Owens & Minor Inc (OMI) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Owens & Minor Second Quarter 2004 Earnings Conference Call. My name is Carol, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call, you require assistance, please press "star" followed by "zero"; and a coordinator will be happy to assist you. As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Gil Minor, Chairman and Chief Executive Officer of Owens & Minor. Please proceed, sir.

Good morning, America. Thanks for being with us to hear this second-quarter report. We had an excellent quarter, and we're building on that from the first quarter, and we are very pleased with our results -- we are very excited about it, as a matter of fact.

And you will hear all about it today, and we very much look forward to your questions. On the call today, with me, is Craig Smith, President and Chief Operating Officer, Jeff Kaczka, Senior Vice President and Chief Financial Officer, Dick Bozard, our Vice President and Treasurer, Olwen Cape, Vice President and Controller, General Counsel, Grace Den Hartog, and several of our summer interns that are sitting in with us today, and we welcome them to this conference call.

But before we begin, I'd like to ask Trudi Allcott, our Communications Manager, to 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 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 healthcare providers, and other factors discussed in reports filed by the company with the SEC. The company is in no obligation to updated information contained in this release.

And just a reminder, you can find the audio of this conference call on our corporate website for the next three weeks. Thank you. Gil?

Thank you, Trudi. Jeff and then Craig will have brief remarks, and we'll look forward for your questions. Jeff, take it away.

Thank you. Good morning, everybody. We are pleased to report another solid quarter. Revenue for the second quarter was $1.12 billion. That's up $65 million or 6.2% over the last year. This growth was fueled by a new customers, particularly HPG, as well as penetration with our existing customers. Year to date revenue was $2.23 billion, up 7.4% compared to the same period last year. On a per day basis, year to date revenue grew 6.5% as we had one additional sales date during the first quarter.

Diluted earnings per share was 39 cents, up 5.4% over last year's second quarter, while net income was $15.3 million, up 12.8% from last year. And that's on top of a very strong quarter last year. You may recall that the second quarter of 2003 was our highest earnings per share quarter of the year. Year to date diluted earnings per share was 76 cents, up 5.6% compared to last year; and net income was $30 million, up 13.1%, influenced partly by the T-Com redemption last year.

Now turning to other results. Our gross margin for the second quarter was 10.3%, consistent with last year's results. As we said, last quarter, we anticipated gross margin pressure would continue and we are experiencing pressure; but our team continues to introduce our customers to products and services that add value, including MediChoice, our private label line; CostTrack, our activity based management system; and PANDAC. SG&A for the quarter was 7.6% of net sales compared to 7.5% in the prior year, and we're pleased with this SG&A result as core distribution productivity partially offset continued investment and strategic initiatives an spending on information technology support and teammate healthcare costs.

So for the quarter, operating earnings as a percent of sales were 2.5% compared to very strong 2.6% in the second quarter of last year. Net income as a percent of revenues is now 1.4% -- thanks in part to strong asset management. And I should mention that this is partly aided by a lower tax rate. For the quarter our tax rate was 37.5%, bringing the year to date tax rate to 38.3%. This rate reflects reductions in our estimates of the ultimate tax liability for years subject to audit.

Other year-to-date results were similar. Gross margin was 10.3%, only slightly lower than last year's 10.4%, while SG&A was 7.6%, slightly higher than SG&A of 7.5% for the same period last year. Asset management was also quite strong with inventory turns at 10 and DSO showing further improvement to a remarkable 25.5 days -- and my hat's off again to the field teammates and to Dick Bozard and his team for their efforts in achieving this milestone. Consequently, we generating operating cash flow of $18.2 million bringing our year to date cash flow to a positive $71.1 million; and I think this positive cash flow is a strong indicator of a good business model and a pretty well run company.

Turning to our outlook. Our guidance for the year remains unchanged. We anticipate revenue growth in the 5 to 7% range, and we're also anticipating that our EPS will be in a range of $1.54 to $1.56 for the year. So in summary, strong sales growth of 6.2%, net income growth of 12.8% versus a strong second quarter last year, excellent asset management, and cash flow of positive 71 million in cash flow year to date; and you'll hear more from Craig on our operational progress.

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

Thank you, Jeff and good morning everyone. Since we are midway through the year, it's a good time to take stock of the first six months and to look ahead. We have reached the halfway mark this year with solid scores on revenue, net income and EPS growth. Most importantly, we have towed the line on expense and managed our gross margin at a steady rate.

Since Jeff briefed you on these numbers, I'm going to focus on what's happening in the company. This year, we made an important change to our leadership structure, adding four regional vice presidents who work directly with me. These field base managers are helping to improve sales and communications and share best practices throughout the company. With solid momentum on the top line, this team will focus in the second half on enhancing margin and improving productivity.

We are seeing continued growth with CostTrack, our activity based pricing model. CostTrack customers now account for nearly 35% of our total company revenue with 8 new accounts converting from CostPlus to CostTrack during the quarter. As you may recall, we are aiming to have 40% of our business on CostTrack by the end of this year. Our RVPs are driving the significant effort. This business model is important for us. It is more cost effective for our customers and more profitable for Owens & Minor.

Revenue grew morn 6% this quarter compared to last year, slightly more than half of the revenue growth came from new customers this quarter with the remainder from penetration of existing accounts. So far we are on target for our revenue projections. Internally we launched a Six Sigma effort with an in-house team, which has already completed two projects and has four more in the cue. Our business partners 3M and PenSKI have helped us to get this effort underway. Our Six Sigma team is currently focused on projects that when completed will yield quick productivity alternative gains. I'm very pleased with the work they have done so far.

Turning to some of our other strategic initiatives. MediChoice sales proved significantly this quarter. We conducted a new product launch in May with items such as synthetic exam gloves and additional personal care products. A little more than a year ago, we launched our private label line; we were offering customers one product at a time. Now we are able to offer a wide range of products and the opportunity for significant customer savings. As for OMSolutions, looking or our scorecard our account development held steady, this quarter; and while we have seen steady revenue growth, we continue to invest in this effort. We anticipate it will be accretive alternative in the second half of this year.

Before we move on to questions, a word about our customers. Out of the top 14 best hospitals in America, in US News and World Reports Annual Honor Roll, 7 have prime vendor relationships with Owens & Minor. This list honors hospitals that excel in six or more medical specialties. Our longtime customer John Hopkins leads the list. Collectively these customers use a broad range of our services, including CostTrack, Wisdom, PANDAC, MediChoice, Focus and OMSolutions. We are proud that our customers are achieving recognition for the expertise they bring to the healthcare sector.

Looking ahead to the second half we will focus on productivity and on customer margin improvement. We create value everyday for our customers and we are committed to communicating that value to them. Although our playing field grows more complex everyday, we are keeping our eye on the ball. We will continue to invest in our future even as we work to maintain profitability in the core business. And finally, a word of thanks to our teammates for turning in very solid results this quarter. They work hard to meet the goals we set for them and they have done a great job so far this year. I am impressed every day by the dedication, innovation and loyalty the team shows to Owens & Minor. Thank you. And we'll take your questions.

Thank you very much, sir. Ladies and gentlemen, if you wish to ask a question, please key "star" followed by "one" on your touchtone telephone. If your question has been answered or you wish to withdraw your question, press "star" followed by "two." Your first question comes to you from the line of Eric Coldwell of Robert W. Baird. Please go ahead.

Thank you very much. Good morning.

Good morning, Eric.

I'm curious if you can address just two questions that I may jump back on in a minute. First, you did mentioned in the press release that employee healthcare costs are continuing to rise, that's consistent I'm sure with most companies. I'm curious, a, what steps are you taking to mitigate that impact, and b, have you revisited your self-insurance maximums to avoid issues like we had in September of last year?

My second question is more of a housekeeping item. Last quarter you provided the number of customers that were on OMSolutions WISDOM2 as well as the number of OMSolutions consulting contract, and I'm curious if you can just give us an update on those numbers?

Eric, I think what we'll do is, we'll address the healthcare cost first and then I will give you an update on OMSolutions. I'll turn the healthcare costs over to Jeff.

Sure. Hi Eric.

Good morning.

Good morning. Our healthcare costs have continued to rise like other companies, not to the level that we had seen in that unusual quarter, the third quarter of last year. But every year annually we look at our carriers, we look at our teammate contributions and so forth, and it's an important benefit to our teammates, so we take that all into consideration.

And we do make changes from year-to-year and we also look at the insurance caps that we have and those are modified on a year-to-year basis. But I don't think the rise in healthcare costs that we have seen is anything unusual as compared to the rest of corporate America.

Jeff, when you came into 2004 after the experience in September of last year, did you lower your caps this year?

Our plan year began sometime in the middle, in the middle of the year as opposed to the end of the year, and we did make adjustments to that.

OK.

Hi Eric. Let me answer the OMSolutions. As I said in my comments we are holding steady on our engagements. If you go back and look at the first quarter, we had a pretty substantial increase in the clinical inventory management and WISDOM2 and we're in the process of implementing those this quarter. We are relatively steady on new engagements.

However, I would say we did see strong revenue growth quarter-over-quarter and we have doubled the revenues since second quarter of last year. So as in any ramp-up business, we're playing a little catch-up this quarter. SIM or 5nQ our acquisition has been very well received. We're continuing to invest in that business.

Again, we're committed to having that accretive sometime in the second half and we're still very high in OMSolutions and what long-term it's going to deliver to the company.

Great. Craig, can you give us quick update on the number of consultants in OMSolutions?

I think that number is probably somewhat flat. It might be up a little bit. We have been really investing more, Eric, on the clinical side of our business in terms of what we can do in the cath lab and the operating room. We're doing some enhancements to 5nQ. We have another product that we're enhancing and we're beefing that staff up which in dollars that's probably a little bit higher than what you would have on the non-clinical side.

Great. I'll jump out now and maybe come back in later in the call. Thank you.

Thank you.

Your next question comes to you from the line of Lisa Gill of JP Morgan. Your question, please.

Good morning, everybody.

Hi Lisa.

Good morning.

I was wondering if you could just may be talk a little bit about your revenue growth. You said half of it came from existing accounts and half came from new accounts. 6.2% is pretty impressive concerning the fact that the industry seems to only growing 3 to 4%. How long do you think you can sustain that, and how much more penetration can you get? And then secondly, can you talk at all about how far you have penetrated your MediChoice, and what percentage of sales you are at this point?

Good morning, Lisa. This is Craig. Well, first of all, we don't really break that out in terms of percentages on the MediChoice in terms of what that make up is, and again overall it's still pretty small but it does have an impact on our overall gross margin. We have been really tracking on the sales growth on same store sales at about 3 to 4%. I would say at least the last two years, maybe longer than that.

As you know, in some of our traditional customers we have somewhere between 35 to 40% of the market basket of what a customer buys. What we are encouraged about is through these integrated service centers, for instance the University of Utah, Iowa Health and some of our OEM solution customers, we are able to see an increase from that 35 to 40% to 45 to 50%.

So we still think, one, we have a good offering for competitive accounts, but we also see that we have opportunities and exiting in our larger systems to grow that business. So you know, we are encouraged, we have been pretty steady at between 3, 3.5, 4% same store sales. We have been picking up some good accounts, maybe not big once but in the $12 million category, and we feel pretty good about our topline. What we really want to work on right now, Lisa is profitable sales.

So we're looking at customer profitability, we're looking at getting the right sales when we bring them in, and so even at 6% we feel pretty good about the sales that we're bringing in.

And then on the gross margin side, I mean, what's driving the lower gross margin, is that the competitive pressures of the marketplace?

Yes, I think really what it gets down to is the customers are really under the gun looking for alternatives, looking for help. I think that's why you have seen the MediChoice sales go up. I think they are more open to commodity products from a private label standpoint.

And what they are looking for is when you think of somebody who has 35 to 40% of the market basket, they are looking for us to help them. So you know, they are under the gun, they have been under the gun for a couple of years and what we hope is through OMSolutions and MediChoice and the integrated service center model we have, we can help them drive their overall cost down.

OK. And then just lastly, do you still expect OMSolutions to be profitable toward the end of this year, is that still the goal?

Yes.

OK. Great. Thanks you very much.

Lisa, one other thing that might be helpful to everyone. The other thing that's affecting our margins at least at this present time is the drying up of the secondary market profitability, which I think is the best thing that has ever happened to this industry. And we're working with our manufacturers to make sure that there's no harm done to the supply chain profitability.

But making the market more comfortable with the products that we buy, where they come from, making sure that they come from the original manufacturer, all the manufacturers are focused on that and we applaud that, we salute it, we stand behind it and we wish it had happened sooner quite frankly. But in the short-term they put a little pressure on our margins but we're making that up in other ways, there's some internal programs so that's why we have been able to get our margin and hold it pretty steady exactly where it is.

Because the doing away of the secondary market, is it costing you more with the manufacturers or is it costing you more to actually verify that the product is coming from that primary market. I mean, how is that affecting your gross margin?

More of the product is coming directly from the original manufacturer as opposed to coming through different sources and so that means the product is more -- it's actually more efficient for us to buy it that way, quite frankly.

OK. Great. Thank you very much.

Yes.

Your next question comes to you from the line of Christopher McFadden of Goldman Sachs. Your question, please.

Thank you. And good morning, everyone.

Good morning, Chris.

A couple of questions if I might. Firstly, in your prepared comments, Craig, you talked about some of the regional vice presidents that you have put into place. Could you give us a little bit a sense of how much -- how many of those folks are internally, versus if you brought any people from outside, I guess just a little division of labor from your historic responsibilities and I guess ultimately what's the measure of success of having put those new people in place?

Second question would be just an update on MediChoice in terms of how product enrollment there is going? It sounds like the end market demand has been good, but how aggressive do you want to be on products and I guess we continue to hear success stories in the industry, particularly from some of your competitors about the overseas sourcing opportunities particularly in the China market and is that an opportunity incremental to the profit contribution of that business today?

And then, finally, if you could just talk about what I think is a new commercial opportunity or at least I'm sure focus for your team, which is the VA contract, which I believe has got some renewal characteristics later this year, early next year, just get a sense of your time and how you're reading that situation? Thanks.

Let me go in reverse on that. The VA bid of course came out, Chris, in June, and I believe all the responses have to be in by August 5th. We -- our strength has always been on the DOD side an directly with the armed forces, so we see this as an opportunity for us on the VA side. Now, we do have some VA business, but we think that this is an upside for us going into that, and I just checked with our VA specialist -- this morning before I got on the call.

So, yeah, we think this is a good opportunity for us and we're going to be aggressive and we are going to be very positive about potentially picking some of that business up. Secondly, on the MediChoice side, quarter-over-quarter sales are up about 70%.

So we have seen a pretty dramatic jump in MediChoice and we are going back actually and on some of the initial rollouts going back and rolling those out again. I think the question is, you know, is it going to be 30% of our business? No. Is it going to be enough that if we have price customers it's going to help them on their savings? I think yes. There are also sourcing opportunities in China and there's sourcing opportunities here in the country, so we're getting better at it. I think we have learned a lot over the year and I think we're becoming much more efficient at, you know, how we're sourcing, who are we are talking to, who we are passing those opportunities on to, and I think we have learned a lot.

And that's part of -- to your first question is what are we holding the RVPs accountable for. You know, as you know, I pretty much had all the operating units reporting in to me when we had some sales issues probably about a year ago in the Midwest and one of the main goals is for the RVPs is to make sure that we don't have those kind of issues again and that we continue to grow the top line and grow profitability.

The other piece that they will be responsible for, Chris, is really implementing and being responsible for the OM model, which we are working on through Six Sigma and working on standardized processes through the company. One of the things we have heard is customers want consistent service, if they are on the east coast and they get great service and get transferred to the west coast, they want the same services they got on the west coast. So that's going to be part of their responsibility, also.

So overall, the day-to-day field responsibility of hiring of development -- management development, sales growth, profitability, really comes under those 4 RVPs and to give you sense they are all four internal candidates. Three of the four have both operations and sales experience, which as you know, you followed distribution for a long time, and it's very hard to find somebody with both operations and sales experience. And the fourth guys, learning operations here are pretty fast.

So I'm very pleased, I think they are a great group. They are as far as I'm concerned the cream of the crop of the field. They have jumped right in since February 1st. And one of their other goals is the Cost Track at 40% and you have seen good growth since the first quarter in Cost Track and I'm counting on those guys to hit that number because that goal was my goal and my goal is Gil's goal, so we want to hit that 40%. He wants 50, but --

Chris, I wasn't going to -- 40 sounds fine for this year.

I knew he wasn't going to let me get away with that. 2005. So we needed a little bit of a catalyst and a stepping Stone there and we're seeing good progress on that. So I have been very pleased, Chris, with the guys delivering in the last six months.

Let me ask a follow-up question on that point if I might which is you've talked about a profitability target for the end of this calendar year and I guess there's obviously 2 scenarios to get there. You get top-line growth and penetration and that drives down and gets you some overhead cost coverage. Conversely if you don't continue to be uptake, is there an approach or is there a scenario by which you would be willing to make cost reductions within that program to get to that same profit objective that you have set? I just -- I guess I want to understand the context.

The only thing I would refer everybody back to is if you look at the last two to three years our head count has been almost flat in the core business with the sales growth that we have, and I think that's a testament with the lines per hour that we have improved on, the pricing and the credits that we have constantly been able to deliver. The warehouse management training program that we started three years ago where we had turnover at 25%, it's now under 15%.

And I think you know we have held the head count consistently for at least the last two years and probably I think it was 29 hundred 3 years ago and we're probably in the 3,000 to 3,100 range. So our goal is to continue to the top line to train to make our people as cross functional as possible and hold that head count to where it was three years ago.

In the core business?

In the core business.

I mean the new people that are on our pay rolls today are the outsourced people that we have contracted for and the OM Solutions people that are providing some of the additional profitability to the company.

Great. Thank you.

Chris, let me comment just on one other thing. MediChoice, this is a momentum thing and we have added some product lines, we have added some SKUs and we will continue to penetrate that whole marketplace. The indicator that we are making some progress is that the -- some of the GPOs are upset by this, because we are in a sense competing against them. We are really not trying to do that. What we are trying to do is when we go in an RP situation we have something else to bring to the table and that's been very positive for us and even that's going to help us, it's going to help the customer and we believe it will help the GPO as well. So we're making some very good progress in this whole MediChoice area.

Good stuff. Thank you, Gil.

Your next question comes to you from the line of Larry Marsh of Lehman Brothers. Please go ahead.

OK. Good morning. And good morning Gil and everyone.

Good morning.

Good morning, Larry.

And speaking of not letting them off the hook, Gil -- Craig let me talk about this OEM solution scorecard. I wish I had my numbers right. So you're basing things to go about 58 consulting agreements, 25 outsourcing, 19 clinical and Wisdom II saw a 30 agreement; is that right?

Yeah.

OK. Should we...

It should be (inaudible) Larry.

That's a better way for saying flat.

Yes. Now, should we expect to see some resumption in those contract expansions in the third quarter?

Yes. There is, you know, you always have consulting is a different business. It's not a 30-day sale cycle, so some are 90 days, some are 60, some are 30. You can get a quick hit on some consulting engagements. We have a lot of things that we're talking to people about, we have got a long list of potential targets, we're past the potential target fees, you know, you never -- you've got to be careful what you say, but we have a lot of opportunity going forward. There is tremendous interest in the SIM program and the operating room.

And you know our goal, my goal, that's another one of my goals from Gil is to get this thing accretive by the end of this and of course it might be someone's goal who is running it is to have OMSolutions accretive by the end of the year. But we have had tremendous interest, we have had cross-selling opportunities in competitive accounts and some existing accounts. So one thing I want to make sure coming out of this call is very clearly that we're committed to OMSolutions and the importance it is for the company.

OK. And Mark fully staffed now?

He is fully staffed for the engagements that he has.

OK.

Now it's really driving the top line and making sure that he gets the margins on the top line that he's selling. That's the other thing is, you know, this is not low margin business. So there's a little bit, you know, there's a lot of due diligence on the hospital side to make sure that they get that, and then there is some ramp up. If you look at the scorecard from first quarter to second quarter we went from 5 clinical inventory managements to 19.

Right.

You're going to staff up for that, you've got to get people on site, you've got to do inventories and then that starts expanding to the operating room and radiology and other departments. So even though it was flat, we did have a huge pickup on Wisdom II and SIM in the first quarter.

OK. Yeah. All right. And then in terms of the other things, I know in the last quarter you had sized the total HPG opportunity, about 105 million by the end of '04. Is that still your thinking?

We're on target for that.

OK.

We had some good growth in the second quarter, and I think you'll see a little more growth in the third and the fourth quarter but we'll be pretty well at a run rate by the fourth quarter. We had some late sign ups if you remember, in one of the calls we talked about a couple of the customers signing up late. So we should be fully up and running by the fourth quarter of this year.

OK. It's actually Chris's question. How would you size the incremental VA opportunity?

It will be awarded on a regional basis.

Yeah. It will be awarded on a regional basis. It depends on in the past even if you had the prime vendor relationship there are a lot of opportunities for other distributors or local distributors to get into individual hospitals. So it depends this time, Larry, if they award the prime vendor if that's really what's going to happen on that. Now, we have business in tied water, of course that's one of our strengths being headquartered here in Richmond, we think we've got some opportunities in California and some of the other markets. It's really hard to tell. We have beefed up our what I would call our government group, our corporate group and we have got two to three really good people that are wired into that. So at this point it's hard to say.

Great. And it's fairly true. It is true. On a personal basis we really don't have a lot of VA business. We have some good DOD business, which continues to grow, so -- but just about anything we do, you know, on a regional side is going to be upside. And I don't think it's appropriate nor do we really actually know how much -- how many dollars are going to be involved. But I tell you we're going after them, like Craig said. I mean, we beefed it up and we're going to use that technology and we're going to leverage our relationship through the DOD to any extent we can.

OK. Gil, maybe your comment on the secondary market, have you seen any evidence of leakage where some of your customers are anxious to lower their acquisition costs so they may be sourcing it from other places or do you feel like there's a clear concerted effort by your manufacturers to protect the -- their channel and not sell them to secondary markets, other places?

Well, I'll comment and let Craig comment. I haven't seen any of that. As a matter of fact, Chris, we are probably, the watchdogs for the industry, because we feel so strongly about honoring those contractual relationships that we have signed. We want to make sure everybody else does too. And so I haven't seen any leakage and the manufacturers are being very positive about enforcing them, and so far so good. I weren't sure that was going to be the case, Larry, frankly, but I have -- I feel pretty good about it.

We're watching it very closely, Larry, and I think the one thing that I want to make very clear today is we will not be put at a competitive disadvantage. So to Gil's point, we are the watchdogs to make sure that somebody is not taking advantage of that in the marketplace. Now, can we guarantee 100% of it, no. But what we are not seeing at this point is leakage into the customer side of that equation. We are working very closely with the manufacturers. We've offered our services to the manufacturers, and the one thing I want to make sure, everybody understand this, we will not put up the company at a competitive disadvantage. So we will be the watchdogs. We have taken the point on this. We are going to help get this eliminated on our side of the business.

OK. Very good. Thanks a lot.

Thanks, Larry.

Thank you.

OK.

Your next question comes to you from the line of Glen Santangelo of Charles Schwab. Please go ahead.

Hey, guys. I just had two quick questions, Gil. Gil, you talked a little bit here about some of the pressures on the margins maybe coming from the secondary business. I mean, how recent of the phenomena -- this isn't something that we have talked a lot about in the past, is this something that you expect to continue to flow through the income statement for the next few quarters? And if you could maybe size up maybe the competitive landscape a little bit and just discuss if you think that is going to continue to have a meaningful impact on the margins going forward? And then secondly, kind of separate from the VA, is there sort of any other big pieces of business within your own book or within your two main competitive books that you're sort of eyeing up at and could be meaningful in terms of shifting market share one way or another?

Craig, why don't you take the second one, and I'll come back to the first.

Well, I think, Glen, we're always - we're always cautious on what we say in the day-to-day and flow of business. There are pieces of business that we're either working on or working with our larger customers to maintain or to try and get. So I would not comment on that that it's just is business as usual in terms of that piece of it. And you know, I think we have had some nice wins in the $12 million customer area, and you know, we'll see those over the next 6 months to 9 months come in. And you know, we -- our goal everyday is to sell our value to either our current customers or our competitors' customers and to maintain that 5 to 7% topline growth. So you know, its pretty much business as usual, and you know, ordinarily we don't comment on that.

Are you seeing your competitors get any more aggressive than normal?

Yeah, a little bit. A little bit. Yeah, because the market is driving it that way, Glen, I mean, we are all trying to find a more efficient way to service the customers and part of it is through some price - pricing that has some value to us and some value to the customer. But yeah, I mean, there's some pressure right there. Gil?

Well, I don't know, if it's any more intense than it is normally. I mean, it seems like it's been this way for the last two to three years.

I think the customer is seeing some benefit out of leveraging the competitors and trying to get either price concessions or service concessions. So I think that's really -- you know, we've been talking about margin pressure for probably a year now to a year and a half. So we're trying to help our customers. We want to maintain our profitability. We want profitable customers. And that the huge initiative for the company is that, we are very focused on our margins and work on that everyday. I'll let Gil answer the other question.

Yes, the secondary source is not a new subject, it's new because of J&J's involvement this year, particularly, but actually two and a half years ago, we made a deal with Tyco (ph) Healthcare to get out of the secondary market with them, and I think all distributors did. So this is not a brand new phenomenon. And you know, we're working with the manufactures, as Craig said, to help them in that whole process. So the margin erosion is -- you know, is there, but we have also been able to find other ways to help make that up.

OK. Thanks for the comments, Gil.

Your next question comes to you from the line of Eric Coldwell of Robert W. Baird. Please go ahead.

Great. Thanks very much. Most of my follow-ups have been asked. I do want to offer my congrats on very good DSOs and strong inventory turns again this quarter. I am curious, if you can give us some sense of, maybe even, Dick could jump in on this, but directionally where do we think we can go for DSOs and inventory turns, and even if you could throw out an absolute target range, if you will? And then finally, with the improving cash flow, I'm curious if there are some balance sheet opportunities that may not be imminently clear to us at the moment?

Eric, we are - I think we're all waiting for that. Eric, we're really tickled that the way the balance sheet looks and all the teammates have worked real hard over the last few years to get it to the point where it is right now. And as we look at the industry, you know, my personal feeling is that we -- the hospitals have seen some pretty rough times. It seems to be based on information I received from conference, I attended recently at Standard & Poor's, that things may be stabilizing. Even though it's at a low level, they are stabilizing somewhat, so I think that's rather encouraging for me. But as we look at the future, I just can't comment on what it's going to -- I can't be forward-looking, but what I can tell you is that, the teams plan, organize, direct, manage, control, benchmark, high use of technology, all of these things are paying off for the company, and we're going to continue to do that. I would say, I don't expect, I think if you look at the consistency of the progress that we have made over the last four or five years in particular. I don't think it's going to swing dramatically one way or the other. There will be some timing issues, you know, with month end closes and things of that sort that we may see some fluctuation up or down a little bit, but I would be disappointed if it was anything significant.

On the inventory turns, the team has really been focusing on that, and that obviously is a big part of the balance sheet. And in talking with the teammates, I think, we're all hoping that as we go forward through the years that we'll continue to see improvements come forward, particularly, as we go through more and more training through OMU on how to use the technology that we have, how to use the reports that we have available to us that we did not have in the past. I think that's going to create some behavior changes for us that will be very favorable for the company. Will it take some time? I think it will take some time, yes, I think we all do, but we think the trend is definitely going to be in the right direction. Working capital management is a key item in the distribution business as we all know and we focus on it everyday, and we'll continue to do that.

It's a great story and we're going to make it stay that way.

That's the commitment.

OK.

And Craig continually gives us wonderful challenges to go forward. OK. Let's see. Anybody else out there have a question?

Mr. Coldwell, have your question been answered?

Yes, they have. Thanks.

Thank you. As a reminder, ladies and gentlemen, please key "star" "one" to ask a question. Your next question comes to you from the line of David Bouveau (ph) of Paradigm Capital Management. Please go ahead.

Hi. Good morning. I had some questions, I guess, I don't understand what the secondary market is and how it impacts us. Could you clarify that?

I guess, since I'm smart at this, I'll probably try to pinch. First of all, let me comment that it's a very small part of our profitability. It is so -- the impact on it is not impact of buying from sourced options, really is a fairly small piece of our gross margin. But if it goes away or if it gets stronger than it's going to impact the gross margin. And for the most part, it's going away, which again simply particularly support that. It is hard to explain. Products flow from manufacturers who have plants in different countries. There are laws about how the products can come in and out of the country. There are also channels of supply that are not traditional channels of supply.

And what is growing up over the years is an offering of products that are legitimate products, but they come not from the product line of the manufacturer, but through other sources. And that's been true in the wholesale drug business. I mean, it's been true in our business for a long time. And so we've been actively trying to do away with it, because it's just -- it's an artificial type of business in a sense, but it's also a little more profitable to us to buy it that way, because that differ manufacturers price differently in different countries. So there's not any parity on price around the world. So we've been participating in that to, I would say a fairly minimal extent but it's a fact that it's drying up now, I think is the best thing that's ever happened.

So we were able to buy some of the cheaper products through the secondary market but we sort of stop doing that beside to spending out?

Well, the manufacturers are closing that down, and they are placing it, they are responsible really for policing their own products. And how they're used around the country.

David, let me try to shed a little light on this. Where we get paid is from the customer and we're in a cost plus environment with activity based costing. So what we really work on is on the customer side to trying to get our base margin and the services that we get paid for up. The secondary source or alternate source is a small piece of our profitability has been going away over a period of time. Where the company really is focused is on the customer side in the cost plus environment, the markets that we put on our product, activity based pricing, which is the Cost Track and getting paid for our services.

So it's a little bit different than the pharma side that's always worked on the supplier side either forward buying or buying heavily on inventory. Our model has always been on the customer side and that's where it's going to continue to be. That's why it's very key that we get Cost Track from 35 to 40 to 40 to 50 because that really helps to customers reduce their costs and it helps our overall profitability either getting our margins up or getting our operating costs down in our operating units. So we really focus on the customer side in providing value to the customer and trying to get paid more really day-to-day on what we do for our customers. So I think that's why we need to stay focused.

OK. That's helpful. And then my other question was you said, same store sales were up 3 to 4%. And I was just wondering, if you can so break that out on a contribution basis from volume, you know, what contribution with some buying and what was from the average price?

Well, those contracts on same store sales are usually contracts that we have in place from either a GPO that's a three year contract or we have individual standing contracts for five to seven years. So those would be under the normal pricing of that. Now, so if you just took 3% of whatever our sales growth was for the quarter that would be the number that you would come up with. But same store sales for us is the best sales because, one, we already have the customer service person assigned to that account, we had people picking orders for that and we have the trucks going to those hospitals already. So, same store sales from an operating standpoint are much more efficient for the company versus a new customer that we might have to ramp up, we have to boy inventory, we might have to add a truck, might have to add a customer service person or new picker. So as much as we can get same store sales where we already have the expense and the building committed to that, that's the kind of sales that we want to grow significantly. That's why we focus on it so much.

OK. Great. Thank you.

Gentlemen, you have no further questions in queue, back to you for your closing remarks.

Thanks very much for listening. And we stand ready to answer any follow-up interpretations or clarifications, and thank you very much. Let's have a great day. Bye, bye.

Thank you, gentlemen. Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. Have a great day.