Owens & Minor Inc (OMI) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for holding and welcome to the Owens and Minor fourth 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 press star followed by one from your touchtone phone to place your line into queue until your name is announced. As a reminder, this conference is being recorded. I would now like to turn the conference over to Gil Minor, Chairman and CEO of Owens and Minor. Thank you for using Sprint Conferencing Services.

Good morning, America. We're very pleased to have you with us today to review the fourth quarter results and full year for 2002. We had an excellent year and we had an excellent fourth quarter. We very much look forward to sharing our results with you and answering your questions, especially answering your questions. That's always the enjoyable part of this.

With me on the call today are Craig Smith, President and Chief Operating Officer; Jeff Kaczka, Senior Vice President and Chief Financial Officer; Drew Carneal, Senior Vice President and General Counsel; Dick Bozard, Vice President and Treasurer; and Olwen Cape, Vice President and Controller.

Before we begin, Trudy Alcott [ph] is also here, our Communications Manager, who will read a brief safe harbor statement. Trudy?

Thank you, Gil. Except for any historical information, material discussed today may constitute forward-looking statements that involve risks and uncertainties and could cause actual results to differ materially from those projected. These include the success of strategic initiatives, intense competitive pressures within the industry, and the loss of major customers. They also include changes in customer order patterns, pricing pressures, changes in government funding to hospitals and other health care providers, and other factors discussed in reports filed by the company with the Securities and Exchange Commission. The company assumes no obligation to update information contained in this call.

And a reminder-you can find the audio of our conference call on our corporate Web site until February 21st. Thank you. Gil?

Thank you, Trudy. Jeff and then Craig will have brief remarks and then we'll take your questions. Jeff?

Thank you, Gil. Good morning, everyone. We're very pleased with our results this year, thanks to a strong effort by everyone on the team. The sales growth rate picked up during the fourth quarter, growing 5% over last year. As a matter of fact, we crossed the billion dollar mark for the first time at $1.02b. Sales for the year finished at $3.96b, up 4% from last year. Diluted earnings per share were even greater than we anticipated at $1.30 for the year, up 11% over 2001. Income for the year was $48.7m, up 14% over last year. And for the fourth quarter, income was $14m, up 11%, and diluted EPS was 37 cents, up 9%.

Of course, as noted in our press release, these numbers and comparisons exclude good will amortization, the impact of restructuring credits and other unusual charges in both years.

Now, let's turn to other results. For the year, gross margin came in at 10.6%, a result that we are very pleased with in light of the competitive pressures in the marketplace and increased emphasis by manufacturers on reducing costs. For the fourth quarter, gross margin was 10.6% of sales where it has been nearly all year, although lower than last year's fourth quarter. We did not see the same level of buying opportunities in the fourth quarter as we have seen in the last two years, and we expect that trend to continue.

We made nice progress on SG&A. We said a year ago that our goal was to reduce SG&A percent by at least 10 basis points and I'm pleased to report that we achieved that goal. For the year, SG&A was 7.7% of net sales compared to 7.8% last year. Of course, this year's number excludes a $3m unusual charge in the third quarter resulting from the cancellation of the computer services contract, and that relates to our new, seven-year agreement with Perot Systems. For the quarter, SG&A was 7.6%, well below the 7.9 we reported in the fourth quarter last year.

SG&A improvement has been a focus for us all year long. The whole team really pulled together on this effort. The improvement came from sharing of best practices, high-end awareness and accountability and from several specific SG&A reduction initiatives. While we've made a lot of progress, the good news is that there's still a lot of opportunity to improve and we'll continue to look for improvements in 2003 and beyond to help fund our investments in the new strategic initiatives.

Our cash rate before unusual items was up somewhat for both the year and the fourth quarter. This is a result of higher non-deductible expenses partially offset by lower state taxes. Free cash flow for the year was a positive $45.9m thanks to effective asset management and lower rates. Our fourth quarter inventory turns reached an impressive 10.3 and our DSO is down to 31.6 days. Our balance sheet shows a $90m increase in accounts receivable, however in effect it's only $20m as we paid down our entire accounts receivable securitization facility in 2002.

I should mention that we used $49.3m in free cash during the fourth quarter, despite the continued strong asset management. This was primarily driven by the accelerating sales growth and the timing of some payments. Capital expenditures were $9.8m for the year, most of which was spent on information technology.

During the fourth quarter, Owens and Minor announced a $50m repurchase plan representing a combination of common stock and trust preferred securities, and in the fourth quarter we repurchased 137,000 shares of the trust preferred securities. This repurchase program is effective through the end of 2003.

Let's turn to our outlook for the year ahead. As we've discussed, we intend to make important investments that will support our new strategic initiatives. While we intend to partially offset this investment with productivity gains in other areas of the company, we are committed to investing in the future. As you'll hear from Craig, we've already begun to make these investments.

Looking ahead at 2003, we anticipate sales growth in the 3- to 6% range and EPS growth in the 6 to 10% range. All in all, this was a very good year for Owens and Minor, and other than a slower than anticipated top-line growth, we pretty much met or exceeded expectations for the year. Again, some of the highlights were we beat earnings expectations, sales growth rates quickly recovered from the slower pace we saw in mid year, we successfully focused on SG&A and achieved our goals, margin remained stable in a competitive environment, we continued our strong track record of asset management, we received an upgrade on our corporate credit rating from Standard & Poor's, and we developed and launched our new strategic initiative.

Thank you and I'll turn it over to Craig.

Thank you, Jeff, and good morning, everyone. Thanks for joining us as we take a look at what we accomplished during 2002. All in all, this was a very good year for Owens and Minor. The extra efforts of every teammate really paid off. As you've seen from our year-end and fourth quarter results, we exceeded most of our own expectations. In the fourth quarter, our sales growth rates improved, even on top of a tough comparison to last year, and we did successfully achieve the adjusted targets we set last quarter. Clearly, our sales penetration strategy is working.

As you may remember, we made leadership changes in two of our areas this fall and these adjustments are starting to pay off. We've already signed new accounts in one area and in the second area I'm very pleased with the changes our new management has put into place and we are working on several new prospective customers. Now, a year ago, we committed to lowering SG&A by 10 basis points. Setting aside the impact of the cancellation of a computer services contract relating to our new agreement with Perot Systems, we did achieve this goal. And I am very pleased that every member of our team contributed to the effort to reduce expenses in overtime, temporary help, personnel costs and travel.

Looking back over the year, we hit some milestones. We grew contract sales to 32% of our total sales, we continued to believe that CostTrack, our activity-based costing model is a strong solution for our customers and ourselves, and in fact we are even using this costing model in our 3PL and OM solutions efforts.

You'll remember that during the year, we signed a comprehensive new deal with Perot Systems, giving us the added capacity to spend more on IT development and innovation. Under terms of this deal, we are migrating our mainframe services to Perot Systems. This migration is under way and so far going very smoothly. This innovative agreement will free up development dollars so we can continue to create and offer technology solutions for our customers.

Our ability to develop and use technology for our customers keeps us at the forefront of the health care industry. For example, we now have 16 customers signed up for Wisdom II, our information management tool. We view dollars spent on technology as an investment in preserving our leadership role in health care, and as a matter of fact we do hold a leadership position. For the third year in a row, we were ranked as the top health care and medical company in the Information Week 500. We were ranked 11th overall.

And now, I'd like to give you a report card on how we're doing with our new strategic initiatives. Since launching these objectives in November, we have already made some significant progress. With our supplier strategy, for example, we are expanding MediChoice, our private label offering. In 2002, we exceeded our sales goals with MediChoice. Our private label effort has been very well received by our customers and is giving our supplier partners new opportunity. We have several new product launches in the works, which will offer new product categories to our customers.

As you might remember, another element of our strategic initiatives is the training and education of our teammates. We opened the doors of Owens and Minor University in January, offering teammates the first phase of on-line classes. Teammates are able to take courses in professional and career development, leadership, operations and sales training.

Now, turning to our third-party logistics or 3PL effort, as we said last quarter we view 2003 as a building year. Since our strategy launch, our team has added a national sales leader and has hired an engineer who will work on process improvement. We are also improving the software interfaces between our systems and other logistics programs. And finally, we are finishing a branding and marketing strategy for this initiative. Looking ahead, we will continue to build our infrastructure, getting our team in place and developing or acquiring the necessary technology and capabilities.

We are very excited about OM Solutions, our supply chain management logistics initiative. To date we have more than two dozen projects in the works. So far, we have seen strong market demand for these services and we have been successful in collaborating with all types of customers to find solutions for their particular needs. We've hired two area Vice Presidents of Sales for OM Solutions along with several other key teammates for this unit.

At the end of the day, none of this matter unless we continue to achieve high customer satisfaction levels. And this year, I'm pleased to announce that we achieved 97% customer satisfaction. That's an improvement from 96% in 2001.

Our strategic initiatives were formed from a foundation in customer research and input that proves to us that Owens and Minor must play a broader role in health care. Our goal is to grow these initiatives while building our profitability and protecting our culture. Thank you, and now we'd be happy to take your questions.

The first question is from Glen Santangelo with Salomon Smith Barney. You have the floor, sir.

Yeah, hi. I've just got a quick question. I'm looking at the guidance, Jeff, that you provided going forward and it's 3 to 6% revenue growth and the earnings guidance isn't much higher than that, which I guess is implying after free cash flow that there's not much opportunity that you're anticipating for margin leverage in 2003. So if you could provide some more color on that and maybe talk about maybe what the biggest opportunities might be to drive some earnings leverage through better margins, I'd appreciate it.

OK. Thanks, Glen. In regard to the first question, as we've pointed out with the roll out of our strategic initiative, the year 2003 will be an important year in terms of our investments in those initiatives. Obviously we're putting in place management and sales force; some infrastructure for the 3PL and OM solutions; some dollars will be spent in terms of the marketing of the new services; Craig described the investments we're making in training. Those are the items that are somewhat suppressing next year's earning growth rate. However, these are very worthwhile investments which are meant to enhance our earnings in the out years and thus far the initiatives have been going quite well.

In regard to the second question, where will we get earnings leverage in the future-we've shown some progress this year, as we mentioned, in SG&A. We've been able to hold our margin fairly stable. We see other opportunities certainly in that regard in our core business as we focus on rolling out best practices, the OM model and so forth and we'll continue to look for improvements there. The strategic initiatives of OM Solutions, third party logistics, other margin initiatives such as MediChoice which Craig described are all avenues of future earnings growth.

OK. Thanks for the comments.

Next question is from Lisa Gill with JP Morgan. You have the floor, ma'am.

Great. Thanks very much. Craig, I was wondering if you could talk a little bit the OM Solutions. You say you have two dozen projects going on right now. What kind of projects are they? Who are these customers? Can you just give us more of an idea what those are?

Yes. Good morning, Lisa. We have actually five areas that we focus on in OM Solutions. We are involved in about 12 outsourcing projects. That can be anywhere from floor replenishment to having warehouse managers on sites to having people in the operating room and the cath lab managing inventory. So there are a number of outsource positions that we're working. We have full outsources in several of our hospitals. We also are working on clinical inventory management. We've invested in technology focused primarily in the operating room and the cath lab where there is a high dollar investment in inventory. Wisdom II is one of the products that the OM Solutions team will have to sell going forward and we've done very well on that. That's improving with some more in the queue.

Warehouse space- as you know, hospitals are running out of space. A lot of them have systems that they cannot afford to either upgrade or rebuild, so we're helping them in terms of space optimization. On the other hand we have several hospitals that are expanding, adding ORs and we're doing the actual OR redesign or physical inventories of operating rooms. So we're doing really a myriad of projects for customers all across the United States and I am very pleased with this initiative and we'll give you probably a little better report card at the end of the first quarter of some specifics.

Can you give us any idea-I mean are the margins around these types of services better than distribution, in line with your other distribution services?

The margins are much better in this. This is a consulting implementation logistics unit so these are industrial engineers, they're project managers, there is technology involved and there is better margins in this business.

Great. Thanks, Craig.

The next question is from Robert Willoughby with CS First Boston. You have the floor, sir.

Thank you. On the gross margin, you mentioned competitive pressures. What are you seeing on the competitive landscape? McKesson seems to be getting their house in order and Cardinal is optimizing their cost structure. Do you expect this will impact the gross margin more going forward?

Well, Robert, good morning. We are very focused on really selling value to our customers and non-customers. And so we are very focused, first of all, on protecting the margin that we have and enhancing that. And really where we're seeing some of the pressure is that the customer is under the gun, to some degree, as you know, and the manufacturer is somewhat under the gun. So what we have done is we are right in the middle of our launch of MediChoice which is our private label products.

We are expanding our presence in OM Solutions. We are getting much more aggressive and active in the cath lab and the OR where we feel there are some higher margins for us and we're moving as many customers as we possibly can to CostTrack which is a more profitable model for us. So we're very focused on a strategy of sales penetration, of selling value, and that has played very well for us.

Robert, this is Gil. Just to comment on your question and also to go back to Glen's a little bit, the total profitability of the company is a combination obviously of gross margins and expenses. The thing we're working on, too, to help total profitability is productivity improvement. And we probably should talk more about that and it's not an exciting subject to talk about but it's the backbone of everything we do in distribution. Managing our costs-we have statistics that show, for instance, this year over last, that in all these measurements we've improved which helps us leverage our expenses against gross margin using technology. These are things that we do every day and so continuing along those fronts is going to help our profitability down the road.

Maybe a follow up for Jeff, if possible. Can you comment on some of the cash flow dynamics? I would have thought on kind of a lower revenue base that maybe more cash would have been generated this year versus last year. What are some of the dynamics, again, surrounding that cash from operations number and what's the goal for '03?

Sure. Thanks, Robert. In regard to the cash performance for this year, as I mentioned, for the year free cash flow was a positive $46m or so and certainly the dynamics associated with that involve effective asset management. The sales growth levels in any individual quarter will affect the cash flow dynamics as well and in the fourth quarter of this year where we actually used cash, we saw accelerating sales growth throughout the course of the quarter. And even though the asset management, the DSO, was quite strong, the inventory turns is at a level we haven't seen in a long time at 10.3 very effectively.

Again, the timing of the sales growth will still affect that and there's certain timing of payments in regard to accounts payable which is highly susceptible to month-end timing and affects the cash flow in any individual quarter. But all in all, we generated about $46m in cash this year.

What is the goal for '03?

We have not established the goal for '03 in terms of what we've described publicly.

Thank you.

Next question is from Kip Hewitt with Legg Mason. You have the floor, sir.

Yes, just a follow up on the cash flow question. Just walk us through a moment with the dynamics here because you said your accounts receivable securitization facility of course has been paid down and that gets a little obscured in the cash flow numbers. And then-but you mentioned of course your total accounts receivables are up. Can you give us a sense of what you're doing or how your strategy with the management of accounts receivable and financing of it has changed and then how that's playing into your cash flow numbers?

Kip, this is Dick. How are you this morning?

Fine.

Kip, when you look at the balance sheet what you'll see in 2001-we ended at $264m published. That was reflective of $70m that we had in the A/R securitization program. If you were to add that $70m back and compare that to the $354m where we ended the year what you'll see is an increase of $21m. Our DSO actually came down 1.2 days during that same period of time. The DSO is the measure of management efficiency. Had the DSO remained the same, we would have ended the year at $373m. So when you're looking at apples-to-apples, you would be looking at $354m where we ended this year versus $334 last year. Does that help?

Yeah. Yeah, that does.

It is a little confusing because we had no borrowings under the A/R securitization facility at year-end this time.

Right, OK. And then also on the SG&A there was an earlier question on that-on the SG&A what would you say is the impact on-what would your-or do you have a sense of what your SG&A as a percent of revenues would have been had it not been for the strategic initiatives or the impact that that's having?

The primary investments that are strategic initiatives will occur in 2003, Kip. There were some expenditures this year but not material.

OK. And then just one more follow up, if I could. Could you give us-you've mentioned of course on your OM Solutions, the 12 engagements and then the 3PL. On the 3PL sales, are most of those new initiatives or new sales that you're working on right now to hospitals or to manufacturers would you say?

Actually, they are both, Kip. We are talking to two or three hospitals that are IDNs that have a high concentration of hospitals in a geographic area that may benefit from either warehousing opportunities or transportation and delivery opportunities, but we're also working with the manufacturers. But actually, we've had some interest, again, from two or three hospital systems that are very interested in developing a model where they could aggregate all of their purchases, both direct and through traditional distribution.

So if you remember, as we've talked in the past, we're really a supply chain company that works both ends of the supply chain. So we will continue to work with the manufacturers and work on the hospital side. We happen to believe that as the hospitals adopt a new distribution strategy perhaps through this, that it will drive more direct manufacturers through distribution for Owens and Minor, really helping our core business, but really moving a lot of the direct traditional manufacturers through our new model.

OK, thank you. I'll just move to the back of the queue, here, but thank you very much.

Thanks, Kip.

The next question is from Lawerence Marsh with Lehman Brothers. You have the floor, sir.

Thanks. Good morning, Gil.

Good morning, Lawerence.

Good morning, the rest of Virginia. I wanted to follow up. You may have mentioned this in your comments, but the release suggested I think something about gross margins being impacted because of more limited buying opportunities in the fourth quarter. Is that referring to 2001 or is that referring to the quarter just ended, and what specifically are you referring to there?

Yeah. Actually, Lawerence-this is Craig. As we've talked the last two years in 2000 and 2001, if you look at our margin in the fourth quarter for the last two years that was up. We did say in both of those quarters at the end of both of those years that we did have some buying opportunities and that we felt that that was probably an opportunity that would start to dwindle or go away in the future years. So the buying opportunities were really not there for 2002 like they were in 2001 and 2000. So what you see for us in 2002 is a very consistent gross margin throughout the year.

So we're seeing a lot less-if you just look at the overall inflation number which is pretty flat for the year, there just weren't the opportunities that there were in the past. But we also realize that in 2001 and 2000 that this was an opportunity for those years and that that would probably start to wind down.

OK. And again, is that just a function of perhaps a less promotional environment or more of-you know, if that's a price deflation or you just-

Well, I think there's been a lot of push through in the supply chain and I think the manufacturers probably are less focused on that in the medical/surgical side than perhaps maybe on the pharma side. And you don't see the large swings of price increases in our product lines like you do in pharma. So where traditionally there might have been some-you know, for lack of a better word, pushing some extra product into the supply chain for either extra dating or a price increase, you're just not seeing that in our part of the market.

Uh huh. But again, you say you're seeing less of that this year than you saw the last two years. So you're saying selectively in past years you might have seen, you know, some push into the supply chain even in your end of the market whereas now you're seeing less of that?

Yeah, I think you're seeing a flattening out, and we've talked about this. There is a very high focus on inventory management in the hospital systems today and as the technology becomes much better and the customers have a much better grasp of the inventory that's in their system, they're really focused on inventory reduction, they're focused on SKU standardization, utilization. That's part of the reason why we've come out with this MediChoice line.

So you're seeing less of a push through on price increases on any kind of perhaps new technology that might have gone through the system and you're seeing a stabilizing of the environment through the whole supply chain. You're seeing everybody really focused, Lawerence, on driving costs down, either through EDI, through efficiencies, better service levels, you know, all across the board. We're really working with our top 25 manufacturers on really process cost reduction versus really-you know, I think the technology is just so much better, you're going to see a lot less of that.

OK.

And there's some performance-based incentives in there, too. As we do these things with our manufacturers, they're sharing-we're sharing those results and if we accomplish them, then it means something to us from a performance-based incentives standpoint.

Yeah. The biggest message is don't expect as much of a step up in Q4 versus the rest of the year. It will be smoother going forward.

Yeah. You want to see a very consistent margin quarter to quarter from us.

OK. All right. Secondly, I guess a follow up with some of the strategic initiatives you mentioned back at your analyst day in November. I think at the time you were highlighting the consulting business as needing someone to run it. You were looking for someone to come in and fill that slot. You had hoped to target somebody by early '03. Where do you stand in that search and is that still right? Are you still looking for somebody to run the business?

Yes, we are, Lawerence. I will say-I am very proud of Tim Gil who has headed that up for us while we're in our search. We just promoted him to Vice President about a month ago and he has really taken the bull by the horns. We did say that we would hire four salespeople. We filled two of those. We're pretty close to filling a third. I'm looking for a very particular person to run this business and I just haven't found the right one but we're very aggressively pursuing that. I'm interviewing a candidate this afternoon and our goal is to get that filled as quickly as possible.

OK. So still the goal may be the first part of '03 you hope to have somebody in place?

Yeah.

OK. And then finally, Dick and Jeff, you may have mentioned this-the tax rate in the quarter with some specific issues. Is this indicative of what we could see in '03 or should we think more in line with what we saw the first three quarters of '02 in terms of a tax rate?

Lawerence, as you know, as in the past, we record during the course of the quarter the estimated total year tax rate and in the last two years there was a slight adjustment in the fourth quarter lowering the rate. At any individual point in time, whatever rate we're recording to is more or less the best indication of where the current tax rate is, based on our mix of business. So although we're not providing guidance, that's what that tax rate represents.

So I guess what you're saying is-I know you're not saying specifically, but it's really more of a fourth quarter phenomenon as opposed to a change in trend.

That's correct.

OK, thanks.

The next question is from Chris McFadden with Goldman Sachs. You have the floor.

Thank you and good morning, everyone. I was wondering if we could talk a little bit more about the private label program. You talked in the release of having expanded some categories. Craig, I recall from the meeting in Boston, you know, one of the sensitivities here is trying to balance-you know, providing more value for your customers but not creating some conflict of interest with your group purchasing customers. And so could you talk about sort of the product portfolio in general, kind of a materiality dynamic to the business, and then how the balancing out of those two dynamics are factoring your decision making?

Sure. As we've talked before, Chris, we have 11 major product categories that we manage in the company and under that currently we just had a huge launch here wrapping up. As we speak today, we've had a major launch with all of our sales force throughout the country on some new product launches. So we actually now have 45 sub-categories that we have MediChoice or private label that roll up to those 11 major categories. So we have added several new lines here in the first month to roll out to this year.

We've worked very closely with the groups. They know what we're doing. They know how we're moving forward. As you know, our relationship is always with the individual hospital so if they're focused on price and they're focused on value we work with them on MediChoice. If they want us to be brand neutral, we will be brand neutral. But for the most part, we've had some great success with MediChoice and we are going through a major launch right now.

Just to give you an example, I think we gave you some ideas of what some of those product categories were. The major launch now would be electrodes which is a huge category for customers; patient care products; nasal airways and several other lines. So-but we are working closely with the groups and they're fully aware of what we're doing.

And so, Craig, the 45 sub categories-what does that translate into SKUs?

We were trying to run that this morning. In some categories it might be 45; in others it might be two; in some it might be 100. So I can probably get you a little bit better number of SKUs and total that for you. But it really runs from product category to product category. But I can get you better-probably a better total number on that. If you give me a few minutes this morning, I'll run down to the supplier strategy folks and get that pulled up for you.

But how many SKUs do we have in the whole program today, just a round number?

I'm going to say 1,000.

Around 1,000 to 1,200.

Right.

OK.

But I can get you that exact number, Chris.

OK. Thank you. And should we assume that a lot of this is product that is price advantaged in part because it's overseas in terms of manufacturing?

Yes. We source here in the country and overseas. But we are working with manufacturers that you would be very familiar with and these people are looking for market share within categories that they're already in or looking to get into new product categories that they may not be in.

Great.

So both. But it's been very well received and we're very positive about it growing this year.

Well, great. Thanks for the details and for the quarter.

I'll get you those SKUs.

Thanks, Craig.

If anyone has a question at this time, please press star followed by one. A question from Kip Hewitt from Legg Mason. You have the floor, sir.

Just on the cancellation of the computer contract and the shift to Perot Systems. Could you just elaborate a little on that? I know that you found it more economical to outsource this just from a personnel standpoint. But on the cancellation, is this-were you stopping-was this sort of bringing short on something that was going to become exponentially more expensive to you or was it simply a project that you felt that you really had to abandon? I mean could you give some color on what it was?

Well, Kip, it wasn't that we really wanted to abandon anything. We really were working with two what we feel were top-notch companies and we felt that it would be a benefit to really go with one company, one economically. But as you know, we have talked about the percentage of developmental dollars that we spend and mainframe dollars just to run the mainframe. This really gave us an opportunity to free a lot of those mainframe dollars up by moving to one supplier to really move more towards development which is where we want to be for our customers.

So it really-you know, it wasn't a negative. It was a positive. What we wanted to do was to free up more dollars for development. We feel we made a great choice. We could have gone with really either company's-but we made a great choice in the end. We are through-we are right in the middle of our transition. We should have this finished I think sometime by mid-February and it's been going very well. And it's been a real win/win for us and we see that in the future years it's going to free up a lot more dollars for us to invest in technology and new programs.

OK.

Kip, let me add to that, just briefly. I can't talk enough about IBM and how good a partner they were and have been through the years. That was a very hard decision. There are people in Boulder and the account representatives that work with us were very helpful and have been and continue to be very helpful during this transition. And so Craig is right. We really had a tough decision. Two good companies, but the bottom line is that we'll be better off from a management and control standpoint the way we're going.

OK, thank you.

Next question is from [David Bouveau] with Paradigm Capital Management.

Good morning.

Good morning, David.

Good morning.

The Perot contract-does that any impact on capital spending? I know you broke out for the year the software investment versus property, plant and equipment.

David, this is Olwen. It did have some impact because we're always taking over some of our midrange infrastructure. So as we anticipated that transition, we spent somewhat less on infrastructure replacement. We deferred a few things until this contract cycle [inaudible]. So you're correct.

So it's an outsource contract that's-is it on a fixed basis every year, what we pay them?

Yes, primarily.

And will they be making the investment in capital?

Yes, they will.

So that's going to run through our income statement rather than being capitalized going forward?

In terms of the computer hardware that previously was purchased by us, just the midrange. Not the mainframe. The mainframe was [inaudible].

But, David, we have a little different arrangement perhaps. Our CIO, David Guzman-instead of having a test of thousands that he has reporting to him, his primary responsibility is working with advantaging the [inaudible] relationship. So-and he has a team of eight or 10 people who are tied to our business units so there's a lot of interface.

And as we see things changing in the marketplace and the needs changing we have a very proactive and positive relationship with Perot to make sure those requirements are met. So it's a very interactive process, not at all an arm's length process, where we depend on them and they depend on us. You know, we're doing this thing together. And that's been the hallmark of our relationship with Perot Systems.

I think it sounds like a great deal for us to do. I was just wondering about the D&A impact. Are we going to stop capitalizing it?

It really doesn't change it dramatically. Most of our capital expenditures in the past have been on the development of software associated with our IT spend. In the past, we had outsourced the mainframe processing and that is going to continue and we paid for that service without making the capital investment in that equipment. In the past, we did make some investments, capital investment, in the midrange computer equipment and in the context of this new agreement those investments will be made by Perot, and we'll purchase those services and it will run through our P&L in that manner.

Also based on their size, David, they have a much better opportunity to leverage capital expenditures and standardize on one system. We did have- as we built Omni, our system, we were on different systems and made different investments in hardware, whereas they will have a much better leverage from their size to be able to get a better price on that hardware for us.

So it is a good deal for us.

Yeah, a great deal.

So as they make investments, that's not going to be a capital spending item for us. That will just run through our income statement?

Investments in computer equipment. As we have investments in regard to the development of software, for instance, that will be recorded as a capital expenditure for us, as it's always been.

Is Perot going to be developing the software?

Yes... Right, at our direction. I mean that's why I say-David Guzman and his team represent the business side of Owens and Minor to Perot so the business side designs and spells out the need. We give that to Perot and they do the work, the development part of it. But it's very interactive. It's a very good relationship.

What's the capital spending outlook for '03?

We haven't provided guidance on the capital expenditure. If you look historically, we spent in the $15m to $20m range. This past year, we spent less as we've been developing our new strategic initiatives and undergoing the Perot transition. It's possible we could be slightly above that range in 2003 to balance off the underspending this year.

OK, great. Thanks a lot.

Craig, do you want to add an answer here on the SKUs?

Yeah. We did get an update on that. And, Chris, if you're still on the line, I was off.

All of us were.

I didn't do my math very well this morning. We are at about 200 SKUs, but that will go up as we continue more product launches and more product categories and so it is about 200 SKUs, maybe a little higher than that. But that will continue to grow for us. And if you aren't on the phone, I'll call you.

That concludes the question-and-answer portion of today's conference. Mr. Minor, I'll turn the call back over to you at this time.

Well, thanks very much. It's time for the market to get going and thanks for listening and please call with questions. And thanks for your support. Good day.

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