Owens & Minor Inc (OMI) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Owens & Minor 3rd 2005 earnings conference call. My name is Dana and I will be your coordinator today.

[OPERATOR INSTRUCTIONS] Now I would like to turn the presentation over to your host for today’s call, Mr. Craig Smith, President and CEO of Owens & Minor. Please proceed sir.

Good morning everyone and welcome to the Owens & Minor 3rd quarter conference call. We will review our results and take your questions in just a moment.

But first let me introduce who is on the call today. Jeff Kaczka our CFO, Dick Bozard, our Treasurer, Olwen Cape our Controller, and Grace den Hartog our General Counsel.

But before we begin Trudi Allcott, our Communications Director will read a Safe Harbor statement.

Thank you, Craig. Except for any historical information, the 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 pressure such as pricing within the healthcare industry. They also include the success of direct marketing programs and attracting new customers, the ability to retain existing customers, changes in customer order patterns, changes in healthcare laws and regulations, changes in government including Medicare reimbursement guidelines and private insurer reimbursements. 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 call today. This conference call will be archived on our website for the next three weeks. Thank you. Craig.

Thanks Trudy. Jeff is going give us a run down on the numbers and then I will make a few comments before we take your questions.

Thank you Craig and good morning everyone. We are quite pleased with our financial results for the quarter. We will able to continue to grow revenue and earnings and produce strong cash flow despite weathering the financial impact of two hurricanes and much higher fuel costs.

Owens & Minor reacted in a way I hope you would expect us to, in regards to serving our customers and looking after the needs of our teammates in the hurricane stricken areas. You will hear more about this from Craig.

Revenue for the 3rd quarter continued on a strong track, growing 6% to $1.2 billion. This growth came primarily from existing customer relationships, some new business and contributions from Access Diabetic Supply. Year-to-date revenue is now $3.6 billion up 7.3% versus last year. Diluted earnings per share was $0.42, up 10.5% compared to last year. These results include the unexpected negative impact to operating earnings of at least $1 million from the hurricanes and higher fuel costs. So the fact that we had our strongest earnings quarter, despite these factors, is a good sign that we are building momentum.

Net income for the quarter was $16.8 million, also up 10.5%. Year-to-date diluted EPS is now $1.22, up 7% compared to last year and net income for the year is $48.7 million, up 7.8%.

Turning to other results. Gross margin for the 3rd quarter was 10.9% significantly improved from last year’s 10.1% and this is attributable to contributions from Access Diabetic Supply. As was mentioned before, Access has much higher gross margins as well as SG&A and delivers an overall positive impact to the bottom line.

We are seeing momentum in our other margin enhancement initiatives, including MediChoice and OMSolutions. The results are coming, but the timing of these improvements was a bit slower than we had expected.

We are pleased with the SG&A results. SG&A for the quarter came in at 7.9% of revenue and that is up from 7.4% last year. The increase was due to the consolidation of Access results. In fact if we exclude Access, we saw improvement over the previous year despite the hurricane and fuel costs.

We are also pleased to report that operating earnings as a percent to revenue for the quarter was 2.6% and that is up from 2.4% last year. With our new mix of business including Access and OMSolutions(SM), we feel this is a very good indicator of our financial progress.

Year-to-date results are somewhat similar. Gross margin was 10.7% compared to last year’s 10.2%. SG&A was 7.9% compared to 7.5% last year. Operating earnings of 2.5% was equal to last year.

Asset management continues to be one of our greatest strengths with inventory turns at 10.3 and DSO at 26 days. Consequently, we generated cash flow for the quarter up $22.9 million, bringing our year-to-date cash flow into positive $144.3 million. It is common for us however, to use some cash in the 4th quarter.

Here is more good news. As a result of our consistently strong cash flow, conservative financial policy and our business strategy, Standard & Poor’s recently upgraded our corporate credit rating to investment grade status. It is quite an accomplishment and I want to congratulate all of our teammates that contributed to achieving this milestone.

Turning to the outlook for the year. Despite the fact that we are gaining momentum and expect a strong 4th quarter we are adjusting our guidance for the year. The primary reasons here are the unexpected impact of the two hurricanes and rising fuel costs, which will continue into the 4th quarter and the timing of margin enhancement initiatives. We now expect to achieve revenue growth for the year of about 7% in earnings per share in the range of a $1.65 to a $1.68.

So in summary, continued strong revenue growth of 6%, earnings per share growth of 10.5%, even after the unexpected challenges this quarter. Continued excellent asset management in cash flow and growing momentum in our margin efforts. Thank you and I will now turn it over to Craig.

Thank you Jeff. The results we are seeing this quarter are what we have been working for. By operating a tight ship and expanding our mix of business, our combined efforts resulted in better expense control, which has always be a strength of the company, higher net income. We are improving our gross margin and we are generating better operating earnings. Our continuing strong customer relationship, new business and contributions from OMSolutions, Access Diabetic and initiatives such as MediChoice are producing all around improvement.

Taking a closer look at the 3rd quarter our team turned in a strong performance, despite the impact of two hurricanes and higher fuel costs. We saw steady revenue growth, primarily from existing customers, but also from new business and we are making good progress in sign-ups with customers, from agreements from Premier, CHI and the DOD. These sign-ups are on-going so we will update you on our final progress next quarter but so far the results are very positive. This new business should begin to ramp up in the 4th quarter and we expect it will more than offset the short-term and long-term loss of Gulf Coast business.

We reported real progress this quarter in gross margin improvement largely due to Access, an effort we are very excited about it and contributions from our strategic initiatives, such as OMSolutions and MediChoice, our private label, which is up 25% over last year. I am also proud of the fact that our productivity continues to get better and better every quarter. This was a big story for us. As we saw improvement in a number of key measures, including lines per hours, growth margins per FTE and sales per FTE. We have done a good job holding the line on expenses this year, especially in our core business.

Now day to day we work on customer relationships and operational excellence. But we also focus on conducting ourselves in an ethical and honest way. Therefore, we are very proud and pleased to be the recipient of the 2005 International Torch Award for Market Place Ethics from the Better Business Bureau. This award salutes our cultural focus on integrity and our ethical business practices, which we live everyday.

This quarter, of course, was marked by the unexpected with two hurricanes hitting the gulf coast and fuel costs rising nationwide. After the first hurricane, our top priority was to locate all of our Gulf Coast teammates. I am pleased to report that none of our people were hurt in the first storms. Although, unfortunately many of them lost their homes. But our warehouses were undamaged and we lost no inventory, trucks or equipment.

One day after Katrina hit we began serving Hospitals from five distribution centers in the region, customers and non-customers alike. Our teams opened our facilities immediately after the storms hit and did whatever it took to serve our customers throughout the recovery. As always Owens & Minor teammates pulled together to serve our customers, while looking out for each other. The company has set up an internal gift matching fund to help our own teammates weather the recovery and donated another $50,000 to the American Red Cross.

I am going to put a little personal color on this, I had the opportunity to very quickly with Erica Davis our SVP of Human Resources and Hugh Gulfcorp who oversees our quality and communications efforts. We visited all five of those distribution centers in New Orleans fairly quickly after the storm hit. And I can not tell you how proud I am of each and every one of our teammates. From the folks in our command center here in Richmond to all of our distribution centers who stepped up and helped our people who were in need. It’s a glowing story always for our company, how our folks step up and all they say is, “Just let me know how I need to help.” And it’s always very humbling to be out with our people experiencing that.

Now despite the fact that these unexpected issues will reign in our overall performance in 2005, we are seeing concrete evidence this quarter that our strategic and operational momentum is building. With strong revenue growth, improving margins, increased productivity and contributions from Access Diabetic, we are seeing momentum reflected in our financial results. Thank you and with that we’ll be happy to take your questions.

[OPERATOR’S INSTURCTIONS] And your first question comes from Christopher McFadden of Goldman Sachs. Please proceed.

Good morning Craig and team. Thanks for the details on the prepared comments. Craig, I guess and it’s two questions. One, sort of high level, you obviously have had some recent first hand experience in the Southwest [inaudible] maybe I should say the Gulf coast region. What’s your sense there in terms of when demand dynamics are likely to come back separate from really kind of the infrastructure re-investment that you’ll be making and that your customers will be making?

And then secondly, we’ve seen some interesting industry data on the on-going growth of ambulatory surgery center sites in the US. We actually saw -- call it a 20% plus type of sites growth number cited. Is that consistent with the sort of ASC opportunities you’re seeing and can you talk in more detail about the sales and maybe some of the operating initiative that you’re taking to try to capture some that ACS volume, both in terms of just moving a patient as well as new site creations? Thanks.

Those are both excellent questions, Chris. Thank you for your questions. The first would be that we do have some hospitals that we’ll probably never re-open. And then we do have a set of hospitals that are open and trying to ramp-up. A lot of those are trying to get up to full range somewhere in November. Those would be a couple of our larger hospitals. And then I think that will be out over a period of time and I did not visit any of the hospitals personally. We’re just getting a lot of information from the folks in New Orleans and when I was down there, and I have talked to some of the hospital CEOs down there. But it could be some period of time before those are all up and really running at full ramp in terms of elective surgeries and full surgery schedules. But again, what I would say is that, we clearly in these other new initiatives have the ability to make up for those sales. But we are doing whatever we possibly can to help all of those hospitals in that area to get up as quickly as possible.

I can give you a perfect example, FedEx and UPS was not delivering in that zone for probably 3-4 weeks. We were actually receiving all the UPS and FedEx for our hospitals in that marketplace and delivering it on a daily basis. So, where whether it’s water or ice or generators, we are trying to do everything we possibly can to help those folks get up and running as quickly as possible.

To your second question, clearly there seems to be a pattern and has been for a long time of out-patient surgery trends. If you just look at the surgery trend numbers they’re up fairly significantly and that’s been fairly high on our radar screen as we start -- you know we’ve always followed the patient as part of our strategy in the organization. So that is clearly something we’re looking at.

Now fortunately a lot of those ambulatory surgery centers are attached to hospitals that we’re already servicing and so that’s an opportunity for the hospital and us to continue to capture the patient as they move through the health care system. But there is a rise to that, we’re clearly aware that we have a plan in place. We have some sales and marketing initiatives around the alternate site market, the non-hospital market, and we’re ramping up for that as we’re speaking right now.

Thanks for the detail. One quick follow-up. Slight tick up in DSOs relative to our expectations not significant, but can you just comment on as you continue to kind of ramp up and familiarize yourself in the diabetics business. Obviously it’s a slightly different receivables dynamic then your traditional institutional customers. Can you just comment on how comfortable you remain with receivables management with that customer population? Thank you.

Chris, I’m going to let the Chief of the DSO for the company, answer that. I’m going to let Dick answer that.

Yes, it did increase slightly up to 26 days. What we’ve seen so far is part of that, a small part of it, does relate to the storms. Actually, as you know, closed all the zip codes. So we’ve taken some proactive steps in order to assist the hospitals in that we put packages together working with them on a daily basis. So, hopefully we’ll see that one time event resolved as we go forward in the near future.

As it relates to Access, the dynamics are totally different. We would like to see our investment in receivables there come down. We do have a lot of research going on right now. We are flow-charting all of the steps in the process and we’ve identified some folks that we think will be able to help us as we go forward. So, we are working on a very proactive plan to address that. And we would expect and, as you know, the excellent team that we have in Access, they are without question focused on this. It is one of the priorities. We know that as we go forward and the business grows, it’s going to have a larger and larger impact along with the co-pays. So, we want to make sure that we are well positioned to handle those going forward. So, we’ll be changing the processes. We’ll be establishing relationships that don’t exist today with the payers. And we expect that we will see some improvement as we go forward. But it is without question a challenge that we’re addressing.

Your next question comes from Charles Rhyee of Credit Suisse First Boston. Please Proceed.

Craig, you know, I just have a quick question here on these margin enhancement initiatives, particularly on solutions. And if you could just give us a little more detail around maybe what’s the limiting factor right now on seeing the realization of the translation of these initiatives into an improvement in your margins?

Let me, Charles, first comment on solutions because we feel that that’s probably one of the strong stories of the 3rd quarter. As you know, on the 2nd quarter conference call, we had talked about getting our expenses in line in that division and getting our margins up and looking at bigger engagements and we’ve actually done all three. So, we will continue to work on expenses in solutions but we’re going to continue to work on those bigger projects that bring on better margins. But we did see really good improvement in the 3rd quarter with solutions and Mark Van Summerine and Scott Watkins and that whole group, have done a good job in that division.

Again Craig, is it that, when you’re getting into these bigger projects you’re just incurring a lot more costs trying to get into these projects that you’re not seeing translate directly to margins yet? Or is it maybe something else here or just generally the expenses in your own solutions division?

Well I think, really what we had is we had probably more people then we needed to have on staff with the way that we were bringing the sales on. So, we have made some adjustments. The bigger part, Charles, is in a bigger engagement there’s a bigger sales cycle and there is a bigger start up time, but there’s a bigger reward in terms of the margins. So, where you might get a small consulting engagement of a $20,000 engagement, you get those pretty good but you don’t get a lot of traction out of that; versus say an $800,000 or a million dollar project, which brings a lot more profitability into the company. So, there is a difference. We philosophically changed late in the 2nd quarter and 3rd quarter to go after the bigger engagements.

Okay thanks. And then, Jeff, if I could ask one more question here? You know cash flow was strong -- has been doing good this year. Can you just remind us of the priorities of the company on the use of cash going forward, and I know that I think you have raised your quarterly dividend a little while back, maybe if you could just familiarize us again with your thoughts on the use of cash going forward?

Sure, Charles, as you know over the course of the last several years, we were able to do a number of things thanks to the excellent cash flow that was produced including the retirement of our trust preferred securities, the pay down of our debt, and with all that, and the improvements in the balance sheet, we were able to achieve the investment grade status. In addition, we were able to completely fund the acquisitions that have taken place this year and a couple of small ones last year. So that is certainly a priority and going forward it gives us options and that’s a nice thing. But certainly dividends, accretive acquisitions and the pay down of debt have been our priorities over the time.

Your next question comes from Terri Powers of Robert W. Baird. Please proceed.

Hi. This is Terri in for Eric Coldwell. Wanted to focus, first of all, and maybe you can give us a little more detail on the fuel costs for hurricane impact. I understand you’ve indicated there was about at least a million impact on EBIT in the quarter. I’m trying to figure out if you can give us a little more detail on maybe where more of the impact came from. Was it more hurricanes versus fuel costs, in other words? I think nobody would argue at this point, that rising fuel costs are not necessarily a one-time item at this point. So looking at operations going forward, I would like to get a little better sense of that.

Okay, Terri. I’ll take that if that’s okay, it’s Jeff.

First, on the fuel – first is we’ve been conservative. Although it’s been rising over the course of the year versus our expectations at the end of the 2nd quarter. We feel that the fuel impact was a little over $200,000. And again, this is just versus our expectations at the end of the 2nd quarter. And, most of that rise was in the month of September, so just the final month of September. So we expect to continue to have an impact as we go into the four quarter associated with that. But of course, we had the other impacts related to the hurricane, and it’s in a number of areas. Certainly, the lost revenue in margin that Craig alluded to with the fact that several of our customers, at least 9 of our customers, have shut down operations and many others were affected as well. But we were able to continue to service our other customers in the region out of our other distribution centers. So we incurred overtime costs associated with that, a significant amount of travel, higher delivery costs. There were insurance deductibles, teammate housing and so forth, which accounted for the number of at least $1 million. So, a number of those expenses and the lost revenues of course, will continue into the 4th quarter for a period of time until things stabilize.

Makes perfect sense. At the revenue line as related to hurricanes -- I would image yes, lost opportunities from certain customers, but did you have some replacement of that revenue, as maybe some of that business went to other existing customers?

You know that is fairly hard to track, Terri. I mean we track our hospitals on a daily basis. I think there was probably a lot of elective surgery that was never scheduled. I think a lot of the people that were transferred were probably fairly sick people that either had had surgery or were recovering from surgery. And, if you remember about 65%, of what we sell, goes into the operating room and about 30% - 35% is floor supplies. So it’s hard to track where, first of all, where the patients went to, which we’ve done a pretty good job of. But I think just the fact the disruption of business in our other 5 operating units. I first hand was in those units for two or three days, and I mean it was -- we were hopping. So, I think clearly any disruption that we had in the 5 units that has settled down completely.

What we’re really focused on now is in New Orleans area. Trying to get as many of those hospitals, for instance, Jacksonville has a fairly large New Orleans customer and that’s about six hours of transportation just getting there and back. We are trying to get as many of our people back into New Orleans and in housing, so that we can move that business back to New Orleans. And, so Houston has got some pretty long hauls going, as does Jacksonville. And, our main goal is to get as many of our folks back in New Orleans, get our operating units up running full-bore. We have about half of our people in the unit today. And, our goal is to get as many of them back and to get as many of the customers back as we possibly can. But to be able to track where they went to other hospital is somewhat difficult to do.

Fair enough, thank you very much for the color and then just a couple of data point follow up questions. Can you update us on what percent of volume you have on costs track on this point, at the end of the quarter?

It’s relatively flat.

Okay.

Quarter-over-quarter.

Fair enough. And, then just an update on the integrated service deals, please.

Going full-bore we have the same amount. We have not added any since the last quarter, but we have several targets that we’re working on and that is a priority for the company over the next 18 months to 2 years to expand. We are working very closely -- the core is very closely identifying targets for OMSolutions. We have several targets that we’re working on. I’m working on a couple myself and these are long-term sells, but we’re -- we feel that this is one of the right strategies for the company going forward.

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

Thanks, good morning. Craig, I don’t want to beat the point, but on the revenue side is it -- you’re saying it’s kind of difficult to estimate what sort of revenue impact you had with the hurricanes, or can you ballpark it you know, $20 million, $30 million, $40 million or is it really difficult to say?

Well again, Larry, it is somewhat difficult to say. I think we’ve got a number that we’re fairly comfortable with going on through the end of the year. Really, the main impact coming from that was around the expense of the fuel. Really the trucks delivering from locations much farther than where they were. Flying home office people down to New Orleans, flying probably somewhere between thirty and thirty-five warehouse people to help the 5 operating units. But there was some impact.

I think probably what you’re trying to get at is the overall number for the quarter. We did have some ramp up as you know pretty significantly on the ISC’s, in the 3rd quarter and, we we’re still ramping up some HPG, some late sign-ups on HPG. But overall, we’ve moved our guidance to 7%, it was 5 to 7 for the year, and we’re very comfortable that we’re going to come in at the high-end, especially with these new sign-ups that we have and that we’re ramping up in the 4th quarter.

Right. So it’s hard to say if it weren’t for the hurricane, that could be 7 to 8 or something, but is it difficult to be that specific?

I think it would be difficult to be that specific. But there clearly, Larry, I could give you a number. But I think there is another disruption to service, dropped calls, it just -- I have never -- I’ve been doing this a long, long time and I’ve been through hurricanes, tornadoes, blizzards, you name it with the company, and in my personal history as a distribution person, I have never been through something like this before. If you remember, usually in the hurricanes we are up and running very quickly and this really -- you know it was a pretty good blow. We have 9 hospitals that are completely closed. We have at least another 10 that our damaged and are not up to fully running expectations. And again, it would be hard to say, from an elective surgery standpoint, what that total impact number is but it’s still -- we’re very positive overall about the top line revenue with all the new business that we’re bringing in. We feel we’re going to end up at about 7%, at the end of this year, and ramping up in the 4th quarter for next year.

Okay, fair enough. Maybe just an elaboration to the extent you can, you’re taking down your guidance I guess $0.05 to $0.06, including saying some of that in hurricane related, fuel related and some delay in the margin up ticks. Are you in a position to give us a ballpark of the break down of those three factors on the impact of this year?

Larry, I don’t think we are in position to break it that finely. However, we did mention that there’s at least a $1 million impact, related to the hurricane and the fuel in the 3rd quarter that really represents one month of an impact because of the timing. So I would expect that the impact from those factors would actually be greater in the 4th quarter versus our expectation at the end of the 2nd quarter. And, the remaining balance of course would be associated with the later timing of the achievement of our margin incentives. Now, I will note that we are -- we’ve seen going momentum in those incentives, we did see some very positive results in September, so we certainly feel we’re on the right track in that regard.

Larry, I would also say that Solutions is in much better position, in the 3rd quarter than it really was in the 1st and the 2nd quarter. It really was more contributing to bringing in core sales or non-customer sales and we’re actually now seeing in the 3rd quarter, Solutions starting to contribute to the margin line. So, just that has had a good impact on the margin. PANDAC, which as you know has been around a long time. We’ve re-activated that. We saw some great progress in September on PANDAC. We’re still behind on MediChoice. We’re still getting some push back from MediChoice, so we are off budget on MediChoice for the year. But again, we did get some pretty strong push back from the GPO’s and the manufacturers. But I will give you one example, MedAssets. In conjunction with MedAssets sat down and targeted their top twelve hospitals to work with us on MediChoice and our sales are up 14%, in those accounts in the last three months. So, we’re seeing a lot of good traction and a lot of good momentum on the margin.

Okay. Two other quick things and to follow-up on that point I think you said, you hope to have a product role out of MediChoice in September. Did that go as planned or --

Yes, we did have a roll out in September and I believe we’re up to now over -- well over a thousand stock keeping units and I believe that was about five product categories that we rolled out in September.

Okay. Let’s see, any suppliers take up price this quarter, that you are aware of?

You know there is a lot of buzz in the marketplace I think there might have been some but I think these fuel costs, Larry, are putting a lot of pressure, the resin prices are putting a lot of pressure on a lot of our suppliers. So I would say with somewhat minimal for the 3rd quarter, but there is a lot of discussion among suppliers about going up.

So you could see some more in the 4th quarter?

Maybe. I would say maybe more towards the first of the year. Traditionally in January, you know in the old days manufacturers would always go up in July and January, but we have had really deflation for the last three years and I would say you might see some in January in the 1st quarter.

Right, which would tend to be net positive for you guys.

Correct.

And finally, just to elaborate – looks like you said Access has made a positive contribution to the financial results this quarter. Was it accretive to earnings on a per share basis, and what were the DSOs from Access in the quarter?

Larry, this is Dick. They have set a very strong financial pace. They are exceeding what we were expecting as far as the contribution. We have not broken out the DSOs for them at this point publicly. As we go forward, if at some point in time – well, let me back up a little bit. We are watching it closely but it is not reported.

Okay.

And it was definitely accretive in the quarter and year to date.

Larry, I think what will bring you some comfort is that as you know, our people do a very good job of asset management in the organization, both on the inventory and the DSO. And our folks here in Richmond are going to get much more involved down in Florida with our guys and help them on the DSO.

Right, okay.

One thing I might say is that even though the DSO, I mean over September of last year quarter over quarter, it went from the 25.8 to the 26. So it has not with that slight up-tick, we have had the hurricanes that we talked about, and the acquisitions that we have made. We are still pleased with the level we are at, but we are working very hard to make sure that we keep that investment minimized.

Right, yes, with very little net impact of overall DSOs. Okay, we will stop there. Thanks.

Our next question comes from Lisa Gill of J.P. Morgan. Please proceed.

Good morning. It’s actually Arthur Freeman for Lisa Gill. I had a couple of questions. The first is related to fuel cost. Is there any way you can break down what those fuel costs are as a percentage of your distribution costs?

Actually, we do not really break that out on an individual basis line by line. But, again, to Jeff’s point, with a pretty sharp increase in September of about $220,000 dollars. The fuel for us has usually been something that we have managed fairly well through Penske and Ryder and other people that we manage our fleet with. But really what happened as you know with the refineries, it spiked pretty dramatically in September. So we just do not break that out as a line item.

Okay. Fair enough. Secondly, on MediChoice you had some push back from some manufacturers and GPOs. Are there any categories there specifically that you are facing to push back on or?

Well, you know, I am getting a little farther away from MediChoice in some of the things that I used to probably be closer to. I would say that there is probably -- I do not have the categories. What I could do, we do have an investor day coming up in December. I can give you a little bit more color on that in December if you guys would like that. But you know, for 2 years, we really had very little push-back and this is just the normal process that now that MediChoice is doing as well as it is, it is, we are getting into some competition. I would say again we are very much in the non-clinical commodity items that customers are usually looking for a better price on. But, I can probably, if there are specific product categories, I could probably update you guys in December on that.

That would be great. We would actually really appreciate that. Last question on Access, we have seen customers there grow about almost 10% sequentially. Any projection that you could provide us on what your targets are coming up?

No, we have not made any projections at all, and we do not plan on it at the current time.

Okay.

We have stated part of our strategy as growth.

Excellent. Appreciate it. Thank you very much.

[OPERATOR INSTRUCTIONS] And your next question comes from the line of Joel Ray of Davenport. Please proceed.

I was wondering if you could talk to us a little bit about, I hate to mention it, but the hurricane preparation in Florida, especially with Access being based there and I’m sure you have a number of hospital clients. Can you tell us where we are in that status today?

Is this for Wilma, or?

Yes.

Well, we have been on the phone for the last two days. Again, this could be a pretty big one. It was downgraded I think to a 4 this morning. We have a standard operating procedure, Joel, especially in Florida on hurricanes that is hospital specific and then area specific, so we are already in contact with our hospitals. Many of them have standing emergency orders that they receive. So they are very much in the preparation. We have already started this 2 days ago. Even when it was a 2, we started preparing.

Some of the things that we did learn some lessons from Rita and Katrina from the standpoint of communication. So we now have satellite phones in all of our facilities, which the government, everyone had a very hard time in New Orleans communicating. So we have learned a few things from the two prior hurricanes that we have now instituted in Florida. One of those would be satellite phones. But, we are ready and we are prepared, and the hospitals are ready and prepared. And hopefully if it hits some colder water, it will get down to a 3 or 2 and have less impact. But, whether it’s a snowstorm or an earthquake, or a tornado, all of our operating units have emergency plans standing with our hospitals and those go -- obviously with an earthquake, you cannot plan that, but --

Right.

Anything that we have an opportunity to plan for we are well in advance of communicating with our hospitals and with the state police and the government authorities.

Can you elaborate a little bit on the extent of your business, the base there relative to other regions of the country. And lastly, I would presume that your latest guidance does not include any potential impact from any future storms, from Wilma or anything else?

Right. You know Florida is one of our older areas, and more established areas. We do very well in most parts of the country. We do very well in Florida. We probably do not break-out per dollars by areas just for competitive purposes so they can not really target any of our areas. Those are very experienced -- the hurricanes are pretty common, you do not disregard it. But we are fairly ready and poised to handle whatever happens there. I think New Orleans -- they weathered the hurricanes, it was really the levees that him them pretty hard.

Correct.

If we could have gotten through the hurricanes, we would have been in better shape then when the levees started to break.

Good point.

I am not saying we are over confident, you are never over confident in an emergency crisis, but we feel we are very well prepared. The other thing we’ve got down very well, which we have done in the past, we now have – we have really gotten our command center down here in Richmond, that is up and moving very quickly to connect and move personnel or equipment or anything that we need to do very quickly. We worked 24/7 through the first two hurricanes. We had people manning the phones. I even took a six-hour stint on a Saturday and the officers were all on there. We are ready for this one and we are prepared.

That is very encouraging. Thank you.

Your next question comes from the line of Mike [Hughes] of Delaware Investments. Please proceed.

Just a point of clarification on the fuel costs. The $225,000 over budget, was that for the full quarter or the month of September?

It was essentially the full quarter Mike, but the larger increase was you know, was essentially for the month of September when the fuel prices really began to increase.

Dana, why don’t we take one more question?

Okay sir, your last question comes from David Boeff of Paragon Capital. Please proceed.

Hi, I was just wondering MediChoice, what percentage of our total sales does that represent?

Well we have never broken that out as a percent, but it is again 25% over last year and it is despite some competition growing nicely. But we really don’t break that out separately.

Okay, and then when you were saying, talking about the push backs of the GPOs and the suppliers. Where you saying that the GPOs were wanting better prices and then maybe the suppliers were pushing back because we were trying to push prices down too far?

No, no it is much more primarily that we are competing now against some brands that might be on contract with the GPO. But again, these are very non-clinical commodity items that are usually fairly -- the hospitals are usually pricing for a good product at a good price. Primarily against the manufactures in some instances it’s competition and in some instances with the GPO’s it’s competition. But that’s fine, we’re continuing to ramp up and we’re very enthusiastic about MediChoice and the results. It’s not where we want it to be for the year for budget, but again, we’re up 25% year-over-year.

Yes, that’s good growth. Is MediChoice – do those gross margins come in above or below what the company average is?

It comes in higher.

It comes in higher, oh great.

It comes in higher.

And then on Access Diabetic, I think you guys put in the press release that we had about 100,000 customers and I was just wondering how that compares to last year and –

Well, it was acquired the end of January but it’s about 10% growth quarter-over-quarter so we’ve had fairly significant growth since we acquired Access in late January. It’s grown very nicely over the year.

I would now like to turn the presentation back over to Mr. Craig Smith for closing comments.

Thank you very much we’d love to have you come down December 8th and 9th to Florida where we’re going to have our Investor Day and we will give you some more information on Access, give you some hands-on information. You’ll get to see how we operate down there and we’ll get you over to our Fort Lauderdale unit which is one of our better core divisions, so we’d love to have you all down. That’s a great time of the year and we’d love to see you in December and we’ll talk with you soon. Thank you.

Thank you for your participation in today’s conference. This does conclude this presentation. You may now disconnect. Good day.