or from new grants. We've certainly done that this year so far. But we also say that opportunistically, it does represent a good use of capital. Cash on the balance sheet doesn't really do anything for shareholders. And, we feel comfortable that we have good access to capital, should we need it. We are in the process of redoing our line of credit, which comes due early next year.

So you know we'll -- we have access to capital. As far as M&A, I mentioned the four that we've done, which is about $40 million of revenue. There is as strong a pipeline as I've ever seen of companies that -- and some of this is us going out, butsome of it is them calling us and saying they don't have -- they recognize that they don't have some of the capabilities that we have to deal with lower utilization and a real focus on operating costs and financial viability. And they kind of see the writing on the wall. So I'm encouraged and yet they still have good relationships with our customers. They still have very good sales reps.

And they see that we have become somewhat the buyer of choice. Not because we overpay or pay more than anybody else does. Just because that they perceive that we're going to take good care of their customers and that's important to them as they sell their business. So I think as I said, I think you'll continue to see us deploy capital for fold-ins and strategics. There are some capabilities that we need to really be 100% effective in the mission, new mission that Gary talked about, to help them improve revenues, costs and efficiencies. So I think you'll continue to see us be quite active in that area.

Great. Thank you.

Thank you. Our next question is from the line of Nicholas Jansen with Raymond James. Please go ahead with your question.

Hey, guys. Quick question on the dispensing solutions acquisitions. I was just wondering how they're tracking relative to plan? And if there's more plans to expand that with future M&A?

Oh, yes. They are on track. We have done a couple more fold-in dispensing acquisitions. Three of the four that I mentioned are actually in that space. As I said at Investor Day, I know I want to have a very robust and large and complete dispensing capability and so we have continued to be inquisitive in that area.

And it tasks our system a little bit. Because we really haven't integrated all of that yet. Certainly we have from a financial reporting standpoint, but operationally you know there's still separate platforms. While each of the businesses individually is performing very well, there is going to be an opportunity to be more efficient as we turn to integrating those businesses under sort of one platform.

Great. And then just speaking on kind of duck tailing on the M&A comments you spoke about earlier. Is there an appetite to be -- to look for bigger deals? Kind of scales more important in this environment? Or is it -- are you just pleased with kind of doing the tuck-ins and that's kind of your strategic focus for now?

Well, not sure how you define bigger. But we do have in a pipeline there are much larger targets that we're considering than the ones that we've done so far. Those take alittle longer. They're a little bit more complicated and they - - more things have to be sort of right with them. You can -- so it's less likely that we'll do a large one, but there are large ones in the pipeline.

And the first filter is whether it helps us achieve our purpose and our mission. And then is it a quality company that would make sense from all the other financial standpoints.

Great.

And just last one in terms -- I think you talked about earlier about organic growth, ex-acquisition in the physician segment about 4%. Can you remind us about what it was last year? I'm just trying to get a sens of if things are stable or getting a little better, getting a little worse?

It's better. Sequentially let me just pull it up here. Sequentially from prior quarter, it was 4 1/2%And last quarter it was actually down. Now part of that is because of flu and last year we did more flu last year than we did this year. So part of that is that.

But it is due to the reach accounts coming on and doing more. And also just some competitive strength that we have in terms of gaining share. So our perception is that we are gaining share in the position space.

Perfect. That's all I had. Thanks, guys.

Great. Thank you.

Thank you. Mr. Coreless, Mr. Bonson,I'm showing no further questions from the phone lines at this time. I'd like to turned call back to you.

Great. Thank you very much, everybody. For your time this morning. And as David mentioned he'll be available for follow-up. Thank you very much. Have a good morning.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and we ask that you please disconnect your line. Thank you, everyone. Have a good day.