Owens & Minor Inc (OMI) 2003 Q1 法說會逐字稿

I would like to thank you all for holding and welcome to your conference call today with Owens & Minor first quarter 2003 earnings conference call. During the presentation all participants will be in 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 1 on your touch tone phone to place your line in to queue until your name is called. As a reminder, the conference is being recorded for transcription purposes today, Thursday, April 17, 2003.

I would like now to turn the call over to Gil Minor, chairman and CEO of Owens & Minor. Thank you for using sprint conferencing services.

Good morning, America, thanks for being with us this morning. We have some great news to share with you today and look forward to reviewing the first quarter results. On the call today with me is Craig Smith, President and Chief Operating Officer, Jeff Kaczka, Senior Vice-President and CFO, Dick Bozard (ph), Vice President and Treasurer, Olwen (ph) Cape, Vice President and Controller and Drew Carneal (ph), Senior Vice President and General Counsel who I'm sad to say is retiring at the end of this month.

But our new general counsel, Grace Heart (ph) is also with us for the first time. Welcome to you, Grace.

Before we begin, Trudy Alcott (ph), our Communications Manager, will read a brief Safe Harbor statement. Trudy -

Thank you, Gil. Except for historical information, material discussed today may constitute forward-looking statements that involve risk and uncertainty that 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 SEC. The company is in no obligation to update information contained in this conference call. And a reminder, you can find the audio of our call on the corporate web site until May 6. Thank you. Gil -.

Thanks, Trudy. First of all, I will call on Jeff and then Craig for brief remarks and then we will take your questions. So first of all, Jeff, take it away.

Thank you, good morning, everyone. We had a very good quarter, but before I go through the numbers let me mention that new SEC rules are in place discouraging the use of non-GAAP financial measures. We believe this is a good thing and support the SEC's efforts to improve disclosure, therefore we have chosen to present our results on a GAAP basis.

Of course, we will continue to provide additional information that will help you further understand their operating results. Sales this quarter were 1.02 billion dollars, that's an increase of 51.3 million dollars or 5% over last year's first quarter and this is our second consecutive billion dollar quarter.

Diluted earnings per share was very strong at 35 cents, up 21% over last year and we're particularly pleased with that in light of the fact that we have been making investments in our new strategic initiatives. And net income for the quarter was 12.9 million dollars, up 19% from last year.

Now turning to other results, gross margin for the first quarter was 10.6% of net sales, down only slightly from last year's first quarter, but consistent with the 2002 total year results. Our continued efforts to find ways to add value for our customers have really helped in this regard.

SG&A came in at 7.7% of sales, improved from 7.8% in the first quarter of last year and the nice thing here is that we have continued to generate productivity gains primarily in the field operations allowing us to fund our new initiatives and still see an improvement in SG&A. By the way, we made nice progress on these initiatives and Craig will give you more detail on that in a moment.

Asset management was quite strong with inventory turns at 10.2 and DSO at 30.8. Consequently, operating cash flow for the quarter came in at a positive 80.1 million dollars. The reason we did so well here, our teammates both at the home office and in the field just do a terrific job with asset management and it's a very important element of our business.

And we have made excellent progress on our repurchase program. You'll recall that during the fourth quarter we announced that 50 million dollar repurchase plan representing a combination of common stock and trust preferred securities. So far we have purchased 27.6 million dollars of the trust preferred securities and 10.9 million dollars of common stock for a total of 38.5 million dollars.

Our purchases have all been made during a limited window of time in which insiders are allowed to trade in accordance with our compliance policy. This buy back program is in effect through the end of 2003 and we're particularly pleased that we have been able to fund it from operating cash flows.

Let's turn to our outlook for 2003. Of course, we'll continue investing in our strategic initiatives and that's reflected in our guidance for the year which remains unchanged. We anticipate sales growth in the three to 6% range and EPS of $1.38 to $1.43 and that's compared with GAAP EPS of $1.27 last year.

So to recap, healthy sales results, excellent earnings per share growth of 21%, strong asset management and cash flow, and we did this while making some nice progress in our strategic initiatives which you'll hear more about from Craig. Thank you now, I'll now turn you over to Craig. Craig -

Thank you. Now I will turn it over to Craig.

Thank you, Jeff and good morning, everyone. And thank you for joining us today. Our first quarter operating results were very solid, giving us a strong start for the year ahead.

Since Jeff has gone through the numbers with you, I'm going to spend my time talking about our core business and our new strategic initiatives which are off to a fast start.

In our core business, the sales growth was very solid, continuing a trend that began in the second half of last year. Our sales growth continues to come primarily from penetration of existing accounts. And as we have said many times, expanding our relationships with current customers is the most profitable way to grow our business and I would like to give you an example. We have a very mature longstanding bulk customer in the Southeast who is shutting down their warehouse and turning their distribution over to us. They will go from bulk distribution to low unit and measured distribution and we are still anticipating that sales will grow by 10% with this customer.

Building on our strong customer relationships such as this one, is vital for our business. We will continue to create supply chain solutions for our customers and we will focus on preserving our number one ranking in customer service.

Since November we have made significant headway in getting our strategic initiatives up and running. Early response from our customers to these efforts has been very positive. With our new initiatives we have just completed the first full quarter of laying groundwork creating infrastructure, hiring and marketing the new service to our customers.

We are very encouraged by early efforts of our teams to cross-pollinate our core business with our new efforts. Our business leaders are actively working on ways to collaborate more efficiently.

I must credit our teammates with enthusiastically embracing the new opportunities we are uncovering. They are very knowledgeable about our business and our industry. And the successful debut of our new strategic initiatives is proving our people make the difference in a demanding marketplace.

Now I promised in November to provide you with a scorecard on how we're doing. In our core business supplier strategy, we made headway in choosing the right mix of SKU's, implemented a new procedure which will allows to us ensure we have the most efficient mix of suppliers and the best products for our customers. Also during the quarter we expanded our MediChoice (ph) line adding new categories such as anesthesia products. By the end of the year we will have launched several new categories is MediChoice for our customers.

Now, improving productivity is an ongoing focus and an important component of our strategy. This quarter we made significant progress. For example, we saw improvement in lines per warehouse labor hour and in sales per square foot in our warehouse facilities. And we grew sales more than 5% with no material change in our head count. Our ability to leverage our core business operations is enabling us to move in to new areas in health care.

With our OMSolutions (ph) effort we're seeing a strong positive response from the health care industry. OMSolutions signed four new outsourcing accounts this quarter for a total of 15. The team is engaged in a number of consulting agreements including several clinical inventory management projects.

I'm also proud to say we have added five new Wisdom 2 (ph) agreements this quarter, during the first quarter we filled most of the critical home office and field positions for OMSolutions. This team has rapidly brought the concept to reality for our customers With 3PL effort we're on target with internal goals.

In addition to existing customers we are in various stages of discussions with both hospitals and healthcare managers for 3PL services. The 3PL group is developing a array of services including warehousing and outbound transportation for manufacturers, inbound transportation management for hospitals, along with order aggregation and cross-docking.

Another important initiative for us has been the launch of Owens & Minor University. I am very proud to say that next week we will open the doors of OMU to all of our teammates. We have a new facility at our home office with state of the art classrooms, computer training facilities and meeting space. Starting next week we will have 75 different courses available and nearly 200 teammates have already taken courses so far this year using real and virtual classrooms. The colleges of OMU include sales, operation, finance, leadership, # professional development and technology. Our faculty comes from the ranks of our teammates. We believe this is an effective and efficient way to share knowledge within our company. I am very pleased with the energetic response from our own teammates and from the healthcare industry. Our new initiatives will help us set the pace in healthcare for a better, lower-cost supply chain.

Thank you and now I will turn it over to Gil for questions.

Thanks, Craig, thanks, Jeff. Let's go the questions and we look forward to those. Turn it back to you, Carol.

Certainly sir. If anyone has a question, please press star 1 on your touch tone phone at this time

Our first question comes from Robert Willoughby (ph) with Bank of America Securities. Go ahead, sir

Good morning, this is Sean Harrington in for Robert Willoughby, actually. My question is pretty quick. Are you gentlemen seeing any softness in hospital volumes at all? Can you speak to the environment overall?

In terms of volumes, I think the hospitals have been fairly steady. We had fairly steady volumes in the fourth quarter and they have continued to carry in to the first quarter. So that has been fairly consistent. But again, what we do focus on, Sean, is account penetration and existing accounts which we have been very successful on the last six to nine months and is going to continue to be a focus for the company.

Plus, Craig, we, as you know, we monitor surgeries and those continue to increase this past quarter over quarter and over last year. And the hospitals that we service are full and that doesn't mean that it's necessarily so profitable for them, because a lot of those cases, some of them are coming in through the emergency room. But we really haven't seen any slackening of growth in our sector. Again, our 5% number is I think pretty much on target with maybe slightly ahead of the industry growth. Thanks, Sean

So you didn't see any material movement in terms of the weaker flu season or any other concerns people may be discussing?

No, absolutely not.

That's very helpful. Thanks a lot.

Thank you.

Thank you. The next question comes from Chris McFadden (ph) with Goldman Sachs. Go ahead, sir.

Thank you. Good morning, everyone.

Good morning, Chris.

Listen, thanks for the details, everyone, on the quarter and certainly for the strong results. I guess a couple of questions, if I might. Talking about the 3PL and some of the strategic initiatives that you have outgoing, you have outlined some specific duties that you have assumed at some of your hospital clients and some of the expanding relationships. I guess talk about, you know, what you think is the competitive climate as you have rolled this program out both to the industry as well as to your competitors. And how you feel about all be it early in the pro session, how the profit profile looks, I guess to what extent the growth in volume is going to help you give some level of operating leverage to the outsourcing agreements that are in place. And then finally, Jeff, if I could just follow-on and just get a little guidance from you relative to full-year tax rate, that would be real useful. Thanks.

You want to answer that first question first, and I'll answer the tax strategies

The tax rate that we recorded for the first quarter was 39.2 and we record the expected tax rate for the year with each successive quarter, so that is clearly the best guidance we can give to you for the year 2003, and that's compared the a rate of 39.6 last year.

Thank you.

And, Chris, on the strategy piece, what we are seeing is a very high interest in inbound transportation to our current customers and competitive customers. They're taking a very hard look at their transportation costs. Also they're taking a very hard look at inventory ownership and how they can start to reduce that inventory dramatically, which is really our two strong points for us and what we're focusing on in the first quarter.

The other piece from the core business is on the sales per square foot and the D.C. optimization, we are working diligently to free up space in our facilities to handle the 3PL business. So it really is a collaboration between 3PL, OMSolutions and the core business. But we have had a lot of interest at the executive level in terms of work in the OR, in terms of the Catlab (ph), inventory ownership and inbound transportation. So it appears that the strategy that we have chosen is right now of great interest to executives in the hospital industry. We're talking to a lot of customers where we don't have the core distribution and we see some opportunities that once OMSolutions starts up, that we'll be able to pull some of the core business sales through the channel. So we have had, I think, a very positive quarter in terms of our strategy, we're going to continue to ramp up. We are getting good margins on OMSolutions and we're going to continue to get good margins on that business.

But I would say, Craig, that today based on what we have done in this first quarter, there's no impact on, on the numbers yet and we don't anticipate there being any impact in this first year, at least toward the end of the year. Maybe we'll be able to report something more substantial. But we're off to a good start.

Off to a very good start.

There's a lot of positive feel.

Understand Understand. Final followup, if I might. Certainly the GPO community has been under a lot of pressure to think about expanding their contracting relationships with smaller vendors, differing vendors offering broader product access under their contracted solutions. Is any of that affecting your business in any way? Is It creating incremental pressure to increase SKU's? I guess is any of what we have heard at the national policy level translating down to your customer relationships? Thanks.

Well, again, as you know, our relationship has always been with the individual hospitals and we support what our hospitals strategy and visions are. And of course, we work closely with the GPO's. I would say that today the overall addition of small manufacturers has not impacted us but we will work with the groups and we will work with the customers, if there is a mix and there is a mission that they set out on, we will support that mission. But I would say as of today, that really has not impacted us.

Great, thanks, everyone.

Thanks, Chris.

Thank you. The next question comes from Larry Marsh with Lehman Brothers. Go ahead, please

Thanks . Good morning, Virginia.

Good morning.

And Grace, welcome to the team. Take it easy on Gil.

I'll do my best, thanks.

Couple of things quickly. Craig, could you elaborate a little bit on the low unit of measure conversion by the vendor? What would trigger that change and was that a direct result of your 3PL initiative? Or was that just something that was already in the works?

That was a customer that has been on CostTrack (ph) for a long time, Larry, and they're looking at ways to drive their process costs down and had, again, worked on that traditional piece and as we talked in conference calls before, the opportunity is really in that direct to manufacture piece and then to really start to work on the activity in the hospitals. So this was a customer who has continued to work on their overall process costs and saw this as an opportunity to drive more efficiencies. They also had a space issue in the hospital where they were literally running out of space and saw an opportunity to utilize some of our space and do distribution through that. So this would be more of a core customer that was one of our more traditional CostTrack customers that's saw an opportunity to work on process costs, but the benefit of course to us is that we saw some really some good sales growth and a customer that we have had for a long time.

So in this case, the sales growth given the switch was positively impacted because of the change?

Yes, the top-line sales growth.?

Right.

Yes.

Secondly, I have to ask you this, I know you had mentioned the goal of getting a new head of your solutions business and in the last quarter you talked about having Tim in while you were conducting the search, you said you were interviewing some people. Where do you stand there?

Larry, I knew you were going to ask me that question.

Not a surprise, uh?

I have been working on it, Larry.

ANALYST: Okay, let's hear it. Give it to me.

All the positions are filled. The key sales positions are filled. I am still looking for that person and again, I think as I had said in the last conference call, I'm really looking for a person with some unique skills and I'm also looking for somebody that will fit in with the senior management team here at Owens & Minor So although I'm being a little particular I think when I find that right person, I think they will pick up. Now, what I will say is we have not had any slow progress because that position has not been filled. Tim Gill (ph) reports directly to me, he's our number two, he is out in the field very actively with our OMSolutions sales force and we have not skipped a heartbeat on this initiative.

Any target, them, when you hope to get somebody in place?

I'm working on it, Larry.

Okay. Actually, I have an interview right after this conference call, that's the truth. Very actively looking much. I talked to somebody earlier in the week, I was very impressed with and I am speaking with somebody today.

Okay.

I'm looking. I'm looking for somebody who really has a good supply chain background, not just a technical background. And somebody who has either been a healthcare provider or worked heavily in the health care provider network.

Fair enough. Finally, Gil, us a mentioned, you're off to a pretty fast start this year versus your expectations and the question I have would be, you know, should we realistically think that there could be a sequential decline in your earnings in any quarter this year given the fast start you have given or do you think that the full-year guidance is just a representation of the kind of conservative nature of your outlook?

Larry, I really can't comment on the next three-quarters, other than the guidance that Jeff reaffirmed for the year. And I would probably like to leave it there. We have a lot of work to do to make this as successful as you expect it to be and as we want it to be. And we have looked at this whole unfolding of initiatives as a one-year project and we're very comfortable that we'll come out at the end of the year where we have said we're going to come out. And that's what we are reaffirming. So I wouldn't read anything plus or minus into a little bit of an improved first quarter except that I think we're running our business better today. I think productivity issues, the asset management certainly getting some improvement out of the interest rates, but that's part of our business. So I think we're running the business on an improved basis and we're still committed. We haven't cut back on our intention to spend the necessary money to make these initiatives very effective for the whole company.

It's fair to say that the guidance you gave for '04, you're not commenting on it but I would assume that's still in place relative to what you said back in November.

Say again, Jeff Jeff. Jeff is whispering now. .

I'm sorry, Larry is referring to the fact we had given guidance at the time we rolled out the strategic initiatives for '04 which was around 15, 20% in the EPS line. The exact guidance, again, at the end of the year.

Right, but it's -- right, okay. We haven't changed it and so we feel comfortable that we said what we said.

Fair enough. Thanks a lot.

Thanks, Larry.

Ok

Thank you. The next question comes from Glen Santangelo (ph) with Solomon Smith-Barney. Go ahead.

Yes, hi, Gil. Just a quick question. It seems like the company did a good job in generating free cash flow and the company is flying through its sharing repurchase authorization, you're almost 80% through. What's your outlook for free cash flow and how do you expect to use that cash flow and do you think it might make sense, you know, depending upon what your other uses for the cash are, to increase the authorization and what's the appetite to continue to buy back stock? Thanks.

Thanks, Glen. We don't give guidance relative to cash flow. We certainly had a good first quarter, which gives us more options to consider, and that's what we're going to do. You know, we keep reinvesting in our company to make it more profitable and more productive and more successful and we'll continue to do that. I think we have said that we are looking for strategic acquisitions to help us grow the business. The share repurchase, you know, initiative was a one-time thing. The board, I'm sure, will revisit that from time to time and our interest is to give our shareholders the absolute best return we can give on the money we generate. So I think the good cash flow gives us some options, Glen, so we will consider those, you know, along the way.

Okay. Thanks.

Thank you.

Thank you. The next question comes from Kip Hewett (ph) with Legg Mason. Please go ahead, Mr. Hewett.

Thank you. Craig, when you mentioned the focus on increasing account penetration, could you talk a little about what's different as you go, as you expand your penetration of an account? Are you capturing a different type of supply, a different type of product mix? Does it impact your, do you move to a higher margin on those accounts? Are you capturing more supplies that is otherwise going direct? Or are you taking it principally from another distributor? Then I think I will have a follow-up after that.

Primarily, Kip, through CostTrack and wisdom and other tools that we have, we look at one, getting traditional direct manufacturers to go through our model, which has been a big focus for us the last several years. Second piece is, we do try, if there is business split between distributors, obviously that's a high priority for us to become the prime vendor on the account. And to move other distributors out that might be in that program. So, you know, through the technology tools we have, through some of the logistics programs we have, through the expansion of our PANDAK (ph) program, bigger focus in the operating room and the Catlab we think OMSolutions will have some impact on the core business of pull-through (ph) and just get us access in departments that traditionally we haven't been in before. So that's kind of a long-winded answer, but I think there are several tacts that we take and, you know, with 3,000 customers, you know, each one is a little bit different. So some are looking for product mix, some are looking for direct manufacturers to go through, some are looking at us just to pick up and manage more of their inventory for them. So it's a combination.

Okay. And then right now of course you're focusing on the penetration of your existing accounts, but at what point does your strategy, does that as a driver of your earnings growth get overtaken by the new initiatives that you're introducing, particularly in the area of 3PL or even OMSolutions as the key driver to accelerate things?

Well, again, you really have to look at all three and not just one, because the 3PL will help us in the direct to manufacture market, it will help us in current customers and non-customers. And OMSolutions again will also help us in current customers in the or in the Catlab, several different areas and so there will be a direct and immediate impact on the core business through those two initiatives.

Conversely, the core business is giving a lot of leads to the 3PL and the OMSolutions folks for opportunities for growth. So we don't really look at them individually, we look at them as one and looking at the hospital business as an opportunity for any of those three initiatives to help us gain better account penetration or get us a competitive customer. So we really are looking at all three combined. But the core business, we're very pleased that's growing, it had, you know, we had a healthy first quarter, we're working on operations, we're working on productivity, we're working on sales growth, so we're not going to take our eye off the ball. OMU, we feel with training programs, will help us on teammate retention and making those folks efficient. So it's really, you know, although we talk about them differently it's really one strategy which is at the end of the day to help our customer be successful.

And then just a final question. Your earnings of course grew faster than the consensus and most of us I think were estimating, I think even general we had been looking in range of a 8 or 9% increase and 21% of course was far exceeding our expectations. How much of that, the fact had you the 21% EPS growth was really tied, you think, to the reduction in the interest expense and the tax versus -- and something that we might not necessarily be able to expect continuing as a year over year comparison versus some of these other initiatives we have been talking about?

Well, Kip, we're certainly pleased with the way the fourth quarter had turned out. I think Craig had referred to nice productivity that we had seen in the field operations, offsetting, more than offsetting some of our investments in the new strategic initiatives. Asset management is a very critical piece of our business, of our business operations and we performed quite successfully there and hope to continue that throughout the course of the year. As far as the tax rate goes, it's literally, it's only 4/10 of a percent different than last year, --than last year's tax rate, so, you know, I see a lot of this coming as a result of our improved operations.

Okay. Thank you very much.

Thank you.

Thanks, Kip.

Thank you. The next question comes from Frank Beanko (ph) with McMann Securities (ph). Go ahead, sir.

Following up on an earlier question, looks like you have about 12 million left our repurchase program. Are you leaning towards buying back the common stock, preferred or combination of both?

Jeff, you want to take that? You want me to give you the -- I mean we'll, you know, we'll go either way and so when we get back in the market, we'll take a look at it sort of day by day. You know, we're committed to fulfilling 50 million.

Okay. And any sense of timing on that?

The programs is in effect through the end of the year and as I mentioned, we're, repurchased 38 1/2 million of the 50 million, so we're 77% complete and we'll opportunistically look in the marketplace.

Okay, thank you.

Thank you. The next question comes from Jeffrey Allen (ph) with Silver Crest Asset Management. Go ahead, sir.

Hi, good morning. Also a follow up to a previous question: The interest expense was down, but looked like the balance went up, so just wanted to confirm, am I right to assume that the decrease in the interest expense is due to lower rates? And also, when does the discount on the receivable securitization go away, since that securitization hasn't been in place for awhile?

On the AR financing program that we have, we set that up with 225 million dollar line and the length of that would run through 2005. That's an asset-backed commercial paper program that gives us very effective rates, so it's one of the most efficient ways for us to borrow short-term. So we don't see that really changing as we go forward.

Okay. So there are still receivables outstanding, it's just that you haven't sold some for awhile?

Right.

I do understand that correctly?

Yes, you do. There are no borrowings out there today. We go in through the month periodically to cover our short-term needs, but our borrowings have been rather light, as you have seen.

Okay, so it's just sort of intra-quarter?

Right, it can carry over if we're in a heavy borrowing mode, which we haven't been lately.

As of the end of the first quarter last year, we had sold 40 million of the AR and as of today there is, or as of the end of the quarter there was zero balance there.

Jeffrey Allen Okay.

The AR securitization.

We were able to fund the 5% growth that we have through operating funds without needing to borrow.

That's right.

So, you know, where does it kick in? You know, gosh, I would love to have that problem of it being 10% growth, then we may have more of a borrowing question. But --

Okay. Then on the interest expense, lower rates.

Well, we have been in a lower rate environment fairly steadily now for probably a year and a half, two years. so it really hasn't, we haven't -- it's not all that dramatic. The borrowings are down, as you've seen. We have continued to pay down debt, we did some refinancing, so the environment is pretty favorable for us right now. The balance sheet, as you have seen, looks very strong, well positioned to support our strategy as we go forward and that's what we have been trying to achieve.

Okay. I just meant the debt balance is actually up year over year, it's down sequentially but up year over year.

This is Olwen, Jeff. I think looking at the long-term debt number, the bonds which last year, 33102 was at 202 now we're at 212. And the difference there is we do have a swap in place and we market to market. So what we have actually got out is 200 million but it fluctuates as the fair value of the swap fluctuates.

I see, okay. All right. Last question is the preferred, redeemable preferred balance went down 21 million but I think you said you bought 28 million. Did some of that take place after the quarter ended?

Some had taken place in the fourth quarter of last year. And I would have reported what we purchased during the total period of time. So the 38 1/2 million dollars in total buyback include that's which was purchased in the fourth quarter which was 6.9 million dollars of the TCON's (ph) and the remaining purchased in the first quarter of this year.

Okay, thank you.

Thank you, Jeff.

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

Well, thanks for your good questions and all of us are available for follow-up discussion on things that we have announced all within the guidelines. Thank you. And everybody have a great day. 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 at this time.