Owens & Minor Inc (OMI) 2002 Q2 法說會逐字稿

Thank you ladies and gentlemen. Thank you for holding. Welcome to the Owens and Minor Second Quarter 2002 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterward we will conduct a question and answer session and at that time if you have a question please dial star followed by one from your touch-tone phone to place your line into queue until your name is announced. As a reminder, this conference is being recorded for transcription today Wednesday July 17th, 2002. I would now like to turn the conference over to Gil Minor, CEO of Owens and Minor. And thank you for using Sprint conference services.

Thank you for being with us for a second quarter conference call. I presume and hope all of you received the press release last night. We look forward to some good dialogue this morning.

With me today is Craig Smith, President and Chief Financial Officer; Jeff Kaczka, senior Vice President; and Drew [Carneel], senior and general counsel by phone; Dick Bozard, a Vice President and treasurer; and [Owen Kate], Vice President and controller.

I would like to ask [Trudy Alcott] our communications manager to read to a brief safe harbor statement.

The matters discussed in this conference call may include forward-looking statements. They may include the success of strategic initiatives discussed, changes in customer order patterns, changes in government funding to hospitals, and other healthcare providers and the potential loss of major contracts and other factors discussed from time to time in reports filed with Owens and Minor with the Securities and Exchange Commission, and the company has no obligation to update information discussed in the conference call.

The audio of the call can be found on our company website until August 7th. Gil.

Thanks, Trudy. Before I turn it over to Jeff and Craig, let me comment about corporate responsibility as it relates to Owens and Minor. It is certainly something that is on everyone's mind.

For example Craig and I were visiting our distribution center. Several questions came up. Good logical questions from the people who do the work every day. I appreciated the opportunity to answer their questions and elaborate further. I take this sole issue very personally. It is a black eye for me and for our company, who has always tried to do what is right to have the credibility of this issue on the front page of every newspaper.

Fortunately there are more of us than them. It appears corporate America has lost the respect of its shareholders, and employees alike. Every CEO in the company must rebuild that trust the right way and perhaps the hard way. We must earn it back. At Owens and Minor, honor and integrity has been a way of life. It starts with me. I am responsible and I am accountable. It has been that way since 1981 when I became President. A directive from Washington will not make me more or less so. But I fully support the Washington and NYCA efforts to bring consistency to this subject.

I encourage you to ask any questions that you have. If you want to talk to the chairs of our audit, compensation or our governance committees, I will give you their phone numbers. Call me directly with questions. If I am in a meeting or on the road, please tell my assistant the subject of your call so yours will be the first one I will return. I can assure you that Owens and Minor will do its part to help restore credibility by being a leader, a role model, and an example to follow.

Thanks for listening. Now I would like to turn it over to Jeff to start today's proceedings.

Thank you, Gil. Good morning everyone. We have another nice quarter to report with both strong earnings growth and exceptional cash flow. Sales for the quarter were 979.6 million dollars, up 3 percent from last year and up 4 percent on a year to date basis.

That's a somewhat slower pace of growth than we wanted to see. We are very pleased with our earnings results. Net income was strong as 11.4 million dollars, up 14 percent from last year, and diluted EPS was 30 cents, en increase of 11 percent.

Of course, these numbers exclude goodwill amortization and the impact of restructuring credits.

We have made pro forma adjustments to last year's results to make them more comparable. Reported net income was higher at 11.5 million dollars up 22 percent from the prior year quarter and reported EPS was 31 cents, up 19 percent.

We continue to be remarkably consistent with gross margin in the face of the challenging operating environment and we attribute that to our ability to add value and our efforts to ensure that we are appropriately compensated for that value.

Gross margin for the quarter was 103.4 million dollars, which was 10.6 percent of net sales and that was consistent with 2001.

We are very pleased with our progress on SG and A, which was down to 7.6 percent for the quarter. That's an improvement from the first quarter of this year, 7.8 percent, and the prior year quarter which was 7.7 percent.

Last quarter we found initiatives we have taken to improve SG and A and we are seeing results. The officers continue to meet on a weekly basis to monitor progress. We are improving procedures for overtime, temporary help, and strategic sourcing of non-inventory items. We have vehicles in place to share best practice, and we continue to have monthly field reviews to monitor progress, and ensure accountability.

We are seeing nice progress. But our goal is to have a culture of continuous improvement.

Cash flow was incredibly strong for the quarter. All of our key asset management measures improved. Free cash flow was 49 million dollars for the quarter bringing our year to date free cash flow to a positive 66.7 million dollars.

DSO is now down to 32 days. That's the lowest quarterly DSO in the last four years. While inventory turns improved to 10.0. We obviously take asset management seriously and we are clearly a leader in the industry when it comes to these measurements.

The cost of this strong asset management and a favorable rate environment we are seeing a positive impact on our financing cost. In addition I should mention that during the second quarter we replaced our one year 225 million dollar receivable securetization facility with the new three-year agreement expiring in April, 2005. And at the same time we replaced our 225 million dollar revolving credit facility with 150 million facility with a new three-year term. Together with last year's refinancing of senior subnotes were well positioned for future growth of the company at favorable rates.

Let's talk about the outlook for the rest of the year. Based on what we have seen to date we are advising our sales outlook from the 6 to 8 percent range to the 4 to 6 percent range. We feel very confident that we can make up for this in terms of cost reductions and lower interest. Therefore, we remain confident in our original guidance of EPS in the range of 1.27 to 1.29 per share. Now I will turn it over to Craig for his remarks.

Thank you, Jeff. Good morning everyone. We are pleased to have the chance to review our results with you this morning. Our second quarter results show we are continuing certain positive trends set at the beginning of the year. We are very pleased with the progress we made on SG and A reduction and with the continuing stability of our gross margin. Sales are a little soft when compared to where we would have expected to be at this stage of the year.

Last year we brought on a lot of new business. However, this year with the economy and general slowness in the healthcare market, the status quo is the order of the day as we are not seen as much business up for bid. Also, we believe we are not seeing the 1 to 2 percent price inflation in our industry that we traditionally see. And this is why we are adjusting our guidance for the rest of the year.

Now in our view, the real story of the quarter is we are having good success with account penetration, adding lines of business to current accounts, which is a most profitable way to grow. And we continue to streamline business that does not meet our profitability standards.

I am pleased to report that even with slower sales growth we reduced SG and A as a percent of sales and maintained our steady gross margin. Overall we are very pleased with our results this quarter.

As sales we are reviewing our top accounts to make sure we are efficiently promoting our value to our customers. We will continue this practice but with more focus than before.

Now let's take a look at progress we have made on some other areas of our business. Cost Track sales were approximately 28 percent on an annual basis and recently we moved some high profile customers to Cost Track including Yale New Haven. As we discussed last quarter we brought in an experienced senior manager to oversee the Cost Track effort. He has validated where we are, and is looking at how we will administer and sell as we move forward. We remain committed to moving 50 percent of our business to Cost Track by 2005.

With Wisdom II we now have nine users with two in the pipeline. We are steadily growing this business and in fact we are bringing on Methodist Houston as a Wisdom II user right now. We now have 163 healthcare users on line with our first generation of Wisdom.

OM direct continues to improve its importance as a customer self-service tool. We continue to view this as a practical, efficient customer service tool that enables us to leverage our resources creating productivity gains for our customers and ourselves. Owens and Minor is expanding its logistics capabilities to include on-site logistics management services. Recent projects include warehouse redesign, storeroom optimization, par management and OR support projects.

The outlook for this type of partnership is compelling and steadily growing.

Now as you know we have been working diligently on developing a long-term strategy for Owens and Minor and it is in its final stages. Our seen your management team participated in building a plan for our future. We worked hard to develop a blueprint that will focus our energies on profitable growth.

Our strategies will incorporate the great strengths of Owens and Minor, our ethics, integrity and strong customer relationships. We will combine these strengths with an innovative approach toward the marketplace focusing on growth, productivity and profitability to pave a promising future for Owens and Minor.

We will unveil our strategy to you this fall. And a final note, our team mates really rose to the occasion this quarter. We asked everyone to find ways to cut unnecessary expenses and improve efficiency and you can see from our SG and A numbers that the team work paid off. And on an editorial note, we are not done yet.

I am proud of the way our team mates work together and the results they achieve time and again. The heart of our company is our people, and the dedication and effort they demonstrate every day on the job. So before we close, I wanted to thank our team for the strong effort this quarter. Thank you and we would be glad to take your questions.

Thank you, fellas. Okay. Let's open it up. First question. Hello.

Sorry about that. In case anyone has a question hit star one. We have [Chris McFadden] with Goldman Sachs. Go ahead please.

Thank you. Good morning everyone. Gil, thank you for the introductory statements. They were well received in this environment. Wanted to ask two questions if I might. Craig, could you talk a little bit about the revenue growth and the outlook for the year? And I am interested as you think about what has not just kind of influenced this result but your revision to forecast whether you perceive in the marketplace areas some slowing characteristics and in market demand you highlighted perhaps there were some slowing new contract movement in the marketplace. Or are there any other factors we should be focused on relative to the top line performance in your business? And secondly, I guess I understand that we are not going to see the full details until the fall of some of the new initiatives that you have been working on.

But is there some way you could frame for us some general expectations around what are the criteria in which you and your board are evaluating some of these new initiatives so we can begin to understand your thought process in advance of understanding the specifics.

Thank you, Chris. The first thing is on the top line growth at 4 to 6 percent that would still be equivalent to last year's average growth or better. So we still feel fairly confident with our sales team that 4 to 6 percent growth is fairly healthy based on where we have been the last two years.

We have worked pretty hard on our profitability as you know. We did - to be honest with you, jettison some unprofitable business in the first quarter that long-term we felt did not fit overall in the Owens and Minor strategy.

We have seen the hospitals actually somewhat - I wouldn't say go into a quiet phase. But I think they are working very hard even the not for profits working on their profitability. As you know we go out on the road quite a bit and see a lot of our customers. And what we are hearing is that last year they had a lot of top line growth, not a lot of profitability. This year they are seeing slower top line growth but that they are working on their profitability and they are working on their mix of patient revenue that they are working on.

And also, I think you are seeing from the price inflation standpoint people holding the line. You are seeing a little bit of some competitiveness on the price and that you are seeing manufacturers working on market share and what we would see is kind of a tight market based on where we are with the economy and the healthcare market.

I think it is a combination of some things that we have seen. Again we have not seen the inflation we ordinarily see. That is not a lot. But that is still somewhere 1 to 2 percent. We are working on the overall margin and the profitability of the customers that we have. And I think you are seeing some slow down in the marketplace in terms of our hospital customer base from that standpoint.

Go ahead.

Let me just add one caveat to that. Chris, we are doing a very good job helping our customers manage their inventories. And in a way that backs up on us because as hospitals streamline their inventories, actually, you know, we are helping them use up excess inventory. So the sales don't replenish a higher value of inventory in the hospitals. Actually we are helping them reduce inventory, especially with the suture management program. So it is a combination of things.

Presumably, Gil, when you ease into the access inventory, you will get back on to use trends.

Right. That's part of our optimism for getting back on track in the second half. That is usually about a half of the year for us.

The - I tell you, we were - we visited a big customer in Detroit yesterday. And we got the message very loud and clear that there is a malaise in the industry right now. They have plenty of patients. But they have a lot of indigent care taking up beds but not using a lot of products and so forth.

I mean we have been asking that question. But there is not a gloom and doom scenario. We think it will pick back up in the second half. But we are behind the eight ball in the first half. So that's why we are adjusting to what we think is a more normal outcome for the year.

Which leads us into the second question, Chris, as Gil talks about working on inventories, the strategy without really giving too much away is that we have really operated in about a 12 billion dollar market environment in the traditional distribution market. And what we have been working on for the last year is how we go after that 55 billion dollar market versus the 12 billion dollar market and how we operate in that environment which opens up a lot of opportunities for us. We have been focused in on how we expand our horizons, and leverage our expertise and distribution and logistics. I think you can see, you know, in some of our remarks where we are going without really saying too much. But the main strategy is how do we broaden Owens and Minor's horizons. We have got a - done a lot of work with customers in terms of validating our strategy. They believe very strongly in the Owens and Minor brand name. They believe that we should leverage that even more in some new businesses that we want to get into.

And we feel very strongly about what we are going to roll out in the fall. We are doing some more - actually just went through a survey with 30 large customers about half of those are our customers. About half of those are not. We have not finished that. But we are again validating that strategy and we are feeling fairly comfortable we are on the right track. But what we want is we want a bigger piece of the pie.

And that's what the strategies around maintaining our profitability and maintaining the strong culture of the company.

I understand. So I guess that suggests that part of your focus is going to get a higher priority than say, seeing if there is another Medic or another inline, an acquisition that would - like Medic did give you a little more penetration in some geographies of the country.

I think all of those options are still on the table, Chris. And as they come along we look at them if they do come along.

But I think we have got sufficient cash and we can do some things if we wanted to do some things with regards to acquisitions and so forth. But they have to fit obviously. So I think everything is still up on the table. But we are focused really on the things that five years out are going to make us a much more viable and competitive company even more so than we are today.

Just to underscore that. I think there is a huge opportunity for us to penetrate existing customers in perhaps areas that we don't operate in the hospital today. And so you know, we are gonna strengthen the core business. We are going to grow the core business. And we think we have got some tremendous upside even in the core business, penetration.

Thank you for the detailed answers. And appreciate the details on the quarter.

Thank you. Next question is from [Kip Hewitt] with Legg Mason. Go ahead please.

Good morning. Just want to get a little more elaboration on the same questions that Chris asked. Because grant it, when we are looking at proprietary hospitals we get only a limited sample of the total market. But the general story out there has been that utilization has been rising very fast, even average acuity levels going up and particularly with the lack of restraint on patients by managed care in the last few years.

So I am trying to just sort of understand your comment about the slowing of the hospital demand. And - because - and then I think Craig, I think you had said that the 4 to 6 percent growth you are looking at would be equal to what you had last year. I think last year your revenue growth grew about 8.9 percent for the year and the year before that, 10 percent. Help us understand a little more what is happening in the market to bring down your revenue growth. And more importantly, how you see that changing going forward. What will be the factors to turn that around given that we could very well be entering a period where greater downward pressure on utilization.

First of all, Kip, that was industry average. We actually has been above the industry average for the last two years. But the industry average was running at about 4 percent last year and we were higher above that.

Again traditionally we see probably 1 to 2 percent inflation on product price. We have not seen that so far the first six months of this year. If you remember, we had - there were several agreements. Last year one of the was Inova. There are no large group contracts up for bid this year. There are some small ships of business in the industry or opportunities. So we don't see any big contracts coming up this year. But traditionally if you look at the 1 to 2 percent, that's part of it.

The second piece is we have again looked at our overall customer base and we have for lack of a better word, jettisoned some unprofitable business. And we are looking at the overall value that we provide for our customers overall in an industry. And I will open it up for anyone else who would like to answer that question.

I had just a follow on question too on the question of your strategy that you are talking about in the fall. Could you give us a - have you - when you were proceeding to set the strategy, did you start with some parameters in terms of revenue growth or operating margin improvement that you are seeking with whatever initiatives you will be working on?

I think we have to be pretty careful. If [Drew Carneel] were in the room and not on the phone, he would probably be giving us one of those famous looks that he gives us in terms of what we can share and not share.

What we are really looking at, Kip, is getting a bigger piece of the pie in the industry in terms of what we traditionally distribute today and what we don't. Some of the services that our hospitals are looking for and asking us for, again either through logistics or technology. And we are taking probably a much more organized approach to both of those opportunities. I think maybe we have been a little conservative on rolling this out.

But as Gil always likes to say, it is that every four to five years we kind of redesign and redevelop the company and we are at that point where we are going to be doing that here fairly quickly.

Kip, let me put a little bit of meat on those bones because I can see that you and I am sure others are struggling with this. Take, for example, a subject we have talked about here in past conference calls. That is the 3PL business. That's an area we continue to explore. It is an area that we have very much in focus with our strategic initiatives going forward as to whether that's a more profitable way to do business or whether or not it is a way that we need to go in order to be a leader in alternative styles of distribution.

So we have to decide in our own planning way what is the priority there? Whether it is to enter a new field to improve profitability or whether we go into this business because the dynamics of logistic supply is going to change.

As opposed to putting our money into something Craig talked about is the Williams Solutions, outsourcing the consulting side of the business. If we do that right, that could bring a lot of profitability and require some capital to make that work. So we are looking at alternatives trying to figure out what is the right combination of priorities that exist as we go down the road. And as Craig said we are pretty far along with it. And I think at our - conference have we announced that, Jeff? We will have one in the fall that's when we will be able to roll. Probably will be in November.

Thank you very much.

Thank you. We have another question from [Robert Willabee] with Credit Suisse First Boston.

Good morning. In terms of manufacturer pricing are there certain pricing lines that have been maybe hit harder than others or is it sort of broad based for you?

Hi, Bob. We are in the process of taking a look at that. Certainly some of the product lines may be hit by varying levels of price deflation versus inflation which, of course, would affect our sales, our reported sales numbers. But I would say at this point, no, there isn't.

I might add a little color to the sales number. In fact, year to date our sales growth really comes for the most part from the penetration within our existing accounts. As Craig had mentioned that's the most profitable way to grow the sales. And for the most part with allowing a couple of our unprofitable customers to go offset by some new business, we brought on, that is where our growth year to date comes from.

We are hopeful and we see in the pipeline somewhat of an increasing pipeline to the second half of the year. We feel comfortable with the 4 to 6 percent growth, and will continue to keep working on the penetration and adding the value on the existing accounts.

Do you see much - broader restructuring in the fall? Can you push through pricing to any greater extent?

I think what we will be focused on really is fee enhancement or margin enhancement which could potentially result in some increased sales as we get more into the advanced logistics programs. It really pushes us deeper and deeper into the organization in a partnership. And we see traditionally direct products start to move over through our pipeline as we start to manage some of these operating rooms and as they start to outsource their warehouses to us. We feel there is an opportunity there on the top line piece. That's part of the 4 to 6 percent.

We feel, one, we will be able to generate more fee revenue and resume some better penetration in existing accounts even than what we have today.

I think at the end of the day, too, Robert, we feel like the 4 to 6 percent probably is less than we had thought we would achieve earlier in the year.

But given the first quarter, and now we think we can make some of that up. It will still be above the industry average for growth. There is some evidence of more utilization in certain products. Those products may not be the products that we sell every day. But certainly we expect to achieve a sales growth number that is higher than the industry average. And we test that, you know, pretty often. So we will keep you advised.

Thank you.

We have another question from [Larry Marsh] with Lehman Brothers. Go ahead please.

Thank you, it is actually Samantha in for Larry. I would like to know if you received an SEC corporate integrity letter? Pledging accuracy of the financial statements. Following that, if you can give us color on your thoughts on the movement to stock options and how it impacts Owens and Minor on the EPS LAN.

Samantha, it is [Owen Kate.] The corporate integrity letter is a letter that Jeff and Gil will be required to sign when we file our second quarter 10-Q. They are telling me that they are ready willing and able to sign the letter. So I feel pretty comfortable about it.

As far as expensing stock options, that's something we have not made a decision on. And we will certainly take a look at in light of today's environment for Owens and Minor it is a relatively Minor expense as compared to other companies. It would be 2.6 million dollars. It would have been 2.6 million dollars last year before tax, one and a half million after tax.

I think on that subject, Samantha, there needs to be some consistency on that. I know some companies are taking a lead on doing that on their own. And we certainly will look at that. As I mentioned earl yes we want to be a leader in those matters, if that's corporate governance or corporate credibility issue.

So our perspective committees will look at that in our upcoming board meeting and committee meetings, and we will do what's right, of course.

Terrific. Thank you.

We have another question from [Judy Hayes] with Banc of America Securities. Go ahead.

Hi. Not to beat a dead horse here, but I am just still trying to figure out what is going to change in Q3 and Q4 but more immediately Q3 to lead to growth above the 2.7 that we saw this quarter? I know that in Q3 you should be getting one extra selling day. And I think that's about 15 million dollars. But you are up against a more difficult -

More immediately for the subquarter what should we be looking for that will get you above 2.7 percent growth. And if you could give us your estimate for cash from operations for '02.

Let me answer the question and then I will turn it over to someone else on a second piece. Yeah, we have sat down with our entire sales management team which includes the field and the corporate sales piece and we have validated the 4 to 6 percent. We have spent a lot of time. We have targeted accounts that we work on year end year out. And what we wanted to do was before we got on this call to get comfortable with the sales team that they could deliver the 4 to 6 percent. They have committed that to me.

So we have gone back. We have some new business that we are bringing on. That did not quite ramp up the way we would have liked in the second quarter. But we have some new targets that we are working on. We do have some smaller accounts that we are bringing over. And the one thing that we have done is spent the last probably 7 to 10 days validating which culminated in the conference call on Monday with the entire sales team on video conference.

So you know, we spent a lot of time validating this. We are not really picking a number out of the air. And our sales team has committed to deliver the 4 to 6 percent the last six months of the year. And they have a list of accounts they are working on. We have seen some sales penetration. We have also seen actually some direct manufacturer sales come over in the last quarter. That will ramp up. We are also talking to some other manufacturers that are looking at getting out of their own distribution and moving to us.

So it really has been a supplier strategy slash customer strategy that has culminated in this 4 to 6 percent. You know, it is - we spent a lot of work on it. We have looked at a lot of industry trends. We have looked at a lot of different things. And I think the bottom line is one, we are going to deliver the earnings. Two, we are going to reduce our expenses. And three, we are still going to have higher than expected industry average sales. So we are still feeling very good about things. We are very positive. And we think we are on the right track. I will turn it over to somebody else on the second piece of the question.

I will handle that, Judy. It is Jeff. That was with regard to cash and I think you were seeking guidance on where we expect it to be for the year. And that's not one of the areas which we have, in fact, provided guidance on. Certainly we are very pleased with the results year to date. The cash obviously has some relation to the level of sales growth. But also it is related to our asset management which has been improved in all respects, the inventory, the DSO, and the payables as well.

And what I might mention also is that it definitely appears that the operations are running very smoothly this year. And you do see that in terms of the cash results and the asset management. But even more so on the SG and A results for the quarter and all of our productivity measures out in the field, we are very pleased with the progress there and expect that to continue.

And we certainly haven't cut back or derailed any CAPEX projects either. I mean so we - because we continue to invest in the future there. Thanks, very much, Judy.

Can I ask up a follow-up question since you mentioned CAPEX In the first six months you have done just over 5 million and I think previously you guided towards 20 million for the year.

So should we be expecting significant spending in the second half or should we be bringing down the 20 million estimate?

This is Jeff again. We actually have not provided guidance on the CAPEX other than the fact that we have spent at fairly consistent levels over the last several years which is generally been less than the 20 million. Probably the 15 to 20 million dollar range.

Last year I might mention during the first half of the year we did have a purchase of land which was not needed. Excluding that purchase of land we are on a page just slightly less than the spending level of last year.

Thanks a lot.

We have another question from [Glen Santaglio] with Salomon Smith Barney. Go ahead.

Couple quick ones. Jeff, I am not sure if you can do this, can you quantify some of this unprofitable business you got rid of earlier in the year. That may help us make more sense of this revenue number.

I am curious were these contracts that you had a long time and for some reason they are unprofitable now? Or were they contracts that came up for rebid and you are seeing your competitors like Cardinal and [McKessen] bid more aggressively for services. Can you give us a better sense what is going on.

And then lastly, is there any more unprofitable business along those lines that you still need to jettison. If you can help us think about that as we go forward, that would be helpful.

I may not be able to give - I won't be able to give you all of the figures that you had asked for. Let me try to answer the question in this way.

We have very good procedures in the company which actually were put into place I think just prior to my arrival a little over a year ago or so. And that includes the margin committee. And the margin committee is a committee comprised of some of the senior executives and other individuals who review on a weekly basis deal status, their proposed new deals, rebids on existing deals, less profitable contracts and so forth.

We manage that on a week to week basis. We provide a very good service. It is validated in a number of ways. We provide solutions, technology solutions and so forth. We expect to be appropriately compensated for that. And the controls we have in place in regard to the margin committee reviewing those deals, reviewing the pricing on the deals, reviewing the status enables us to very effectively manage the profit associated with our customers.

And so as I mentioned we meet on a weekly basis. We combine that with various active credit and asset management and productivity management in the field. And from time to time we will need to release some customers for which we won't - we don't foresee ourselves receiving the right level of profitability. And that will vary by quarter, from quarter to quarter.

This is not contracts that came up for rebid and you decided not to re-up the contracts because the profitability wasn't high enough.

Yeah, that's part of it. I mean when we looked at that, we have a very good way through Cost Track plan of analyzing what our costs are. And we decided that we are not going to just buy business or to keep business just for the sake of having the business unless we can develop a partnership with the customer, that includes a recognition of return for us as well.

So, yeah, there is some of that. And I mean a lot of it is just when the service requirements go up in an account, that we go back to the account and we say, look, here is what is going on. Here is what we need from you. Sometimes they will pay us if it is worth something to them. And sometimes they won't. So we back off. I mean just as - we are just as aggressive toward bringing into our portfolio business, profitable business. And the most profitable way for us to grow is take an existing account and go from like 20 million up to 25 million through a cap penetration. And that's where our focus is

Are you seeing any change in behavior at the competitors in terms of way they price their services?

A price war, no. I think there is certainly some good competition that is going on. Always has gone on. Has it intensified? No, I wouldn't say it has intensified. But it is out there.

As you look at your book of businesses are there any sort of - you know, any sort of unprofitable contracts that you still think you would like to rationalize? So should we expect any continued pressure in that regard?

I don't believe that there are any accounts - because we do track this information very carefully too that are unprofitable for us or - any more so than we are willing to live with. And I don't mean that we live with unprofitable accounts. But if there is a bidding situation, and the account bidding situation changes, then we do have to rationalize a decision as to whether we want to keep that account.

Or if it is a new account that we don't have, how aggressive do we want to be. Those are decisions that the price committee looks at all of the time.

If I could ask another question. This price inflation I don't understand. It seems like hospital profitability is the highest it has been in the last five years. Yet we can't even pass a one and a half percent price increase on to the customers. What is different about this year versus the last four?

Glen, that's not us. That's the manufacturer. We work on a cost plus or an activity based costing fee. Traditionally the price comes from the negotiated price between the manufacturer and the customer.

What's your sense why the manufacturers can't pass on the price increase? Is there anything different this year versus the past few?

I think as Jeff mentioned there is some deflation going on in a few product lines that offsets the inflationary number. It is a netted number that I think is down from previous years. How rampant is that? We don't think it is rampant. But we do think it is out there. And we are seeing some evidence of that.

Okay. Thank you very much for the comments.

We have another question from [John Patrick Walsh] with Wachovia Securities.

Good morning. I was wondering if you could elaborate on the free cash flow number. Maybe how you are getting the EBITDA to the 29 million.

This is Dick. The way it is defined is the cash flow from OPS, adjusted by the AR securetization amount. And then that would be adjusted by the capital expenditures. And that would bring the free cash flow to 49 million for the quarter. And it would bring the free cash flow year to date to 66.7 million.

And what is your outlook for that for the full year?

We haven't given any guidance from that as we go forward. But as mentioned earlier, the asset efficiency ratios are at pretty strong levels right now. You won't see any major movement there. You can probably pick it up from there.

What exactly was the size of the securetization facility that you replaced.

It is 225 million.

Do you have any outstanding on that at this point.

We do not.

Okay. Thank you very much.

Sure.

One more question if there is one and everybody needs to get to the ticker and hope for a better day today.

Thank you. We do have a final question from [Kim Pervis] with [Duquest Capital.]

My question has been answered. Thanks. Gil thanks, Kim. You bet. Well, that's it. That wraps it up. And thank you all very much for listening. And please call with questions about anything. We are right here to answer you. Thanks so much. Bye-bye.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you.