Owens & Minor Inc (OMI) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Owens & Minor second quarter 2006 earnings conference call. My name is Nicole and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS].

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

Good morning, everyone, and thank you for joining us today. I am Craig Smith with Owens & Minor. With me today are Jeff Kaczka, our Chief Financial Officer; Charlie Colpo, Senior Vice President of Operations; Grace den Hartog, our General Counsel; Olwen Cape, our Controller; and Dick Bozard, our Treasurer.

And before we review results from our second quarter, Trudi Allcott will read a brief Safe Harbor statement. Trudi?

Thank you, Craig. Except for any historical information, materials discussed today may constitute forward-looking statements that involve risks and uncertainty 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. 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 health care laws and act regulations, changes in government including Medicare, 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 conference call today. Also, we will archive this conference call on our website for the next three weeks.

Thank you.

Craig?

Thanks, Trudi.

And now let me call on Jeff to review our financial results. Jeff?

Thank you, Craig, and good morning everyone. I will have some comments on the second quarter results and I will also provide a little more detail on our pending acquisition of McKesson's acute care distribution business. We are pleased to report that revenue for the quarter was $1.3 billion, up 7.4% compared to revenue of $1.21 billion last year. That brings our year-to-date revenue to $2.6 billion, up 6.6% compared to the same period last year.

The revenue growth, which has accelerated from the first quarter, resulted from a combination of penetration of existing customers, new business, and growth in our direct to consumer effort.

As we turn to earnings results, please keep in mind that the results for the quarter and year-to-date include a charge of $11.4 million, or $0.17 per diluted share related to the early retirement to debt during the second quarter.

The results also include the expensing of equity-based compensation associated with FAS 123(R), which was $1.2 million for the second quarter and $1.6 million year-to-date. Also about $900,000 of expense associated with the first quarter move to our new home [inaudible - background noise] is included in the year-to-date results.

So, for the quarter, diluted earnings per share was $0.26 versus $0.40 last year, while year-to-date diluted earnings per share was $0.67 compared to $0.80 last year. Net income for the quarter was $10.5 million versus $16 million in the prior year, and year-to-date net income was $27 million versus $32 million last year.

Our gross margin for the quarter was 10.9%, improved from 10.6% in the second quarter last year, and year-to-date gross margin was 10.8% compared to gross margin of 10.6% last year. These improvements were attributable to growth in our direct to consumer sales which has higher gross margins than our traditional distribution business.

We are very pleased with the SG&A results so far this year. SG&A for the quarter came in at 8.1% of revenue compared to 7.9% last year. Likewise, SG&A year-to-date was 8.0% compared to 7.9% last year. These measures are up only slightly from last year despite the growth in our direct to consumer business and the additional expenses related to equity-based compensation and the home office move.

Our field and home office teams have made excellent progress in generating productivity and controlling expenses. Asset Management was also strong during the quarter with inventory turns at 10.1 and DSO at 24.9 days. This allowed us to generate $20.4 million in operating cash flow in the second quarter, bringing our year-to-date operating cash flow to $42.1 million.

Of course, we are very pleased with the outcome of the bond transaction completed in the second quarter, as we were able to take advantage of excellent market conditions and investment-grade ratings. We refinanced $200 million in debt, reducing our borrowing rate from 8.5% to 6.35%.

Turning to our guidance for 2006, we expect to see revenue growth in the 6 to 8% range, and diluted earnings per share in the range of a $1.75 to $1.80, excluding the onetime charge of $11.4 million related to the early retirement of debt from our bond deal. This guidance also excludes the expected increase in revenues as well as the dilutive earnings impact from the pending acquisition of the McKesson Acute Care business.

We anticipate that the pretax dilutive impact will be in the range of 10 to $15 million over the course of the six month transition period regardless of the start date. At this point the closing date for the transaction is unknown as we wait for regulatory approval. The dilution naturally will be greater at the beginning of the transition period.

I should mention that we view this dilution as part of our investment in the success of our acquisition. We are committed to an orderly transition of customers and new teammates to Owens & Minor. The transaction is expected to add at least $800 million in annual revenue, and once we complete the transition, we expect meaningful accretion to earnings from the acquisition.

So in summary, it has been a busy and exciting quarter, accelerated revenue growth of 7.4%, excellent asset management and cash flow. We refinanced our debt at favorable rates, we acquired another small direct to consumer company, and we announced plans to acquire the McKesson acute care distribution business.

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

Thank you, Jeff. And as Jeff said, this was a very busy quarter, but it was also a very productive quarter for us. And we are pleased to report that we are on track with our expectations so far this year.

Our core business grew at a fast pace in the second quarter. We expanded our relationships with existing customers while bringing on new business. The new business included some of the customers that we had talked about in the first quarter that we had expected to come on board in the first quarter, and they have come on board in the second quarter.

We are pleased with our margin results which benefited from growth in our direct to consumer effort, increased revenue from MediChoice, our private-label, expansion of PANDAC, our suture management program and growth of SurgiTrack, our clinical preference program. We continue to see improvement in productivity measures including lines per hour and over time and maintain good expense control for the company.

We have said all along that our asset management skills, along with our discipline in the field, allow us to efficiently serve our customers and enhance our value for our shareholders.

Now before I turn to our pending acquisition, let me bring you up-to-date on a few items.

On the Novation sign up with a few weeks left, we are making steady progress and to date our results with the sign up are good. With our direct to consumer effort, we saw revenues regain traction this quarter, and new customer starts were strong resulting in a customer base of approximately 136,000 customers. We continue to grow our respiratory business and we are aggressively evaluating the market for opportunities in other disease states.

We also completed a small acquisition in this direct to consumer sector on the last day of the quarter. Direct to consumer is a growth area and we remain committed to growing our presence in this market.

Now let's turn to the acquisition of the McKesson acute care business. Let me tell you, we are very excited about this acquisition as it is a unique opportunity and really a great strategic fit for Owens & Minor. This deal is certainly one of the most significant that we have done. Along with an estimated 800 million in revenue, this transaction will give us the added power of an experienced sales team and distribution professionals nationwide.

In fact, we have had informal meetings with many of the sales reps and other employees in the distribution centers. The McKesson team is excited about the opportunities with this acquisition, and we're also getting positive feedback from customers and suppliers. We're looking forward to introducing the new customers to our highly efficient distribution methods and our value added services. We believe we can help them lower their overall total delivered costs of med-surg supplies.

And when we announced the acquisition, we had a number of questions about how we intend to transition this business to Owens & Minor. So we would like to provide a bit more detail. Now, Jeff has already explained that we expect this transition period to be dilutive to earnings, but meaningfully accretive following the transition. Therefore, we will spend a few minutes today discussing the transition period and the transition services agreement of this acquisition.

First, of the 24 McKesson DC's serving the acute care market, we will take ownership of 12 facilities after the close. Of the remaining 12 facilities, we will simply take on the acute care business much like a customer conversion over the six month transition period; this means a greater throughput for our current Owens & Minor operating units.

Now, because this is a curve out acquisition, we are taking extra steps to accomplish an orderly transition of customer accounts from McKesson to Owens & Minor.

During the transition, we will essentially subcontract to McKesson the day-to-day servicing of the customer accounts until we move them to Owens & Minor.

During this time, we will compensate McKesson on a fee basis for performing such services as customer deliveries, customer billing, customer service, order processing, warehousing, and inventory management.

There are also other costs that will be a result from the transition including costs for moving inventory from one DC to another, increased travel expenses, as we convert customers to Owens & Minor and one that I have a very personal interest in, which would be increased training cost as we intend to invest very heavily in educating the McKesson team about our value added products and services.

Consequently, this transition will have a dilutive impact that Jeff has described for you in dollar terms. Now, one of the hallmarks of our management style is long-term thinking and a long-term commitment to the company, and this is one of those times where spending in the short-term will yield meaningful results in the long-run. We firmly believe that this short-term dilution is a necessary investment in preparing ourselves and this new business for future accretion.

Turning to what's ahead for this transaction. We have officially filed a pre-merger notification for federal review of the transaction under the Hart-Scott-Rodino Act. We expect that this review will take a minimum 30 days, but may take longer. Once the review is completed, we will close the transaction and begin the estimated six month transition period. We are very excited about this acquisition.

Productivity in our core business is strong. Our balance sheet is sound, and cash flow is positive. This is a great time for Owens & Minor to do an acquisition in our core business. We look forward to welcoming customers on board and adding new talent including sales reps and other employees to our family.

Thank you.

And we'd be glad to take your questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from the line of Robert Willoughby with Bank of America Securities. Please proceed.

Good morning, Craig. A question on the diabetes franchise. Can you speak to the profitability -- I know it had slipped in the first quarter for seasonality, did that run up -- did that improve.

And secondarily, the acquisitions spend I see about 3.7 million on the cash flows statement. I mean isn't that essentially the synergy from the transaction. You're moving your customer list over to existing facilities or will you maintain some of those operations?

Well, first, let me have Dick give a little color on the access piece, Robert. And then, I'll answer the second part of the question.

Good morning, Robert, how are you today?

Well.

Good. We were very pleased with the progress we made this quarter at Access, especially after the slow start that we had at the beginning of the year. The revenues were 21.2 million for the second quarter. That was up a strong 46% over last year.

And of course, last year, as you know, the business was much smaller. But we're also up sequentially from the first quarter 14.45% as we expected the seasonality and customer ordering patterns did not occur in the second quarter, so we were pleased with that.

Okay.

Access was accretive for the quarter and we made an overall positive contribution to the total results for the Company. The operating income improved to $330,000, and as you know that compares to a negative 300,000 in the first quarter.

So we are encouraged by the progress that we're making, but we're not where we want to be long-term. In order to maintain the high growth rate that we've experienced and a high level of customer satisfaction, we build out our infrastructure.

The opportunity for us going forward is clear. It's to improve processes and productivity, just like we do on the court everyday. So we will be leveraging the infrastructure as we go forward. We've put together what we think is a very solid plan, and we're highly focused on this goal. For the long-term, we believe this is the proper approach.

And let me put a little more color on that, Robert. I think we've had really very good sales growth, and we have done a great job on the margin. You know, our opportunity really is on the SG&A side, and we are going to be working on that really aggressively.

Anytime you are in a growth mode like we have been over the last 15 months, with this business, sometimes you have got to take a little breather and make sure that you're leveraging just like we do in the core, leveraging buildings and leveraging technology, and leveraging people. So we are going to be very focused on the SG&A side of the business over the next several months.

And the acquisition was 3.7 million -- is that correct? And I assume there is a synergy there bringing something down.

Yes, that was primarily related to the key acquisition, which was a stock acquisition. And in most cases, we do not take on the facilities where we have got obviously the customers and some inventories and so forth. In this particular, it accounted for a little bit differently because of the stock transaction.

I am sorry. Okay. That was a stock deal. All right. And just a last question. It looks like after getting years of improvement, you know, cash conversion cycle is finally starting to flatten out. Can you look for any working capital gains? I saw the inventories picked up a bit. Can we -- will those be worked down or are you as good as it get on working capital metrics now?

Well, Robert, let me answer on the inventory piece. We had two large customers that were to come on in the first quarter that came on in the second quarter. So we will see that the inventory start to work down a little bit. Anytime you are in a first 60 to 90 days based on information that you get from a competitor, you know, that takes some time.

We also just converted all of the B Braun business, which was a direct manufacturer to BroadLink. So that was something that we had to ramp up for at the start of July 1st. so you'll see that start to work its way down too.

So to answer your question, there is some opportunity on the inventory side. Dick keeps telling me he can't get any better on the DSO, and he keeps getting better. But I think we're just about at the bottom on that. But clearly, there is some opportunity on the inventory side.

Okay. Thank you.

Thank you, Robert.

Your next question comes from the line of Lisa Gill with JP Morgan. Please proceed.

Thanks very much and good morning everyone.

Morning, Lisa.

Good morning, Lisa.

I was wondering, maybe, if you could just talk a little bit about your gross margins. They continue to improve, obviously, up 30 basis points year over year and up sequentially. I know a part of that is coming from the direct to consumer business. But is any of that coming from the core business? And, perhaps, you can talk a little about the different components of the drivers there.

And then, secondly, as it relates to the McKesson acquisition, have you had an opportunity to go out and, perhaps, talk to some of the larger customers? I'm just wondering what the reaction has been.

And also, as you continue to grow your -- the revenue growth organically within distribution, where are you taking market share from? Is that from McKesson and from Cardinal or is it from the smaller players, just to understand the competitive dynamics of a bit better?

Let me answer question two and question three first. Question two. After today, we will have talked really with all of the McKesson employees over the last week and a half. Starting next week, we will start to coordinate calls with McKesson people to some of the larger customers.

Gill and I personally have called three of the larger customers with McKesson, and I think that will go fairly smoothly, as I know John and Paul have been calling on their side. I would say, overall, Lisa, from the GPOs, the customers and the suppliers, we have received very positive feedback. They see this as an opportunity for two companies to come together to be stronger and better.

To answer your third question, a lot of our growth actually has come from this $28 billion to $30 billion that I continue to talk about over the last couple of years, which is the direct manufacturers. For example, B Braun with BroadLink is all direct business that now has moved through the Owens & Minor network.

I can give you a -- you know, we can go through a list of a number of manufacturers that we have worked with over the last two to five years, direct manufacturers that use Owens & Minor. Primarily, the customer is driving this and asking for this to really start to leverage their efficiency and productivity and their distribution network.

So we are getting some competitive business. It's kind of across the board. Some of it is from the smaller distributors that just do not have the technology or the logistics that we have, and we have taken some business from some national players. So it's kind of a combination from both, but we also are still getting good penetration from existing accounts, primarily on the direct manufacturers.

On the direct --

Yes?

On the direct manufacturing side, when you talk about the $28 billion to $30 billion, what's the real market opportunity? I mean, how much do you think can actually go through the distribution channel? Is it 25% of that number, 50% of that number, so we can think about it as a market opportunity?

Well, what we've talked about is primarily there is about 12 billion in what we call traditional distribution business. So that would be a manufacturer like Kimberly-Clark or a manufacturer like Tyco that is completely through distribution.

Then, there is another larger percentage of that, the Arrows of the world, the Boston Scientifics, the Cooks, the Coruses -- I mean I can go right down the list -- Abbott, Hospira and a lot of those manufacturers. And we think that there is a big upside opportunity on that. So we really look at this -- and [Hydith] just had a report come out that it's 35 billion. So we are actually saying it's probably 28 to 30.

And a lot of that will be driven by the supplier working with the manufacturer to move that through traditional distribution. And we are seeing some progress in the clinical preference items, which will probably be the last piece of that that starts to come over. But we are starting to see some opportunities there. So I look at it is about $28 billion to $30 billion market.

Great. And then on the gross margin side?

Yes. I am sorry. Jeff will maybe put a little color on that.

Okay. That'd be great.

Okay. Lisa, I think, it is fair to say that the driver on the gross margin improvements clearly is the growth in the direct to consumer business. On the core side, I think, it is fair to say what we're seeing there is stabilization as increases in MediChoice private label sales and other value-added services, such as PANDAC and SurgiTrack and so forth, are offsetting pressures -- other pressures in the core [piece] of the business.

I would say, Lisa, the last six to nine months, we have been pleased with the progress of the margin in the core business. You know, we have worked pretty hard on the private label. We're seeing some good traction on that. PANDAC has been revitalized. We have put some investments in that. We have automated it. And the SurgiTrack group, the Medical Specialties Group, we have new management that has been driving that for about the last six months. And we have seen very good progress on the SurgiTrack too.

Great. Thanks very much for all the comments.

Your next question comes from the line of Glen Santangelo with Credit Suisse. Please proceed.

Yes. Thanks a lot. Craig, just a couple of quick questions. I was curious if you could give us a little bit more color around the $10 million to $15 million pretax earnings impact you lay down, is that really more of a function of just kind of one time spending that you will have to do during the transition, I think you kind of highlighted some transition fees and moved inventory.

Right.

I mean or is that more of a function that the business currently may not be profitable and it's going to take you at least a couple of quarters to move it back into profitable territory? You kind of anticipate taking a charge for these onetime items? Any type of color on that would be helpful.

Well. A lot of it is really geared around the transition fee, which will be fairly significant as we start, as that business winds down and moves into Owens & Minor units, obviously there is just going to be some costs for training McKesson people and moving inventory. But we're very comfortable and very confident that once it's in the Owens & Minor units, then we can really start to drive the SG&A down and the profitability.

And you know you got to remember Glen, this is the only thing we do everyday is the hospital business and the investments that we made in technology and training of our people, if you look at our core SG&A, it continues to go down while we're leveraging our topline growth. So we see this as an opportunity to get this business really efficient, and, you know, McKesson has got multiple business and multiple units, which has multiple cost to it because the doctor business is more expensive, the long-term care business is more expensive.

So once we carve that out and get that in our operating units, from a throughput standpoint from just a productivity and investment technology, we feel we can really drive this very significantly. There will be some one time costs. I don't think we've really broken that out yet in terms of what it could be. I know you have a question, so I'll be quiet and let you answer your question.

You talked about meaningful accretion. I mean, I know it's probably, obviously too premature to comment on that, but is this something that you think you can bring the McKesson business up on kind of on parity with margins you're currently generating your acute business? And if so, like how long do you think it could take? Are we talking a couple of quarters or we are talking years? What do you think -- ?

No. One of the reasons why we did this Glen, and specifically for the question that you just asked. We feel that we can get the Owens and Minor margins in the Owens & Minor SG&A in this business.

Now, I will say over the last five or six days, Charlie and I have been to lot of these operating units and lot of these people and I think that I'm probably more convinced today then I was before we did this deal that this business will very much look like an Owens & Minor business.

I hate to put a time frame on it, six months is aggressive. But that's to get the business over. There is probably a what I would call a short trailing period of -- you know, there might be some deals, some particular customers, there might be a little bit more complicated, but we expect this business to be accretive fairly quickly and then to become fairly meaningful almost immediately after that.

So we have got this six month period. Charlie Colpo, who was on the last call is really specifically for the next six months completely committed to getting this thing done and there might be a few months trailing after that, but then we feel that these are going to look very much like an Owens and Minor customer going forward.

Good. And this is my last question maybe for Jeff we saw a little bit of a tick up this quarter in D&A versus last several; could you just kind of give us a little sense of why that happened?

Glen, that would be related to the direct to consumer business where there is the amortization of intangibles and advertisements.

So is that a better run rate to use going forward?

I think that's indicative. Yes.

Okay. Thank you, guys.

Thank you, Glen.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of [Gregg Solomon], SAC Capital. Please proceed.

Good morning. I just wanted to drill down a little bit on the SG&A, and it's specific to the DTC business. It's up higher and I think your profits are down year-over-year despite having what was like record high revenues. I am curious if there anything in the SG&A that is you would consider investment spending versus ongoing spending, if you could parch that out?

We're actually, Gregg, pleased with the SG&A results. Of course, it's up year-over-year due to the mix of the direct-to-consumer business, higher gross margins, higher SG&A. But also within those numbers, we have the FAS 123 expenses, as I mentioned before. In the second quarter, that was $1.2 million. Year-to-date, that's 1.6, and that's really related to an accounting change. And on a year-to-date basis, we have the home office move of $900,000. So those would be the unusual items.

And what was the year-over-year change in operating profit in DTC business?

That's -- well, the operating profit we have had disclosed. In the second quarter, the operating profit was $330,000 and that offset an operating loss of the similar amount in the first quarter. So that's breakeven year-to-date.

And I guess what I am getting at is, you know, that margin of the DTC business, that's a normal operating margin, if you are happy with the SG&A level?

Well, that's not a normal operating margin. We -- as we -- we are in a --, as Dick was mentioning we are in a rapid growth phase here. The revenue has grown at a very fast clip. The gross margins, we're very pleased with at this point in time. We have some work to do in terms of the SG&A.

We think there is some opportunity in operating margin in the direct-to-consumer business. And we are going to be focused on SG&A over the next several months. I mean we have done a great job on the topline sales. I think the guys in Florida have been a great job on that.

We have done a great job on the margin. We just -- we got an opportunity on SG&A. In any business, you got three triggers. You'll usually work on one of those three triggers, and we've got some expense opportunity in the direct-to-consumer business that we need to work on.

And that's just the crux of my question or anything you can drill down on that SG&A line with the DTC business?

Well, I think in a normal when you are in a growth mode, there are always some triggers that you can work on. And a part of that is that when the sales are growing so fast, you know, you have got some additional buildings. You've got some other things that you really need to work on.

And we really prefer not to drill down too much on that. I think the main thing here is that we'd recognize that we are working on it, an we expect to see some improvement in the third and fourth quarter.

Okay. And then sorry to keep on --

That's all right.

The G&A line that Glenn was asking about. I know that you indicated that was kind of a normal thing, because of the DTC growth. Should that continue to grow with DTC revenues or is that kind of a flat run rate from here?

Hi. This is Olwen. What happens with that is -- and if you look at our SEC filings, you know, footnote, you'll see a little bit more information. As we capitalize customer relationships and the advertising, over a period of years that will build in the essentially amortization period. And then it will settle down at kind of a more or less the steady rate, all other things being equal.

Of course, as the business grows and we invest more in advertising, the amount we capitalize will increase. And as we acquire businesses or customer accounts, in our acquisition strategy, that amount will build. So I know you are trying to understand the predictability of it. I would say that at least over the next couple of years, we'll see growth in that [aspect] and in the amortization.

Okay. Thank you very much.

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

Thank you, and good morning, everyone. I will divert from usual questions and ask about different color distribution centers. You really expect Owen -- you really expect Owen, did you, Dick. You just -- you talked about the different distribution centers, and I think you said that you're going to be keeping 12 and closing 12. Could you walk through what you are just closing in the process?

Larry, the 12 will stay with McKesson. Those are multiple businesses in those distribution centers. So we will take 12 and we will carve out the acute care business in the other 12. We are not sure what McKesson will do with those 12. Whether they keep them or not, we are not sure of, but we will basically take all of that business, the acute care hospital business out of those 12 and immediately, over a period of time -- it's almost like a big customer conversion, [now], we'll go into our operating units without physically taking the building or the equipments or anything like that. In the other 12, we on the day of close, we will physically move those 12 over to Owens & Minor. And so that's really how you get to the 24, but we are taking 12 and McKesson is keeping 12.

I see. So you are keeping the reds. Is that right?

Yes, yes.

We are taking the reds and the blue, yes -- and the blues, Larry.

All right. Right. Oh God. Okay. 8 reds and 4 blues.

Yes.

Blue.

Right.

Okay. And then --

And, Larry, just as a point of clarification, the reds come over to what's immediately on closing, the blues will be a little bit lighter.

All right, guys. Okay. All right. Right. So -- I see. So you are not suggesting closing any of those? And are you talking about -- would that be something that you could do in the future or is that going to be --?

Yes, Larry, I think it's a little premature, because we are right in middle of this Novation sign-up. We are trying to be very sensitive, you know, I'm, Charlie and I are going to out meeting a lot of customers. Gill actually will be making a few calls with the McKesson folks. And I think to address those 12 today would be very premature. And you know the deal really technically has not closed yet. But -- So we are trying to be very sensitive to those 12 operating units.

What I can tell you immediately that we're taking is the sales force, which Charlie and I have met probably 80% of those folks. If we have not met them, they are on vacation or we have one more group to meet with, actually this afternoon. They're great folks. The average tenure I think is 18 years, so we're getting a seasoned sales force. We've been to the operating units, great people and this is again a great opportunity for the Company. But whether we are going to close divisions or not, that is very premature.

Okay, right. And then just one other point of clarification from the filing, you talk about certain contracts you are getting such as the [inaudible] City and Kansas City contracts. What are you referring to there?

Customer contracts.

Yes, those would be customer contracts.

Okay. Would those be something that you could renegotiate to help improve the profitability of the business? Is that one of the opportunities you're suggesting?

I think Larry, really the opportunities are what we have continually gotten from the sales force, is the opportunity to sell more private label, to really get into the PANDAC, which we have had to compete against for several years. The procedure based systems of SurgiTrack, all of the operating efficiencies that we have with some of our larger manufacturers.

We think that that's where the opportunity is. And we put a lot of color I think on that in the last call. It's really not around the price piece, it's around efficiency and productivity. All you have to do is look at where we've been the last three years on SG&A, on consistent sales growth of 6% to 8% and continuing to drive our SG&A down. That's what a great opportunity to bring this business over and really start to leverage it from an SG&A standpoint. But we also think we'll get some margin improvement with the programs and services.

Okay. Two other things. You filed Hart-Scott-Rodino late last week. You mentioned that it might take longer than 30 days to hear? Why would that be the case?

Let Grace answer that.

Hi Larry. This is Grace den Hartog. We filed two days ago on the 17th or the 18th.

Okay.

The days have blended together for me lately. So it was just filed this week. And under the current schedule, the 30 days would expire at midnight on August the 17th. Now, it is possible that we will get some informal request for information, there may come a second request, but the 30 day waiting period would expire then and if we have had no second request from the federal government, then we will close almost immediately thereafter.

Okay. So you could close as early as mid August?

Or late August. Under the agreement we have an agreed timetable for that. But it would be late August, if there is no second request.

Okay.

No information from the government.

Right, okay. All right. And then Craig did you say -- did you disclose the size of the B Braun incremental volume that you're now carrying through BroadLink.

No, I didn't Larry.

How do we think of - oh, good you made my next question almost. How should we think of that as incremental business? Is it immaterial or more so?

It's I would say is immaterial. But from a volume standpoint -- again, this is a third-party logistics model. So this is, from what I've understand, not a buy and sell relationship - oh, it is a buy and sell. Okay, so it is a still not material but it's going to be nice topline growth through the remainder of the year. I mean -- I'll try and give you little more flavor. I think really what I want to make sure is that we underscore with that is that again we are working on these direct manufacturers, we're having good success, and this is just another example of working with the manufacturer who really now understands there is supply chain costs in the value of distribution. And I think it is really a win- win for BroadLink because it is on our trucks, win-win for B Braun because they can drive their costs down and of course a win-win for us because we get some topline growth out of an account that we have had for five years now.

And just in this sort of situation, is that decision to drive the volume through you've made and enforced by the GPO or is this just the manufacturer initiating the response?

I would say in this particular case, Larry it was a three-way decision that the individual customer BroadLink would benefit by putting more on our trucks for them to receive. So typically that is driven by the individual customer. In this case all three of us really saw the benefit and the value that we would get out of it. So it is a little bit unique from a standpoint that ordinarily the individual customer drives that with us as their distribution partner.

Okay. And one more, I promise. Jeff, would you -- you talked about the purchase price and the inventory acquisition. Would you anticipate having any intangibles associated with this transaction that you would have to amortize, and if so, how much?

I would anticipate that there would be some intangibles, including the customers at this point in time. We're not disclosing those elements, the amount.

Would you define it to be, a minor part of this 10 million to 12 million. Obviously that's going to be ongoing.

Too soon to tell, Larry.

Okay. So the customer would usually amortize over a longer period of time, like 10 years.

On the valuation of the customer contracts Larry it would be typically over the life of the contract. That's because we are under Hart-Scott-Rodino, we do not have information to provide you and if we wanted to but again, it is really premature. Once we have better information of course we will share it.

Okay. All right very good, thank you.

Thank you, Larry.

Let's take one more question.

Your next question is a follow-up question from Robert Willoughby with Banc of America Securities. Please proceed sir.

Have you given any breakout in terms of the charge itself, $10 million to $15 million? How that would split between COGS and SG&A? Any guidance on that front?

No Robert and again that's -- those would, that would be the actual dilution related to this transaction over the course of this six month transition as opposed to one-time charge.

I'm sorry, you are right. Is there a gut feel though as if it's more out of COGS than SG&A?

I think, Robert, whatever I think what we were trying to do just for this call, because we didn't give, a lot of flavor last week. I mean, we're still very early in this, and again we have closed the deal and we are moving as fast. But we definitely wanted to try to at least give an estimate on this call so that you folks could kindly get a better feel for at least what this might look -- look as once, we close the deal, what if I look at least for the first six what we might look at in terms of the first six months.

And I think, what will do is over, as this thing rolls out, as we get into transition. We will clearly give you more information, so that you guys have a better feel for that $10 million-$15 million.

I appreciate it, extremely helpful. I -- just my last question would be a notice the word choice has been quite careful here then it is accretive hosted a two quarter period. Here six month period, but is it necessary accretive to all seven earnings. Is it still too early to make that conclusion?

It's too early to make that conclusion, and one of the main reasons there is we do not know when the transaction will actually close.

Clearly, Robert, we're going to work as quickly, as we -- once the period starts, our goal is to get as much of this into Owens & Minor units in that six months period. And we have the lot of people focused on this. We've had a lot of people focused on it. Prior to the acquisition, we're getting our teams in place, we're getting ready. But we still know we have to wait till the government approves this. And then believe me; we'll be ready to go day one.

Fair enough. Thank you.

I thank you, Robert.

All right, well thank you for your questions this morning. We look forward to the McKesson acquisition, and we will touch base with you next quarter.

Thank you.