Owens & Minor Inc (OMI) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Owens & Minor Fourth Quarter 2004 Earnings Conference Call. My name is Christie, and I'll be your call 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 today's 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, this conference is being recorded for replay purposes.

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

Good morning, America. Thanks for joining us to hear about and share our fourth quarter and yearend results. We are very excited and very pleased with these results, and Jeff and Craig and all of us are going to chat about it with you this morning, also want to talk about strategic acquisition, which we also announced yesterday, which closed on Monday afternoon.

On the call today are Craig Smith, President and Chief Operating Officer; Jeff Kaczka, Senior Vice President and Chief Financial Officer; Dick Bozard, Vice President and Treasurer; Olwen Cape, Vice President and Controller; and our General Counsel, Grace Den Hartog.

Before we begin, Trudi Allcott, our Communications Manager, I should say, our ace Communications Manager has worked tirelessly during these last few days, will read a brief Safe Harbor statement. Trudi?

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 ability to assimilate the operations of an acquired business, the potential loss of key personnel, intense competitive pressures, such as pricing within the healthcare industry, it also include the success of direct marketing programs in attracting new customers, the ability to retain existing customers, changes in customer order patterns, changes in healthcare laws and regulations, changes in government reimbursement guidelines and private insurer reimbursement amounts, also the ability to maintain product suppliers, product price increases by suppliers and other factors discussed from time to time in reports filed by the Company with the SEC. The Company assumes no obligation to update information contained in this release, and this conference call will be archived on our website for three weeks. Thank you, Gil.

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

Thank you. Good morning, everyone. We are very excited about our new acquisition and the growth opportunities it provide. We're also pleased with our results for 2004, which with the exception of a fourth quarter write-off of software assets and higher than expected spending on Sarbanes-Oxley were on target with our expectations for the year.

Revenues were strong throughout the year, up 6.6% to $4.53 billion, including 5.2% growth in the fourth quarter. We had one less sales day in the fourth quarter this year compared to last year's fourth quarter, so on a comparable basis, revenue growth was 6.9% for the quarter. Revenue growth this year came from a healthy balance of new customers, several of which were won partly as a result of our OMSolutions expertise, as well as penetration in our existing accounts, and congratulations to the sales teammates for successful effort in both avenues of growth.

Net income for the year grew 12.8% to $60.5 million, and for the quarter was $15.4 million, up 7.2%. Diluted earnings per share for the year was $1.53, up 7.7% compared to last year and 39 cents for the quarter, up 8.3%. Fourth quarter net income and earnings per share were impacted by $1 million write-off of the software investment, which was recorded in the other income and expense line.

We conducted a regular review of our assets and concluded that certain components of the capital spent on a large software upgrade project would not be utilized as previously anticipated. In addition, we incurred approximately $500,000 in fourth quarter expenses for Sarbanes-Oxley internal evaluation, and this was far greater than anticipated, but I'm sure many companies are having a similar experience.

Now turning to other results. Operating earnings, as a percent to revenue was 2.4% for the year, down slightly about 5 basis points from the prior year. This was impacted somewhat by slightly lower gross margin and strategic investments, partially offset by expense control in the core business. Our gross margin for the year was 10.2% compared with 10.3% in the prior year. Again, the actual difference was only about 4 basis points.

As we have said before, there are continuing competitive pressures in the marketplace, and the alternate sourcing contributions to margin are smaller than we have seen in the past. But we are seeing success in our efforts to offset the gross margin pressures, including our expansion of the MediChoice private label line. And we're pleased that SG&A came in at 7.5% of net revenue, unchanged from the year before, as we've made investments in OMSolutions that effectively offset this with the expense control in the core business.

Asset management has been a strength for Owens & Minor, and this year is no exception. Inventory turns were 9.6 and DSO was 26.5 days as of the end of the fourth quarter. This was the lowest yearend DSO we have ever reported. Operating cash flow for the year was $58.7 million. We were a net user of cash in the fourth quarter. This is common for our company in the fourth quarter; in fact, this has been the case in each of the last three years. This year's fourth quarter was affected by the timing of payments to vendors, an increase in accounts receivable, and inventory purchases to support new business.

We're very excited about our recent acquisition of Access Diabetic Supply, which was completed January 31st. It's a great cultural and strategic fit and we expect to see some accretion in 2005 and we have included these expectations in our guidance.

So turning to the guidance for 2005, we have sales growth in the 5% to 7% range and diluted earnings per share in the range of $1.71 to $1.73 with stronger comparative earnings growth in the second half of the year. This earnings per share outlook does not include the impact of expensing stock options under FAS 123(R), which would reduce earnings per share by 3 cents.

So in summary, healthy total year sales growth is 6.6%, net income growth of 12.8%, earnings per share of $1.53, continued strong asset management, cash flow of $58.7 million, a strong balance sheet, and an exciting new acquisition for the Company. Thank you. Now, I'll turn it over to Craig.

Thank you Jeffrey and good morning. I'm going to take a few minutes to look back at 2004 and then spend a few moments looking ahead, for the year ahead and then bring you up to speed on our latest acquisition, which we're very excited about at Owens & Minor.

First let's take a look at 2004. Revenue growth was a great story for us this year, and we ended the year with strong momentum. Actually on an apples-to-apples comparison, we had fourth quarter revenue growth of 6.9% and our sales team did an outstanding job along with management this year in really selling our true value to our customers. And as many of you know, we do serve a roughly 700 of our customers every year. We just got those survey results. And then I'd like to just take a couple of moments to share them with you because, as you know, we spend a lot of time and focus groups in listening to our customers. And again, we had a 98% satisfaction level with our customers, which year in and year out is pretty tough to do. So we have to work pretty hard to maintain that number. That's around 700 customers; about 650 are primary customers and about 50 are, what we would be considered as a secondary distributor. And there are some telling points that come out of that.

First of all, two-thirds of our customers believe that Owens & Minor is better than most medical surgical distributors. Nine out of the 10 customers rated Owens & Minor higher than our competitors on customer service, which we have been known for, for many years and had worked very hard at keeping those numbers. A majority of our customers reported that our sales reps continue to outperform their competitors and our OMSolutions teams, teammates are viewed favorably and are seen as highly professional by about 84% of our customers. I believe these results are direct reflection of our culture and our professionalism of our team, which distinguishes their selves in the marketplace every day and truly helps account for the strong pace of our sales growth.

Recently we also announced that we've won two awards for our service to the US Military. And I'm sure that you'll all know that we've worked with the logistic services of the Pentagon to build a military air bridge to supply troops in the Middle East and Afghanistan. And literally in 30 days, we created and implemented an innovative cross docking facility, cutting delivery times for medical supplies sent to the Middle East from as much as 60 days to only three days. And Gil and I were very pleased and very honored and the Company is very pleased and honored, to be recognized for our efforts and to receive those awards and we will cherish those.

Taking a look at the core business, we had a very good run with CostTrack this year, ending at 36% of our revenues, and that's up from 32.5% from 2003. We will continue to focus on growing CostTrack sales in the coming year. We did a terrific job this year, as we have the last three years, in holding the line on expenses as a percent of revenue even as we added new teammates and continued to invest in OMSolutions. We did make headway in 2004 in OMSolutions in signing new agreements and consulting outsourcing technology and clinical inventory management. However, we didn't meet our financial goals with OMSolutions this year, but we remain firmly committed to our effort.

Now over the year we've seen improvement in the OMSolutions scorecard. And for competitive reasons, at some point we will probably, in 2005 start to wind that scorecard down. Unfortunately, as we report out on these, we find that our competitors are duplicating those services 45 to 60 days after we start to talk about new services and programs. We feel that a lot of the things that we're doing are cutting edge or taking the point with our customers. We'd like to keep that competitive advantage as long as we can, but I'm going to share with you what we added in the fourth quarter in terms of engagements.

In the consulting arena, we added 18 new accounts. In outsourcing, we added five new customers. In the QSight, if you remember, that was from the 5nQ acquisition, QSight is our clinical inventory management program. We added 14 new accounts. And on WISDOM2, we added one new customer. So, we saw some good growth in terms of engagements in the fourth quarter. Now where we have been pleased this year in 2004 is really with the job of cross selling with our core business. OMSolutions helped us increase penetration in existing customers and was instrumental, along with the core, in landing seven new competitive accounts this year.

Now turning to our acquisition, we are very excited to bring Access into the Owens & Minor family. Access brings us a great management team. There are three guys along with their team that have just done an outstanding job there the last five years and are just bright great people. They have a very similar culture and have terrific teammates, and I have a fortunate opportunity after this call to go down and meet with the folks and spend some time down there today and tomorrow. Now this acquisition supports our long-term strategy of expanding our market and customer base in healthcare and we expect it will be accretive in 2005.

The Company has grown rapidly in only five years and was recognized in 2003 as the 25th fastest growing company in America by Entrepreneur Magazine. Now some of the impressive points that Access has is, they have a very low customer acquisition cost, which in their business is very key to being successful. One of their strong points is really their ability to use marketing to bring on and maintain customers, and they have built a great expertise in handling Medicare and private insurance reimbursement. Now, after talking with providers and suppliers about the market, we looked at a lot of opportunities -- and we feel that Access is a ripe good strategic fit.

Access extends our reach further into the healthcare supply chain and importantly gives us a channel direct to the patient at home. With our core business next year, we will incorporate OMU, Owens & Minor University, Six Sigma, and best practices in the field to continue improving efficiency and service to our customers and managing our expenses.

In 2005 we will continue to focus on margin with an emphasis on growing profitable sales. And we want to provide the highest quality service to our customers with the best-educated and trained teammates. Now we had strong results in 2004, but as Gil says you can look at that for New York second and then you have to move on. We are never satisfied. We always want to do better. We want to provide a perfect order every day with improved service levels and an accurate pricing to make our customers more efficient and more successful. We want to provide our hostile customers and patients' the ability to receive the right product at the right place at the right time from the hospital to the home.

I want to thank all of our teammates for their hard work and commitment to our customers in 2004. And as always, they go the extra mile and we greatly appreciate everybody's efforts. Thank you and now we will open it up for questions.

Ladies and gentlemen, if you wish to ask a question please press "star" followed by "one" on your touch-tone telephone. If your question has been answered or if you wish to withdraw your question press, "star" followed by "two." Questions will be taken in the order received. Please press "star" "one" to begin.

And your first question comes from Eric Coldwell of Baird. Please proceed.

Thank a lot and good morning to every one. My first question relates to the acquisition of Access; clearly you are moving into a newer channel here going to the patient's home. I am just curious if you could give us some sense of the cost of that acquisition as well as some details around growth margins. And you did specify that there'd be some accretion in year 2005 targets, if you could give us a sense of the magnitude of that accretion?

Eric, let me talk a little bit about the margin opportunity and the sales growth opportunity. In this market, in the market of chronic care management, the margins are better.

And historically have been better, and we see them being better going forward. We see this as a tremendous opportunity as we started to talk to a lot of the hospital providers, we just had a focus group two weeks ago, there is a need or desire to follow that patient out of the Health Care Hospital into the home.

And that's usually through a discharge nurse. And there is a commitment by the hospitals and many of them are still in this business today to follow that patient with supplies to the home. And that was what started to get our interest in this marketplace. Obviously it's a huge market, it's a fast-growing market, it's an unconsolidated market; Access is one of the top suppliers in this market today.

So it gives us a good presence in that market. In the market that they work indirectly, which is the direct mail order catalog, or the direct mail order business, that's about $1 billion business out a $5 billion to $70 billion business. But we see this as a platform to really grow into some other product categories, especially using our MediChoice and our focus product and starting to leverage some of our relationships with our suppliers to help Access get better acquisition costs also.

I would say at this point for competitive reasons, we are not going to disclose the acquisition price. And it really is not material. But since we are getting into this market, and we would like to get a leg up and move forward and we see some other opportunities in that marketplace. We are not going to disclose the purchase price.

Now, Craig, typically this is a business where you are going to have a pretty big call center and I suppose that's where the 200 employees come from or a number of them. How can -- does it make sense to do more acquisitions in this field? Because how you really bring the call centers together, and if you could just give me some color on that.

Well what we are doing -- well, they have a great call center, Eric. That was probably one of the most impressive attributes that they had. And they have some great technology in terms of tracking profitability of customers, making sure that they get their supplies, which is absolutely critical in that marketplace.

So we feel that we are poised right now with the call center and the people that they have to do tuck-in acquisitions and grow that and leverage that call center. We also see some synergies from the core business in terms of telemarketing to house accounts and smaller accounts that we have. So we think this is going to be a great learning environment also for our core business to do more via telephone and electronically with some of our smaller hospital customers.

Also, Eric, the primary focus is diabetic supply to the consumer. They're getting into and moving rapidly into respiratory care. And there are two or three other product illness diseases that can be brought on line and can be part of a strategic plan down the road. So there's opportunity to grow in that business.

No, it's definitely an interesting field. So congrats on that. Maybe if I can just ask one or two more quick questions and then I'll come back later if I need to. There was a little bit of a spike here in inventories in the quarter. I'm curious if you can give us some sense of what's going on with inventories. Turns were down just a fraction, although, it's still pretty good. What's going on with inventories, what should we be looking for? And if you can give us some color on what the components of that were?

Well, typically in the fourth quarter, we ramp up inventories slightly as we go into heavy holiday season and Christmas and New Year's. We've also -- I think we talked on one of the calls earlier -- we are implementing or upgrading Manugistics, which is our forecasting system, which has a little bit heavier inventory just up front as we start to make that migration to the new upgrade. And we did, on these integrated service centers; we did buy back some inventory from Iowa and Chance (ph), which is our two big integrated service centers. And of course that will just flow right back through to the customers. So that would be where you would see some of that ramping up.

Okay. Great. And then finally, I am just curious if you can discuss the other income line, which even excluding the $1 million software asset write-down, that number was a lot lower than we were looking for. Is something changing with your customer financing terms there put in there, and if you could give us some direction of what to be looking for moving into 2005?

Yes. Eric, this is Dick. Last year we ran in the range of a little over $1 million a quarter in finance charge income. One of the things that we've experienced is that the receivables are turning faster; therefore you are generating less time price differential or finance charge invoices to the customer. So that has a direct impact on the amount that is paid. Its probably stabilized at this point to what would be a normalized level. The fourth quarter of last year was a very good quarter for us in finance charge income. So it -- actually for the year, it ran about $1 million higher than it did this past year.

Right. So, basically, that's highly correlated with DSOs, and as DSOs come down, so will that finance income?

Yes.

Okay. Great. Thanks guys.

Thanks.

And your next question comes from Larry Marsh of Lehman Brothers. Please proceed.

Yes. Good morning. And Gil, maybe you can start off by saying that with the acquisition of (inaudible), what are your predictions this early on for this season?

Hi. We're going all away this year.

Add away. I would have expected no less a comment. Okay. Onto Smith here, Craig you talked about OMSolutions not hitting goals for 2004. I know you guys talked about that with the third quarter and addressed several things that you highlighted as issues; one, two of the six regions been below plan. I think you talked about buying HLS Company back in California.

You also mentioned the link of some of the products being longer than you expected, then I think you said you were a little overoptimistic coming into the year. I guess the question I have is, could you elaborate if at all as to how diluted OMSolutions was for this past year, and do you anticipate that this division will be accretive to earnings in 2005, and if so, how much are you building in?

Let me take a couple minutes, Larry, and just reflect on solutions. I usually give short crisp answers. I'm going to put a little color on this because since it's the end of the year and we are reflecting on OMSolutions and what it did and what it didn't do for us in 2004, if we go back a year or 18 months, we started this business at scratch. We invested in a business with really a few people.

And we made too great acquisitions in 2004 -- HLS, which is great people, they're all on board, still with us. They are having a direct impact on the organization. 5nQ, the two business owners are still with us developing QSight and really expanding that program. And as you can see, QSight had some good progress in the fourth quarter.

We have hired some great nurses into the organization, and if you really -- you almost have to say that 2004 was an R&D year for us. What we are trying to do is be leaders by listening, and our customers are asking us for these programs and the services, and we're providing them.

The integrated service center, which was a direct outcome of this, and the interest that that is creating. The seven new customers that I think would have been very difficult; doesn't mean we wouldn't have gotten them, but with a new approach and the programs and services, we won those accounts. We resigned tow accounts this year for last year that was a direct reflection of that.

So you have to look at as standalone, but you also have to look at how it supports the core business and how it's going to continue to grow the topline. Now, that still though, Larry, has to reflect in the bottom line, the number, the profitability. Are we happy where we are? No, we're not. Are we still committed to making this grow and be a contributor to the overall success of the company? Absolutely.

But, we've made a lot of progress. We have a lot of customers; we just finished a focus group two weeks ago. A lot of what we're doing in terms of transportation and warehousing and integrated service centers and the technology, our customers are asking for this. So, we're having to still invest in some people that we just did not have the expertise and skills or the technology.

But I will tell you, and you know me pretty well, I am absolutely committed to making this work. We're getting better every month, and we're seeing good results with the core in new wins, we're seeing a lot of interest on the integrated service center and we're going to continue to grow this thing and invested it and make it work.

Just to follow-up, would you say it was dilutive in 2004? Are you anticipating any accretion in 2005?

Larry, you should have a reporter; I bet you were a reporter in another life. We're just not going to break that out separately. I think what you've got to look at is that the core did a great job this year. It was very strong. We had a fortunate opportunity to be leveraging expenses to invest in a new business. Again, its not where we wanted to be, but we've made good progress over the last 18 months.

And, Larry, we have solved all of that and came out with one heck of a great year overall. So -- believe me, the focus -- Craig's spelled that out very clearly, this thing is going to be an important contributor to the company in many ways. And we've observed it, sure, we would have liked to have made some money of it this year, but we have never made short-term decisions. We've always looked beyond the end of our nose, and that's the case here.

And I'm disappointed; all of us are that we couldn't find out a number that was accretive. But overall, long run, this is a very significant commitment that we've made and it will develop and pay off.

Okay. And just to follow-up your comment on the guidance for this year suggests comparatively strong results as you move through the year. I wonder, Jeff, you could provide any elaboration as to why that would be the case, and if there's any more quantification of how that's going to progress through the quarters; it would be great?

Sure. Larry, it's for a couple of reasons. Two of those reasons are certainly the acquisition that has taken place during the first quarter. So there will be time for that to ramp drop the course of the year. And as you know Access Diabetic Supply has been a fast-growing company. So there are certain expectations there.

In addition, we talked about home solutions. And we did mention we did not meet our individual profit goals on OMSolutions in the course of 2004, so it will take a little bit of time in 2005, so we should see improvement year-over-year in that regard. So those are factors, if you look at the second quarter of last year that was a very strong quarter as well. So comparatively, we feel that the second half of the year as we implement these programs and so forth will see stronger growth.

Okay. Thanks.

Thanks, Larry.

Thanks, Larry.

And your next question comes from Glen Santangelo of Jefferies & Co. Please proceed sir.

Yes, Gil just a quick question you have the company basically, it was the first quarter and I think three years is the company experienced gross margin expansion. And it was a fair amount and I think on the call you guys you attributed this expansion to the MediChoice private label. I was curious about how much MediChoice contributed to that gross margin expansion. Could you give us any parameters around that, because what I'm really curious to find out about is if the margin expansion is a result of any better pricing that may be going on in the industry.

The MediChoice is one of the factors that has contributed to our margin-- to holding our margin and bringing it back some. So and we have not broken that out as far as what its actual contribution is except that we are saying that our sales growth is significant. We've been adding new products, adding new lines. And it's been successful and very well received. Craig, you want to speak as well?

Glen, I think that's just a piece of it too. I mean we have continued to identify opportunities with our top manufacturers on operating efficiency on market share growth. AS you know we have our focus program that has been in place for many years and continues to grow.

We also are working on profitable sales. We had a very high focus on that in 2004. We've been talking about that probably on the last four or five calls. And we're working on our base margin, our customer margin.

We're working on contract compliance, which we do a very good job of but there is always opportunities. And we are looking at our SKUs, or Stock Keeping Units by profitability. And that's going to still be a very a high focus for the company. We've done a great job on MediChoice, but that's really only a piece of what we've been focusing on over the last probably 15 months.

Hey Craig, maybe along those lines can you give us a better sense of maybe what's going on competitively in the business? I mean the revenue growth has been fairly stable for some time now which maybe would lead one to assume that there has been no meaningful market share gains or losses. Are you seeing any easing of the competitive pressure? Just give me a sense of what's going on?

Well, I think everybody in every industry across the country is focused on getting a better price or efficiency and productivity. And even our good customers who are doing well-- there are not good or bad customers, our customers are perhaps are struggling, want to continue to ensure that they're going to be successful in the years to come. So price is a piece of it. Fortunately we've a lot of customers that are starting to move to activity based costing.

As you've seen the improvement there. You've seen customers who were looking for more integrated services to work on processes. If you remember, Gil always talked about that, 50 cents on every dollar. We have a lot more customers at the executive level really starting to focus in on that.

So price is a component of that but there's also a process opportunity. We work on activity based costing everyday here. OMSolutions, any of the businesses that we look at or new business we look at today is all through activity based costing. And we're very focused on that.

So price is important. It's going to be -- it's going to continue to be important. And these focus groups, the customers continue to say that pricing is a component that they're going to continue to take a look at. Next MediChoice in focus in and some of the other things that we've come up with are addressing that directly. And then we have customers that are looking for process improvement. That's a direct reflection of the programs and services that we're offering through OMSolutions.

Hey Craig, one last question. And then leave you alone. Last year you guys told us how there was no manufactured price inflation on the products. Are you seeing a return to more normal inflation levels?

I would say for 2004 was fairly consistent with what we had seen over the last several years on the medical surgical side, probably actually even a little bit of a downward trend. But typically we have not seen the inflation as the pharmaceutical industry has done. So we have been very focused Glen on --

Please stand by. Thank you for your patience. Your conference will begin shortly. It will be just a minute before we get back in touch with the speaker for this call. Thank you for your patience.

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Speakers rejoin the conference.

Glen, where did we leave you? I'm sorry.

We can wrap up. I mean Craig was just talking about that there was -- he did not see much price inflation and maybe there is a little bit of a deflationary trend versus last year.

I would say it's flat or some deflation, Glen. I mean really where you see our sales growth is either sales penetration in existing accounts, which is about half of it, and the other half is a new business. So we're not really seeing any pickup on inflation.

Okay. Thank you very much. I appreciate it.

Thanks, Glen. I'm sorry; we lost you there for a minute.

That's okay.

And your next question comes from Lisa Gill of JP Morgan. Please proceed.

Great. Thank you very much. Good morning everyone.

Hi, Lisa.

Hello Lisa.

I was just wondering, Craig, you made a comment at the beginning, where you talked about that you have 650 primary customers and 50 secondary customers. Can you just give us a little bit more color on the secondary customers? And are they the newer customers and they're trying to become the primary relationships, and what are the opportunities there? And then secondly, Jeff, I was wondering, if you could talk a little bit about the expensing on the stock options? When you talk about this 3-cent, is that for half of the year? Because that's when 123 comes into play. Or is that for the full year? Will you be actually expensing that or take at below the line and talk about it with us?

Let me take the first part, Lisa. That the 700 customers is 700 of 4000 that we survey every year. The 650...

And they aren't the same ones.

They aren't the same customers. And as you know, Lisa, we have been doing this for a long, long time. And this is we get a lot of key indicators and good information out of that.

So 650 would be where, we are the primary distributor and do the majority of the business. The other 50 would be where we are secondary or we have the business split with another distributor.

And we always see that as an opportunity to go to the primary distributor in those accounts. But what we want to do is we want to get an accurate survey of customers -- and we don't have non-customers but we do have those in a secondary role or a split. So that we can get some information just not from the 650 that do all of their business from us and we usually get some pretty good information on how we're doing. It also tells us regionally how we're doing. And it goes directly to customer service, sales, how we are servicing the individual customer. There's a lot of good information that we get from that. So it's about 700 of 4000 that we rotate on a regular basis.

All right. And one of my question is that when you are surveying these other 50, is this your opportunity now to look at, what their needs are and what they're looking for and now just trying to bring them over to becoming a primary relationship? I mean, and how successful have you been in doing that?

Yes.

Our record speaks for itself, Lisa. I mean, always -- I mean, we are mining the field all the time. And we have been very proactive in that area and very successful.

We also have to be somewhat careful because that is an independent survey. And I think people are usually a little bit more open, if it isn't the company that does the survey. So we do use an outside source. And then -- but we can tell regionally, where we're doing, what we're falling short on. Actually, we're doing a lot of tracking on the name brand of OMSolutions and how that is being recognized and either being supported or not supported in different markets. So that also gives us an opportunity to see, where we have some opportunities from the marketing standpoint to really get our name-brand out in some of these markets. I will turn the rest over to Jeff on the options.

Sure. Lisa, in regard to the 3 cents associated with the expensing of stock options, that is our estimate of what the expensing of options would cost us over the course of a full year. It's a full year impact and we're still studying, as to when in fact that would be adopted and if in fact, it will be adopted for all companies. But we felt that compelled to provide that information along with our guidance.

And then once you get a better understanding, where you update the guidance for us to manage our expectations? And will it include -- if your understanding is that that you want 143 that you have to include that you will include out within guidance is my understanding?

Yes, we will. And by the way it would impact SG&A as the posed debt anything below...

Okay. Great. Thank you very much.

Thank you, Lisa.

And your next question comes from Robert Willoughby of Banc of America Securities. Please proceed sir.

Thank you. Craig or Jeff could you comment on the capital efficiency of excess either from the working capital or pleased from the working capital standpoint as well as -- perhaps the investment in bricks and mortar that they've made? And secondarily just the timing, why was this deal announced basically today when -- instead of maybe two or three years ago, when you were thinking about some of the internal initiatives? Why the priority now?

Robert, let me talk a little bit about the capital investment. One is, if you look from a technology standpoint and the bricks and mortar standpoint, they are in very good shape to grow the business down there. They have capacity in the building that they're in today, and they have a great deal of capacity on the technology side to pickup new customers, who do tuck in acquisitions. If you look at our literature Robert over the last two or three years, one of the key points that we have always talked about is following the patient.

And this of course, is not something we just decided to do overnight. We've been looking at this stage for probably over a year, maybe 18 months. As you know, we are somewhat conservative in how we move forward, and we wanted to make sure that this was the right direction, that this was a good growth opportunity for the company, but it supported the expansion of the healthcare supply chain.

We got a lot of validation from suppliers and companies and consumers, and we just think, this is the natural progression. 80% of what Access sells today in terms of stock keeping units of Owens & Minor's cells in the marketplace is big. Bigger box, bigger unit of measure, but there is some great opportunities from just a supply standpoint and a manufacturer standpoint to move into this marketplace. So this -- we've been looking at this for at least a year or probably longer than that about 18 months.

Craig, how do the DSOs compare between the two businesses?

I will let Dick or Jeff to answer that.

Robert, when you look at the industry, what we have seen is that the customer parent mix falls into three categories. You've got the Medicare and supplemental, which is about 50% of this business. 30% of this is private insurance. And then, Medicare only is 18%. It's not unusual to see with these type of payers, 50 to 60 days in receivable.

Although, we have seen some companies that do a much better job than that. This particular company is well run and does handle it very well. Not at the point fixed day level, but it's a rather low capital intensity model that they have, which is very important. It's a -- so I think we will see that coming, I know you are very concerned about EDA type models and working capital, and this is the complement to an improved model over our traditional core business.

I am predisposed to like the deal for the market demographics and it would seem to me to be a nice and official one I just thought that maybe this is something that you could have stumbled across two years ago rather than now; given some of the returns on some of the '02 initiatives tier being a bit below expectations. But we will see how plays out. Is it safe the question was asked indirectly, I guess, or in another fashion, do you have additional acquisitions budget into '05?

No. There is none of that provided in our guidance. This is for -- the guidance we provided is for our business today plus Access.

But I will say Robert if there is an opportunity and it fits somewhere in the strategy, whether it's a talk again or small acquisition, we are open to looking at those in 2005. But again we think that Access is a great addition. They are a bright young group down there and they have a great strategy that meets our strategy and so potentially some opportunities might come up in 2005.

That's great. Thank you.

Thank you.

And your next is a follow-up question from Eric Coldwell of Baird. Please proceed.

Thanks a lot guys. Just a couple of quick housekeeping items. First up with your guidance of 171 to 173 for the year, I am curious if you have any sort of GAAP or one time items that are anticipated in that number that we should be looking for as year progress?

No. There is nothing unusual in there.

So no more software issues or things of that sort?

No.

Okay. Great. Second...

But Eric we do review periodically throughout the year, as any company should do the value of those assets. And as far as we know, we are on good firm ground going forward.

That's great.

We do review it.

Now earlier I had in my first round of question I had asked if maybe we could get some sense of the level of accretion from Access and I don't think that was specifically addressed. Is that something you'd be willing to give us some sense of that range?

I think, as it gets material, we would break that out separately. Today it is not and I think again for competitive reasons, it is a small acquisition, if you look at it overall. So, we probably wouldn't comment again for competitive reasons. We probably would not comment on that until its material and we would at that point then we would break it out and report on that.

Fair enough. A question perhaps for Dick. If you could give us a sense of the tax rate expectations for 2005? You made some nice progress in last two years and lowering your effective tax rate. What direction should we be looking for?

Maybe, Eric, I will handle that.

Okay, Jeff, sure.

In regard to 2000 I am sure you saw that the tax rate for the year came at 38%. That's lower than it has been historically. As we mentioned during the course of the year, we had a couple of adjustments related to changes in estimates for the ultimate tax liability related to previous years.

So the assumption would be that those changes in estimates would not be available next year. Although, we do not provide guidance on our tax rate, I think, you ought to count for the fact that there were some of those items related to previous years in that tax rate calculation for this year. So it may be more appropriate to look at years past.

That's a fair answer. PP&E was up 5 million or so quarter-to-quarter. Was there something going on with your property plant and equipment or was that just related to the new HQ in the facility there?

It's related to the new headquarters facility.

Great. Final question is, I am not sure if you've been making a lot of noise about this, although there is some much -- and trade Regs out there you guys are investing, I think, pretty heavily in WISDOM3 roll out. Could you give us a sense of what's going on with WISDOM3 and where you stand on that amount and what kind of progress you're making with WISDOM3?

We're making good progress. Eric we -- I think we said we would be six months approximately before we started to roll WISDOM3 out. To be honest with you, I can give everyone an update publicly. We're moving forward nobody has come back to me to say that we're going to have a slowdown or backup on that. It was a fairly significant investment, which we feel will actually leapfrog us over our competitors again as we did with the WISDOM1 and WISDOM2. So we're expecting anticipating sometime in 2005 to have that ready to go and so working with customers on that.

And would that be -- Craig would that be more the front half '05 or more the back half?

You know, I'd hate to put a number out there and then have to come back, but I am very comfortable with sometime in 2005 we will have that.

That's great. Thanks a lot guys.

Thank you.

Ladies and gentlemen this concludes the question and answer portion of your call. I will now turn the presentation back to Mr. Gil Minor for his closing remarks. Sir, please proceed.

Thanks very much for being involved. And we will look forward to reporting out to you as things develop. And have a good day. Bye, bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.