麥卡遜 (MCK) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the PSS World Medical fiscal year 2012 fourth-quarter and year-end conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded today, Thursday, May 10, 2012.

It is now my pleasure to turn the conference over to Jenny Kobin, Vice President of Investor Relations. Please go ahead.

Good morning and thank you for joining PSS World Medical's fiscal year 2012 fourth-quarter conference call. Our speakers on the call today are Chief Executive Officer, Gary Corless, and Chief Financial Officer, David Bronson. We issued two releases this morning, including our earnings release for the fiscal year 2012 fourth quarter. These releases and our financial workbook for the quarter are available on our website at www.PSSWorldMedical.com.

The Securities and Exchange Commission and the 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 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 the forward-looking statement disclosures in our fiscal year 2012 fourth-quarter press release and to other information provided in our most recent Form 10K and other SEC filings, copies of which are available on our Company website or from the SEC.

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 reconciliation charts in our financial workbook that is located in the Investor Relations section of our website and is filed on our Form 8-K that we submit to the SEC.

I would also like to let you know about several upcoming investor events. Our Management team will be hosting our 2012 Investor Day on Thursday, May 24 in New York City. In addition, we will be presenting and conducting investor meetings at the Goldman Sachs 33rd Annual Global Healthcare Conference on June 5 in California, and the William Blair 32nd Annual Growth Stock Conference in Chicago on June 13. For our call today we will follow our formal remarks with a Q&A session as prompted by the operator.

I would now like to turn the call over to Gary Corless, President and CEO of PSS World Medical.

Thank you, Jenny and good morning everyone. Thank you for joining us on the call. Today is a monumental point in time in the future growth and development of our Company. In addition to our financial results we announced a strategic transformation that we believe will take PSS World Medical to the next stage of growth and success. As we look back upon the past fiscal year, and look forward to the next several years, there are evolving industry trends, significant changes amongst our customers and tremendous investment opportunities to grow our business. We look forward to sharing our thoughts on these important issues with you.

We have a lot of information to cover today so let me lay out the agenda. First, I'll explain the background and rational for the strategic transformation plans that we announce today. Then I provide an update on our four key corporate strategy; Reach, Strengthen, Our Health and LEAN. This will be followed by David's review of our full-year and fourth-quarter financials. I will then make a few summary comments and then we'll open up the call for Q&A.

We're proud to be on the front lines in healthcare serving our nation's caregivers who are dealing with the rapidly changing environment of lower utilization, consolidation, evolving regulations and declining reimbursement rates. As our caregivers in our US healthcare system deal with this unprecedented change and uncertainty, it is imperative that PSS be part of the solution which we are referring to as Healthcare 2.0.

Healthcare 2.0 is a transformation we are undertaking that will reposition us to better serve the front line caregivers who improve patient outcomes through the delivery of high quality, cost effective care in settings preferred by both patients and payers. The strengthening and serving of these caregivers best match our competencies. The new strategic transformation plan is the result of a thoughtful comprehensive evaluation of our product and customer portfolio, industry trends and future opportunities. Through increased focus and investment in key strategic businesses, managed as four high growth business verticals, we will be well positioned to further enhance value for PSS shareholders.

This plan will also include the integration of all our warehouse operations into one common distribution infrastructure as well as a redesign of our shared service and field support functions. These efforts are expected to significantly reduce operating costs while streamlining decision-making. It also means that we will divest businesses that do not fit this vision. Although our evaluation of this plan has been in process for some time, this past quarter was further evidence that these changes need to be made. It has become increasingly clear that ours may not be the best model for serving skilled nursing facilities and it does not fit our vision for the future of this Company.

By focusing on these four higher margin business verticals that we believe will also be the fastest growing segments of alternate site healthcare in the US, physician, laboratory, in office dispensing and the home care and hospice markets we will be better able to support these caregivers and will provide accelerated growth and higher returns for our shareholders.

Now let's talk about the areas of investment. First, physicians. This vertical includes providing services to primary care, front line specialists, and health systems. You will see current steps and future plans to help strengthen the clinical success and financial health of these caregivers by solving their biggest problems. We estimate the overall physician market is $7 billion to $9 billion with a historic growth rate of 2% to 4%. Although consolidation is happening, patient care is still provided at more than 250,000 individual sites.

We have a market leading presence with this customer base, yet we still have significant runway of opportunity due to the high degree of share held by national and independent companies. Our goal is to increase our share to 25%. As our healthcare system continues to adapt, the emergence of health systems such as integrated delivery networks, IDNs, accountable care organizations, ACOs, and management services organizations, MSOs, all designed to provide accountable efficient care have highlighted an opportunity and a need to serve our front line caregivers under many different ownership structures. At PSS, we currently serve hundreds of these systems. This is just the beginning.

We are dramatically increasing our investment in the health system resources. This includes significant new investments in leadership, sales, marketing, technology, and back office support to serve and grow this important and changing customer base. Our purpose again is to strengthen the clinical success and financial health of these caregivers by solving their biggest problems and we do that by helping these front line caregivers improve patient outcomes and practice strength through the detection, diagnosis and treatment of illness and disease.

One of the ways we do that leads us to our next area of focus, laboratories. We will greatly leverage our longstanding, market leading position in this high growth area through aggressive investment in this vertical, focused on providing laboratory supplies and services. The recent acquisitions of two premier lab companies, Infolab and ProLabs, will help leverage our existing expertise as well as add new competencies and markets. These additions will help further position us as an indispensable partner to consolidating health systems and take advantage of the trend toward expanding physician practices all leading to more attractive growth opportunities.

We estimate the laboratory market is $6 billion to $9 billion with an expected growth rate of 5% to 6% and is made up of over 100,000 individual physician office laboratories and 8,000 independent, clinic, and small hospital laboratories. Our goal is to capture 15% share of this defined market over time.

Improving outcomes often requires the detection and diagnosis that our nation's laboratories make possible. And it then often requires treatment which leads us to our third business vertical, in-office dispensing. The timely administration of treatment is an important part of effective cost efficient healthcare. Studies have shown over 10% of prescriptions are never even filled, often related to the inefficiency of a system that requires patients to bounce from one location to another in order to begin their treatment by filling their prescriptions.

We are partnering with caregivers to reduce this costly inefficiency that is inconsistent with better patient outcomes. We have grown to be the largest physician in office dispensing Company in just the past year and a half. We continue to search for quality companies that can expand our reach and competency and we continue to find them as evidenced by our most recent acquisition of Physician Partners. We estimate the in-office dispensing market is a $1 billion to $2 billion with an estimated growth rate of 10% to 15%. We believe there are upwards of 40,000 sites in the US that would benefit from our dispensing technology and turnkey service. Our market share goal for this vertical is 20% to 25%.

This brings us to our fourth business vertical, home care and hospice which is consistent with our Company, our nation's and the payers' interest in primary care. They are providers of efficient and cost effective care delivered in patient preferred settings. You will see current steps and future plans to grow our home health agency and hospice caregivers' ability to efficiently care for their patients where they and the payers want them to be taken care of, in their home. We believe that the dramatic growth of these patients presents a large and growing opportunity that is aligned with our expertise.

Although this is emerging market and therefore difficult to size, we estimate that with the right combination of products and services it would be upwards of $5 billion. The historic growth rate has been approximately 7% to 8%. These caregivers operate out of approximately 12,000 agencies and 3500 hospice sites. Our goal is to be a market leader in this space with at least 10% to 15% share.

To live up to this opportunity and responsibility requires us to significantly increase our focus in this area. Our home care business and customers will greatly benefit from a move to a singularly focused home care sales force with dedicated marketing and technology support. Also we will service this business through our existing PSS distribution infrastructure, which is better designed to meet the service and delivery needs of the home care agency and patients they serve.

Along with our acknowledgment of the need and opportunity to invest in these areas, we also have to accept that we cannot be all things to all people and that we must narrow our focus. Therefore we are working with advisors and have begun the process of identifying the right buyers with the best fit to acquire the skilled nursing facility portion of Gulf South and the specialty dental portion of SAS, or Southern Anesthesia and Surgical. We believe that new owners will be able to maximize the success of these businesses, enhancing the value proposition for customers and increasing opportunities for the team members serving them.

This in turn will enable us to redesign our back office and support functions. We will structure and resource our one team focused on the fastest growing segments we believe are the future of healthcare delivery. Healthcare 2.0 is the focused investment in four high growth, higher margin verticals that are aligned with the patients' preferences, our nation's payers' interests, our competencies and shareholders' interests, all delivered by a more streamlined back office model. Although we've been working on this transformation plan for some time, it is a work in progress. Our Board approved the plan this week and therefore we are building out our milestones into specific tactics. Over the next year you will start to see this in how we report and manage the business going forward.

Healthcare 2.0 is about aligning our efforts with where healthcare is going to better serve our nation's caregivers and our Company's shareholders. We believe this new direction will provide accelerated growth and higher returns. The strategic transformation of our Company, which will occur over the next several years, will enable us to provide attractive returns for the target of doubling revenues and increasing operating margins to greater than 10%.

As we're implementing this transformation it is critical that we continue to execute in serving our existing customers and growing sales and margins in both the short-term and long term. So while our business structure is changing we will not be changing the key strategies that our teams deploy for success. These strategies Reach, Strengthen, Our Health and LEAN will continue to be the key drivers for each of the four verticals moving forward. So now let me provide a brief review of the performance of our key strategies for FY12.

Reach. In the physician business PSS added 23,626 new buying customers in FY12, including over 6,000 in the fourth quarter. Given this environment of change and customers' openness to new solutions of partners this strategy will continue to be important to our success going forward. In the extended care business Gulf South added over 1100 new accounts in FY12 and over 300 in the fourth quarter.

Strengthen. We help strengthen thousands of caregivers in important ways. The Strengthen strategy is the heart of our purpose to strengthen their clinical success and financial health by solving their biggest problems and our mission to improve their financial performance by 20%. We accomplished this by helping them increase revenues, reduce expenses and improve efficiencies.

First, increase revenues. We do that by helping them in source the appropriate services that improve patient outcomes and are reimbursed. Diagnostic testing is a good example. In FY12 we sold $129 million in diagnostic equipment which our customers utilize in the detection and diagnosis of illness and disease.

Second, we help caregivers reduce expenses by offering quality alternative brands, relationships and cost savings programs. A good example of our ability to impact the caregivers' financial performance is by the growth of our high quality and often lower cost Company brand alternatives. In FY12 we grew our brands a total of $31 million. Our growth rate for our brands was strong with Physician business growth of 10.5% and Extended Care growth of 7.3%. Overall, we ended the year with a Company revenue mix of 17.6%.

Third, we help our caregivers improve efficiencies. One way is through the introduction of innovative technology and practice management solutions. A powerful example of how we can make a significant impact on our caregivers' efficiency is through our healthcare information technology, HIT, and revenue cycle management solutions from Athena Health.

In this past year we closed 2328 providers which is 166% growth. Working with Athena, we have estimated a $50 million to $60 million positive financial impact on these caregivers' practices based on measurements of increased collections, increased patient volumes, reduced no show rates, meaningful use incentives and qualification for PQRS Medicare, and that's physician quality reporting system. This is a good example of the power of our purpose and our ability to dramatically strengthen our caregivers' practices.

Now, Our Health. Our Health is about delivering the combination of products and services that optimize profitability. We accomplish this through an increasing mix of our brands which have inherently higher gross margin and better economics from the branded manufactures. We continue to expand gross margins in our Physician business by 184 basis points in the fourth quarter and 106 basis points for the full year.

LEAN. LEAN has and will continue to play a major role. We have a significant opportunity to apply LEAN principals to our redesign of our back office support.

In summary, we are in the front lines of healthcare serving caregivers who are dealing with the rapidly changing environment of lower utilization, customer consolidation and decreasing reimbursement rates. These headwinds created challenges during the past year, which impacted our financial performance. While we were able to generate reasonable annual growth in fiscal year 2012 of 3.3% in revenues and 4.5% in EPS, we have not been satisfied with our performance and results. We intend to match the rapid rate of external change with a proactive transformation of our organization designed to maximize the strength of our caregivers, our people and all those invested in us and our purpose.

It is becoming increasingly clear that our offering may not be the best fit for skilled nursing facilities. We will realign our efforts and investments to those areas identified as critical to the future of US healthcare and best aligned with our competencies. David will walk you through the full year and fourth quarter details. The most important take away in all that I've described this morning is that we are taking bold actions to position the Company for future success both operationally for our customers and financially for our shareholders.

I would now like to turn the call over to our CFO, David Bronson.

Thanks, Gary, and good morning, everyone. Thanks for your participation today. For my part of today's call I'm going to cover first our financial and operating results for the full fiscal year 2012 and for the fourth quarter; second, balance sheet and capital structure; and third, some perspectives on the transformation plan we announced today.

Starting with revenues for the full year. Consolidated net sales, as Gary said, increased 3.3% to $2.1 billion versus the $2.0 billion a year ago driven by 6.2% growth in the Physician business offset by a 3.4% decline in our Extended Care business. During the year, we completed eight acquisitions that combined for about $80 million of annual revenues. These acquisitions added about $17 million of revenue in FY12. Both businesses improved gross margin as a percent of sales during FY12. The Physician business raised its gross margin by 90 basis points overall and Extended Care improved gross margin by 110 basis points.

Consolidated gross margin for FY12 was 32.1% and that was 90 basis points higher than FY11. These results came from a combination of continuing to grow our private label sales, which carry a higher gross margin for us and offer better prices for our customers, as well as driving improved profitability with our branded manufacturers.

Total SG&A for the full year was up 7.7% to $541 million. Most of the growth and expenses came from acquisitions not yet fully integrated, both this year and last year, along with the investments in growing our sales force and other business strategies and initiatives as we outlined at the beginning of the year. These increases were somewhat offset by a significant reduction in short and long term incentive compensation expense, based on performance shortfalls against plan in both businesses.

For the full year our consolidated operating margin declined by 30 basis points to 6.3% with 9.6% in Physician and 4.7% in Extended Care. The decline in operating margin reflected lower than expected sales growth, operating expenses from acquired companies and acquisition related expenses. Net income for the full year was $74.3 million, essentially flat to prior year. Earnings per diluted share grew 4.5% to $1.38.

As I alluded to just now, our results for FY12 were lower than the goals we set for the year and were impacted throughout the year by continued low utilization and particularly a very light flu season that resulted in approximately $12 million to $16 million less revenue of flu related products compared to the prior year. Cash flow from operations was $128 million, exceeding our goal of $115 million to $120 million. Return on committed capital for fiscal year 2012 was 34.8%.

Now for Q4. And in Q4 there were 64 selling days compared to 65 a year ago in fourth quarter, so I'll give you both per day and total figures. Consolidated net sales in Q4 declined by 2% or on a same day basis 0.4% from prior year fourth quarter. In our Physician business, sales declined by 1.7% from prior year fourth quarter, 0.1% on a same day basis, and were significantly impacted by the lower sales of flu products.

By product line, Q4 same day sales. Disposables grew by 5.3%. That's the best growth rate we've seen for a couple years for a quarter for disposables. Pharmaceutical products grew by 5.1%; equipment grew by 1%; lab diagnostics, the category most affected by flu related products, declined by 9%. In the Physician business, sales of our brands, or private label products, increased by almost 12% in the fourth quarter and were 15.5% of the revenue mix.

Now for the Extended Care business. During Q4, account losses continued to adversely impact year-over-year sales comparison offset partially by acquisitions. In our Extended Care business, total sales declined 2.6% in the quarter, 1.0% on a same day basis. Q4 same day sales by customer segment, skilled nursing facilities revenues were down 3.6%, home health was up 13.3%, hospice was also up 5.6%. In the Extended Care business, the sale of our brands increased 4% in the fourth quarter and was 23% of the revenue mix.

For the fourth quarter, consolidated gross margin grew by 120 basis points to 32.6%. Overall the Company grew our brands by a little over 9% in Q4 and it represents, as Gary said, 17.6% of our overall mix.

Total selling and G&A expenses in the fourth quarter of fiscal year 2012 increased by 4% to $140 million, primarily due to acquisition related expenses. Excluding this impact, fourth quarter operating expenses were up about 1% over the prior year. For the fourth quarter of fiscal year 2012, our consolidated operating margin declined by 30 basis points to 6.6% with 9.5% in Physician, and 3.8% in Extended Care. Operating margins declined due to decreased sales, acquisition related costs.

Excluding these costs, consolidated operating margins would have shown about 20% or 20 basis point improvement from prior year resulting mostly from the improved gross margins. And here I'll refer you to our financial supplement that's on our website. There's some really good reconciliations of sales growth and operating expense growth and the acquisition related impacts of those for both acquisitions done in last year and this year.

Our effective tax rate for the fourth quarter of fiscal year 2012 was 33.9%, and as we explained last quarter, we are benefiting from a restructured tax structure for our global sourcing operations that will result in the lower effective tax rate. Net income for the fourth quarter of fiscal year 2012 was $20 million, and our earnings per diluted share was flat to prior year at $0.38.

Let me move on to balance sheet and cash flow. Operating cash flow for the fourth quarter was very strong at $62.3 million. Trends in working capital management for the fourth quarter included receivable days grew by 0.9 days to 42.3, inventory days were up 0.2 days to 57.4, payable days improved by 2.7 days to 36.9. These increases both in receivables and inventory days were impacts of the acquisitions, which had slower working capital turns than our core business. Our core business did not change from prior quarter.

As I think most of you know, during the fourth quarter of fiscal year 2012, the Company took advantage of favorable market conditions to close on a $250 million, 10 year senior notes offering at an interest rate of 6.375%. The proceeds of this financing will be used to partially pre-fund the retirement of our existing convertible debt which comes due in 2014, as well as general corporate purposes, including acquisitions and share repurchases and you can clearly see the impact of the additional interest in our interest line for the quarter. Partly in anticipation of that offering and the resulting short-term dilution of EPS, we have been more active than usual this year in the share repurchases.

For the full year, we bought back 5.6 million shares at an average price of $25.10, including 1 million shares in the fourth quarter at an average price of $24.21.

In terms of growth investments as I said we completed eight acquisitions in fiscal year 2012 totaling about $80 million of annual revenue, compared to our goal of $30 million to $40 million for the year. These acquisitions will expand our geographical footprint, they will add sales reps and add new competencies. We'll continue to seek, evaluate and add both fold in and strategic acquisitions to augment organic growth and as a way to profitably deploy capital, and as part of our transformation plan. As we announced today, we have very recently either closed or signed definitive agreements for three additional acquisitions that are expected to be accretive in FY13 and add about $120 million of annual revenue.

Now, before I turn it over to Gary for closing comments, I want to take just a minute or two to share some historical perspective on the transformation plan we announced today.

When I joined PSS a little over 10 years ago, the Company was in the beginning stages of a similar transformation. That plan, which rolled out over about three years, basically reinvented the Company. We divested our imaging business, which due to fundamental changes in that industry no longer fit our service model or our core competencies. We consolidated the distribution infrastructure, rationalizing about half of the existing locations, implementing a standardized ERP system and improving efficiencies, service levels and customer satisfaction in the process. We launched a global sourcing effort to take more control of our profitability. We designed and implemented a shared service approach for back office functions. We instituted a long term strategic planning process and implemented long term incentive programs throughout the organization that were aligned with those plans.

The results, that plan and our successful execution of it positioned the Company to double in revenues in the ensuing five years, improving margins from 2% to 6% and increasing return on capital from 12% to 30% plus. Investors were rewarded with a share price that went from $5 to $6 a share to north of $20.

I share this bit of history because, as we look back, all those initiatives looked very challenging at the time as do those that we announced today. But this is, by and large, the same team and having accomplished this type of transformation before, gives us confidence that we can do it again, leading change both internally and within our industry. We look forward to sharing more details of what we're calling Healthcare 2.0, including the year one key milestones of our transformation at our upcoming Investor Day on May 24.

Now I'll turn the time back over to Gary.

Thank you, David. This is an important time for our nation, specifically our healthcare system. There will be a prominent place for those who are part of the solution. Those players who are helping our caregivers adapt to the new realities and requirements to provide quality care efficiently and effectively. We are proud to have that opportunity.

Healthcare 2.0 was about the acceptance of new realities, the opportunities these create, and the ability to adapt to where healthcare is going. It is about being humble enough to know what others do better and bold enough to invest in your proven strengths. It is about being the place of choice for the caregivers our family and friends depend upon, the best talent in our industry who are helping them adapt, and the shareholders who make it all possible. We are more than excited to make this a reality for all. One purpose, one mission, and one team focus for growth, this is Healthcare 2.0.

I'd now like to turn the call over to our operator, Sharon, and begin the Q&A.

(Operator Instructions)

Larry Marsh, Barclays.

Okay. Thanks, Gary and David. A lot to discuss. To me, the first glance of all these changes seem very confusing, but on the strategic transformation, when do you think you'd be able to complete the sale of the SNF and specialty dental business given you're just kind of started? And how do you separate especially SNF from the rest of elder care, given they're running on the same systems and remind us what the size are of both those businesses?

Good questions, Larry. Let me answer the process question first. We're a little bit further along with the specialty dental business. We've engaged an advisor, William Blair. I think the process says the book is out. We are looking at indications of interest and we think that that process will probably take another three to four months.

As you suggest we are just getting started with the carve out of our skilled nursing facilities business. It's between $450 million and $500 million of revenue and probably a little north of $30 million of EBITDA when we get it carved out. We have engaged a banker or an advisor to help us with that process but we are really just getting started and it will probably take I would say four to six months to do that and let's see what else did you ask? Oh, how do you do the carve out?

Most of our reps in that business sell to both home care and extended care or SNF customers so it will take a little while for us to figure out the carve out. But I think that we'll be able to do that in a way that takes care of the customers and maintains continuity with them as well as setting us up to run this as a separate standalone business and service the customers out of our PSS distribution infrastructure. But it will take some time to accomplish that.

And David, how big is specialty dental did you say?

Oh, it's about $45 million of revenue and $7 million or $8 million of EBITDA. This was part of the business that we bought six or seven years ago up in South Carolina. The reason we bought the business originally was for the controlled drug competency that they had that we could distribute controlled drugs into our physician practices and it came with a specialty dental business that has done very well, but is not part of our core strategy going forward.

Okay. Second question really I guess for Gary which is you're communicating now you're going to try to get into four businesses, I guess three of which you're already into a certain extent, sounds like you're getting in the lab services business. So who is going to be running these four businesses now? How do you manage that? And then how do we even think of how to put those together with what you already had and what you may be selling to give us any indication of how you're thinking about fiscal '13?

Okay so let me say Larry that we're involved in all four of these areas to date, so a significant portion of the Physician business is laboratory. I don't know if we've sized that.

$450 million to $500 million even before the Infolabs acquisition, so a little north of $500 million after the acquisition is where we're starting from in lab.

So a significant portion of the Physician business and as you know has been a competitive advantage for us for some time. The reason that we have now broken that out as well as in office dispensing from the Physician business, obviously the physician reps will still be the ones selling it and we'll still be an integral part of the Physician offering. But we've broken out because there's a significant opportunity that we believe that we've been sub-optimizing based off of the strength of our offering, the strength of our relationships with suppliers, and just the expertise that's been built. And when it was a marketing segment of the Physician business, one of many, it didn't get the time and attention and investment that it deserved and we believe that we can take a competitive advantage to an extreme competitive advantage in the area of laboratory.

Now the Infolab acquisition also enables us to go up a little bit higher into the laboratory space which is good, considering that the consolidation that's happening, the expanding size of physician practices as we mentioned on last quarter's call, some of the highest growth equipment are the large analyzers which is different than it used to be. So they bring us an expertise and an ability to move up that chain and so laboratory has been an important part of our offering in our competitive differentiation.

This is about increasing investment, time, talent and money to take that up to another level. In office dispensing as you know has been an important part of our strategy for the past year or so. We believe it is an important part of the detection and diagnosis and treatment that we will help our caregivers achieve and that is important, with the future of healthcare being outcomes based, not just today's fee-for-service. So that's a large part of what Healthcare 2.0 also is is to making sure that the way we're able to help our caregivers is in both today a fee-for-service model but also in an outcome based model.

Home care as you know, Larry has been an important part of our focus for probably the last five or six years and have developed a pretty good competency there that we also believe that when it was combined with the skilled nursing facility business. Because it was the smaller piece of what was then coined elder care business, it struggled to get the resources and the attention because it always seemed to compete with the legacy skilled nursing facility business. So by breaking it out we plan very much on increasing the time, talent and money focus there.

So these four verticals are very much where we believe healthcare is going. They are aligned with the payers' interest which we believe is very important as well and will give us again the chance to really increase focus and attention there.

Now, leadership. These four verticals will report to a gentleman that you're very familiar with, Eddie Dienes, who has been a proven executor. For the leadership of the verticals we believe that in some we may have the in house talent and the others we may have a real opportunity to go outside and really strengthen the team as we did by adding John Sasen many years ago or David Bronson 10 years ago. So I think there's an opportunity there to continue to strengthen the team although we do have a good bit of talent that know these four verticals well.

So I don't know if that answered your question or not but you can tell me if it did.

Okay. I'll just defer, but just the final thing in the interest of time. So how are you going to be able to frame these changes in an outlook for '13 specifically given all of the moving pieces now? Are you going to give us a best estimate, and if so, how do we even think about any growth for fiscal '13 at this point?

Yes, that's a good question, Larry, and as part of Gary's call or comments today, he sized the markets and our expectation for goals for share and those are several year kind of goals. We've helped you a little bit to understand where we're starting from in terms of the size of these and just to be clear, in Physician we're starting from around $950 million of after you carve out the lab piece, lab about $500 million to $550 million, dispensing about $110 million business today and home care about $100 million business today.

At our Investor Day we're going to give you some milestones, key milestones for both the implementation of the strategy over the next 12 months as well as some of our growth expectations for the short-term. As far as EPS goals, because we're going to have discontinuing operations for a period of time here, and we may have some charges associated with implementing this transformation plan, we're going to probably stay away from any GAAP EPS goals for a while until we get a little bit better handle on, but we'll be able to at least help you understand what, how we're going to measure our success here.

Okay, I'll stop there. I'm sure I'll follow-up, thank you.

Thank you.

Glen Santangelo, Credit Suisse.

Thanks. Gary and David, it's a little bit unclear to me exactly as part of the transformation, I mean do you expect to spend a lot of incremental amount of money? I get it you're divesting a couple businesses and you bought a couple of incremental lab businesses, but is there a lot of incremental expenses attached to this transformation above and beyond that?

There may be some restructuring type costs as we redesign both our distribution infrastructure to support all four verticals and redesign our shared services function. But it's important also to understand that we are expecting a much higher organic growth rate and growth rate from acquisition in these four verticals, so is this a net cost down or up? I think we'll have to wait and see.

David, would you anticipate calling out these restructuring costs as a one-time item because it sounds like you're going to move away from a GAAP EPS number so would you anticipate kind of excluding all this one-time noise from the P&L?

Yes, and it is important to just clarify, there was no one-time costs associated in our fourth quarter results but there may be some going forward depending on both the nature of the plans as we finalize them and the timing of those things. So yes, anything that would be one-time in nature, we will highlight and call out.

Just a couple more items on the fourth quarter. How much did the refinancing impact your earnings in the quarter?

There was about an extra $1.5 million of interest expense but we also had a slightly lower share count because of the share repurchases. So from an EPS standpoint, I'd have to get back to you on that but those are the components.

Okay, and then in your prepared remarks you suggested that there was some acquisition related costs in the quarter. I didn't get a chance to get through everything. Were there some one-time acquisition related costs that you want to mention?

Just deal costs, Glen, not material or significant, legal and consulting and due diligence costs and travel, those kind of things.

So they aren't worth calling out I guess at this point?

No.

Okay. And then just my last question and I'll jump off. The operating margin in the lab business, could you kind of give us a sense for maybe how that margin compares relative to your Physician business?

Higher than the blended Physician business operating margin. In fact it's probably our most profitable product line or category if you will.

Okay, thanks, I'll follow-up as well.

John Kreger, William Blair.

Hi, thanks very much. David, maybe could you just continue along that same line and give us a rough sense of what you think the underlying profitability will be for the other three segments, similar to what you just did with the lab?

Yes, John, that's going to be a little bit hard because we haven't completely finished the carve outs yet, but I'll tell you that and as we've said in the past, home care and hospice have probably 200 or 300 basis points higher margin than our skilled nursing facility business, so low teens kind of thing. Our dispensing business has pretty good operating margins, north of 10% today. And we're still trying to figure do we do the lab carve out based on products or where it's used in the practice and so I'm hesitant to be too specific about either the lab business or the underlying Physician business until we finish that.

Okay, great. Thank you. If you just look at your fourth quarter performance under the existing structure, could you tell us what the organic revenue growth was in physician and elder care?

Organic was about 0.4%.

Combined.

Yes.

Do you happen to have it for the two segments?

No. There wasn't, as I said there was very little impact in terms of total revenues from acquisitions in comparison to the total, so I think if you use the same day numbers it will be close enough.

Okay, realizing that you're not really ready to talk about the '13 outlook, if you think about the longer term earnings goal that you guys have articulated in the past I think it was about 17% to 19%, as you think longer term, do you think this new structure puts you in the ability to still be in that range or should we be thinking about you in a different kind of long term earnings goal range?

So what we said today was that we want to double the size of our business after the two divestitures, double that revenue and get to north of 10% and I think we've given you enough information that you can kind of derive that. This is going to be a faster growing business going forward than it has in the past. But I want to be clear that the three year guidance that we gave at the beginning of last year is certainly going to be not in place anymore and we will have to give new long term guidance as we get into this.

Great, thanks and then finally, notice that you're going to be consolidating your distribution centers into it looks like one common footprint. Do we have any details on that, what do you think the ultimate footprint will look like compared to what it is for the Physician segment today?

Well, no, we don't, and we acquired, with Infolabs we acquired six distribution centers, there are distribution operations in our dispensing business. So I think that will be probably several months away when we finally decide that but I think it will be safe to assume that that footprint for our Physician business will certainly be a starting point. Now whether we need a few more or a few less depending on the needs of our customers and the strength of our systems, we'll figure that out over time.

Okay, thank you.

John Ransom, Raymond James.

Hi. I blipped out for a minute so I may have missed this, but do you have an idea of what type of goodwill if any impairment you might be taking in '13 as you divest in these businesses?

All of the goodwill, we aren't anticipating an impairment, John. The goodwill will transfer with the businesses, it will be part of the assets. So it will go off our books but there won't be a charge for goodwill if that helps you.

You aren't taking a big write-down, okay. The second question was about home healthcare. I'm sure you know the government's taking 1000 basis points of margin out of that business, the volumes have slowed pretty dramatically. There's another probably 4% or 5% cut coming in fiscal '13 if you count sequestration and rebasing, in the last cycle, the agency count shrunk by 40%. I just wonder if we're looking at this industry wrong and if you're not thinking, if you're betting against one of the cyclical government engineered capacity crunches coming.

Look, it's a good question and we're aware of all of the challenges that the caregivers in the home care and the hospice are dealing with. What I'll tell you is this, as you know, one of the reasons that the government has paid significant attention to the customers there is because of the significant profitability in each of those caregivers, so considerably higher than most others.

And the other part is we have a relatively small share there and even with some of the challenges the overall market customers are dealing with leaves us a significant opportunity for us to grow and to bring some differentiated solutions to help these customers when they're dealing with those very specific items that you mentioned. So there is, as we mentioned, a prominent place for those that can help care givers deal with these challenges, there's a significant runway of opportunity within home healthcare and hospice ahead of us, and most of them are starting from a pretty significantly profitable point in dealing with some of the changes to the reimbursement.

Okay, and then lastly, and again I apologize if I missed this, but are you literally going to have to deploy four different sales forces and is that going to involve, how much of that can be attacked through acquisition and how much greenfield hiring? And then the other question is can you give us some idea of the costs you can take out of your business post-sale or is it going to be kind of a wash?

So John, I'll take the sales question. No, we do not have to significantly change or add to the sales design as it is now. And let me tell you, so the physician office representative currently sells the laboratory diagnostics and the in office dispensing offerings.

What we will do is as we've said before, we're going to expand the number of physician office reps that are out there because there are areas that we believe we can grow and need to serve better. We will add laboratory support and we will add in office dispensing reps that will support, just liked today. So what I want to tell you is there's no master transformation of the way that we go to market from the sales side. There will be additional resources in the area of health systems, there will be additional resources in in office dispensing and additional resources in laboratory. But we have a very, a high quality sales force, over 700 strong, with longstanding relationships with all of these physician offices that we now will better leverage with this -- the growing support behind laboratory and in office dispensing. Does that help a little bit?

So let's just say you had, I'm just going to make up a number, let's say you had five reps covering a geographical region. Would you then layer in, okay we're going to have one guy whose job it is is to be the lab specialist and the five reps get out there and gen up leads and then plug this guy in when you get a warm prospect, is that kind of--

Generally supported by specialists is that what you're describing? Yes.

Yes.

And that's much like we have today, we just sub-optimized we believe in those key areas of laboratory and in office dispensing and believe with those additional support of those specialists and those high end reps and more generalists that we believe there's significant growth opportunity there.

Okay, thanks a lot.

John, the second part of your question was on costs. I just want to be clear that the way that we are approaching this is not that we are taking the costs out of our shared services that supported the skilled nursing facility. Certainly that will be part of it, but this is a redesign of our shared service infrastructure. We believe there are opportunities to be more efficient, more effective, and lower cost but still a shared service structure that supports these four verticals. So the answer is we don't know if it's going to be net costs up or down.

Okay.

But it's going to be the right design to support that transformation.

And I'm sorry, just to clarify too and I apologize if I missed this but let's say you get $100 of proceeds from the businesses you're selling. Should we think about that $100 just being redeployed into new, the new businesses you talked about or is there going to be some excess cash that you might plow back into share repos or something like that?

No, for us to achieve a doubling of our revenues, it's going to take a fairly aggressive acquisition strategy in addition to organic growth so you will see us be as aggressive or more in acquisitions over the next few years so the use of proceeds will go I think a large -- to a large degree towards that.

Okay, thanks.

Robert Jones, Goldman Sachs.

Thanks for the questions. So just in looking at the markets you guys will be focusing on going forward, I think first with the core Physician business, could you guys maybe talk about your assumptions around the consolidation that's taking place in that market and are there specific things that you guys need to do to better align with that evolving market beyond some of the things you mentioned today?

I don't know if I would say beyond. What I would say is we do see the consolidation increasing and because of that, and the growing acceptance that we found of our model, a lot of what we need to do is make sure that these health systems know us and so our service model has been valued. We continue to win health systems when we battle it out with our competition. Our issue is that you can imagine that a lot of them didn't know who we are, so we need to increase from a leadership standpoint and we are, a sales standpoint, we are, a marketing, an awareness and also some technology and back office support to handle these when we do win them.

So will this consolidation continue at the same rate? I don't know. It doesn't even have to in order for us to take advantage of what has happened so far, so what it requires is for us to invest like we are now in order to take advantage of this growth opportunity here.

So nothing major from an infrastructure standpoint, additions, investments that you would need to undertake in order to address the larger customers in this market?

No, and here is what I will tell you is depends on how you're coming at this market, so for us, no. Our service model has been highly valued by the health systems that we've spoken to. Our investment is in awareness so they know who we are. Others may be coming at it from a hospital side and everyone's aware who they are. They need to invest in the service model. So everybody has a different way they come at it. But no, we will not need to make those type of investments to succeed here.

Understood, and then just quickly on the lab side, not as familiar with the dynamics of that market and I know obviously with the acquisitions today a much bigger focus and you did share some high level metrics. But could you maybe just talk a little bit about the health and the competitive landscape of that market, relative to the core Physician business?

Well remember, a huge part of that market is in the Physician business, so one part of what we mentioned is there are over 100,000 physician office laboratories. We do business with a significant number of them but there are a significant number that we don't, so a lot of the investment will go in leveraging the current relationships we have and establishing new ones with competitors' customers. So I want you to make that clear that there is a significant opportunity just in the physician office laboratory that we don't currently enjoy even though we have a leading position.

And then what this does allow us to do is move up a little higher in the triangle, up into larger laboratories that really require a laboratorian to call on a laboratorian as opposed to maybe in the waived market. So this expands our capabilities with the larger piece of equipment, with the larger customers, and then of course there is also the opportunity in the small fragmented hospital, which is not necessarily being covered by some of the larger laboratories so a pretty good niche for where Infolab found itself there as well.

Got it, and then Dave if I could just one housekeeping. On the skilled nursing business that you're looking to divest, how should we be modeling or looking for that to show up in the next couple of quarters until that business does, if and when that business does get divested?

Yes, well the first step is to complete the carve out financials and understand what's home health and what is skilled nursing facility. Our goal is starting with Q1 to report these as reportable business segments and the two that we're selling will show up as discontinued operations down at the bottom of the P&L. So you're going to see our business kind of reported on a go forward basis and until we complete the sale, we'll have some discontinued ops.

Got it. Okay, thanks so much.

Okay.

Lisa Gill, JPMorgan.

Thanks very much. I just had a question around cash flow. Can you maybe just provide us with the expectations around cash flow for the elder care business that you're going to be divesting and what that impact would be going forward number one. And then just secondly as we think about the physician market, I know you said a weak flu season was difficult from a comp perspective, but I'm just wondering what you're seeing since the March quarter ended, are things starting to pick up? What are you seeing on overall utilization?

We've never reported cash flow by division or by business unit, but I think the EBITDA number I gave of around $30 million would be a pretty good proxy for cash flow that will go away with the skilled nursing business.

And from a utilization standpoint, we pay attention to all of the external factors like you do and we do as well, I don't know that I could update it since the quarter. I would say that we believe it still continues to bounce around in this, depressed from a couple years ago but pretty much stable I would say, not seeing any real inflection points downward or upward.

And then just lastly you talk about a big acquisition strategy for growth going forward. Can you maybe just give us any insights as to if you're currently in discussions with some of the parties to make the acquisitions or what the overall market looks like right now? Do you have a lot of willing participants that are looking to sell these businesses? Are they mom and pop type businesses, just to help us understand what the overall market environment looks like. Thank you.

Well the pipeline continues to be very robust and healthy. Our strategies for these four verticals will be part strategic in terms of the filling out the offering and perhaps some things that we haven't been in before that round out our offering and expand the market for us. But there's still going to be a lot of fold ins as well, so the Infolab one that we just did, we've been working on for a couple of years. Physician Partners which we also just did was about a four week process, so they run the gamut of fast to slow and strategic to fold in and there are going to be some of both, Lisa.

Thank you.

Robert Willoughby, Bank of America Merrill Lynch.

Hi, how are you? I actually had a few things. Obviously the right strategy from our perspective in terms of splitting things up, but David, we had talked a while back about if you got rid of the elder care business you'd lose the purchasing synergy that it got you. So how do we think about the margin for the remaining business near term? Can we factor in some offset from rationalizing the footprint or do we lose that purchasing synergy and the cost savings from the distribution network much further down the road? How do we time that and size that?

It somewhat depends on who the buyer is, Bob, because we may still be supplying them with our private label products if they don't have that so I can't answer for sure. The other thing I'll say is that all four of these businesses are going to grow a lot faster than we would have anticipated if we hadn't have made this change and that will offset a lot of that too.

Okay, and did you mention deal prices? I saw the three deals. Those are not in the cash flow statement for this year (multiple speakers)?

They will be in the K but we paid our normal multiple for all of those which you know is five to six times EBITDA.

Any reference on accretion or dilution?

Not yet. Maybe we might be able to share a little bit more with that at Investor Day. These are pretty fresh hot off the press here and so not yet.

A couple more quick ones. Just on the labs side, any thoughts on ultimately moving into specimen collection for the laboratories, for the central laboratories?

You know, that is a valued service and as part of moving up in the triangle, as Gary talked about, we will be exploring new services that we can add to laboratory customers, especially ones that we haven't served before like the freestanding independent clinical laboratories, which is an important part of the market here. So yes, we will be looking at that. There's other potential laboratory services as well that we would be adding to our offering.

And you could imagine that each one of these verticals will get the full time and attention of our full senior team. So we'll be evaluating many different opportunities that in the past might have been deeper down in the chain.

Okay, and lastly just the in office dispensing business, can you give me a 30 second tutorial on that? It just doesn't strike me that the payers or the PBMs are real keen on seeing doctors writing scripts and having them dispensed on site without a chance for the payer to weigh in on switching to the proper formulary drug or to the generic. Can you run me why that business is going to fly?

Here is what I would say is that from the very beginning, we said that this doesn't have to be right for every single one of our customers in order for it to grow at a substantial rate, that there will be certain specialties that this is better for and certain payer relationships that this is better for. What I will tell you is that each one of the businesses that we've acquired has had a substantial growth rate and with substantial margins and believe that our ability to now leverage the over 100,000 relationships that we have with offices today provides a significant growth opportunity for us, even given those dynamics that you mentioned.

Are these predominantly biologics or vaccines or are you actually dispensing Lipitor or something?

No, it's a lot more generic than that.

Okay.

It's Extra Strength Tylenol, it's antibiotics, it's the things that mom has to go to Walgreen's to fill a prescription for with a kid with an ear infection kind of thing, so it's very much a convenience for the patient. It's a revenue source for the doctor. It's better patient care as Gary suggested in his comments. And it's good profitable business. But it is an emerging market and so this is a little bit of a missionary sell to a lot of the market.

But I think it is important to understand David' answer to your question, which is it might not be as sexy as originally you had thought, so this is exactly like the products that David mentioned. This is the 80/20 rule. It's the few things that they actually dispense in the office very frequently. We're not trying to do the esoteric drugs, we are not trying to do any of those other pieces. So this is the high volume items that all of us would hope that we could walk out of the doctor's office with and not have to go sit in line somewhere else.

And just lastly thoughts on share repurchases here, do we put that on the shelf while the focus is on deals here or can you be in the market buying some stock?

It's a good question and I think we'll still have our regular philosophy which is we would want to offset dilution from any new grants or financing. We got pretty far, actually we're able to get ahead of that a little bit with the share repurchases that we did this year, so I think you'll see us much more at a historical rate.

That's great, thank you.

Mr. Corless, I will now turn the call back to you. Please continue with your presentation or closing remarks.

Just some closing remarks. Very much look forward to seeing as many as can make it to our Investors Day on May 24. Appreciate your time this morning and excited to talk to you a lot more about Healthcare 2.0. Thanks, bye-bye.

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.