Owens & Minor Inc (OMI) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And we can to the Owens & Minor second quarter 2009 earnings conference call. I will be your operator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Good morning, everyone. And welcome to the Owens & Minor second quarter 2009 conference call. We'll review our results and take your questions in a moment. But first, let me introduce my colleagues on the call today. Jim Bierman our Chief Financial Officer; Charlie Colpo, Executive Vice President; Grace den Hartog, General Counsel; and Olwen Cape our Controller. Before we begin, Trudi Allcott, our Director of Investor and Media Relations will read a Safe Harbor statement.

Thank you, Craig. Our comments today will be focused on Company results for the 2009 second quarter which are included in our press release. The press release as well as the related presentation can be found on our website. In the course of our call today we may make forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please see our press release and our SEC filings for a full discussion of these risk factors. And finally, this conference call will be archived on our website. Thank you. Craig?

Thank you, Trudi. Now let's call on Jim to brief us on our financial results.

Thank you, Craig, and good morning, everyone. We are very pleased with the results for the second quarter 2009. We reported record quarterly revenue while transitioning the acquired Burrows business and converting new customers. The fundamentals of our business continue to improve and as a result our operating cash flow for the first six months exceeded $120 million. After I present an overview of second quarter results, Craig will comment on our business, the overall market, and provide a progress report on our strategic initiatives. As a reminder, we completed the sale of certain assets of our direct to consumer diabetes supply business on January 2, 2009, and thus it is shown as discontinued operations in our consolidated financial statements. The results from all prior periods have been reclassified consistent with the current year of presentations.

Second quarter 2009 revenues were in excess of $2 billion, an increase of $242 million or 13.7% when compared to second quarter 2008. Approximately 70% of the increase resulted from the positive impact of the Burrows Company acquisition as well as other net new business. The remaining growth resulted from a net increase in sales to existing customers.

For the first six months, revenues were a little less than $4 billion. Increased 13.3% or $464 million when compared to 2008. For the first half of 2009, revenues are where we expected when we issued our guidance for the year. Please note that we completed the acquisition of the Burrows Company on October 1, 2008. Therefore when considering the revenues for the latter half of 2009, remember that the percentage increase for the second half of the year will be less than that reported for the first half. Let me illustrate.

In order for us to exceed 12% annual growth this year, we would have to recognize in excess of $190 million more in revenue in the second half of 2009 than we did in the first half of 2009. Gross margin for the second quarter 2009 was nearly $198 million, an increase of $22 million when compared to the second quarter of the prior year. As a percentage of revenues, gross margin in the second quarter of 2009 was 9.82%, a decrease of 8 basis points from the prior year. The decline resulted primarily from lower margins on business associated with the Burrows Company transaction; however, this year-over-year decline was partially offset by the recognition of $2.7 million in revenue related to customer contracts with performance targets. This amount represents the reversal of amounts previously deferred as we successfully met contractual performance targets and this net of revenues deferred during the second quarter. As Craig said last quarter we intend to continue offering this collaborative option to select health care customers as we see a need for these types of agreements in the marketplace.

Looking at the year to date results, our gross margin dollars were $381 million, increase $36 million. As a percent of revenues, gross margin declined 26 basis points, primarily due to three factors. Sales associated with the lower margin Burrows business representing approximately 8 basis points. The deferral of revenue representing approximately 4 basis points, and the impact of greater supplier price increases in the first quarter which resulted in an increased LIFO provision representing approximately 11 basis points. To that point, please note that if we had valued inventory on a FIFO basis, gross margin would have increased 41 basis points in the first half of 2009 and 30 basis points in the first half of 2008. When we initially issued guidance for 2009 at our December investor day, we identified suppliers as a variability factor for this year. And as we have said repeatedly, we do not have any control over supplier price changes, and we have limited visibility in advance of a price change. That said, we have been notified that one of our suppliers intends to significantly reduce its price on a certain set of products during the third quarter, which would have a positive impact on our financial results. With this supplier pricing change, our initial assessment indicates that we would record a decrease in the LIFO provision in the third quarter that would have a positive impact to income from continuing operations of at least $0.10 per diluted share.

Let me reaffirm that if we were on the FIFO method of accounting, this event would have no impact on our financial results. Under the LIFO method it still has no impact on future cash flows, revenues, or SG&A expenses. Although this event is a potential positive for us it is not indicative of a change in our fundamental business model. Therefore we are presently treating this pending event as outside of our guidance for the year. Second quarter 2009 SG&A expenses were $144 million, an increase of $15 million from second quarter 2008. As a percentage of revenues second quarter SG&A expense decreased 12 basis points to 7.15% when compared to the same period last year. As we were able to gain operational leverage over our larger revenue base.

The increase in SG&A dollars resulted primarily from two factors, first, the expense associated with serving our new customers and the acquired Burrows customers, and second, expenses associated specifically with the transition activities for the Burrows business. Year to date SG&A expenses were $283 million, increased nearly $32 million when compared to the same period last year. As a percentage of revenues, SG&A expenses for the first half of the year were 7.15% compared favorably to last year's 7.20% of revenues.

Looking ahead to SG&A trends for the second half of 2009, we are targeting improvement in SG&A as a percentage of revenues of 15 to 20 basis points. Resulting from the cessation of the majority of expenses associated with the Burrows transition and improved leverage from our operational excellence initiatives. For the second quarter 2009, operating earnings were $49 million, increased $6 million when compared to the same period in 2008. As a percentage of revenues, operating earnings were 2.43% unchanged from a year ago. Interest expense a component of net income but not of operating earnings was $3.3 million, increased only slightly when compared to last year. For the first six months of the year, our effective interest rate was 6.2%, essentially unchanged from the first half of 2008 on average borrowings of $215 million. For the quarter, the effective income tax rate was 39.2% essentially in line with last year's second quarter tax rate. Overall, we continue to target the effective tax rate 2009 to be in the range of 39.5% consistent with the previous guidance in the prior year's effective rate.

Income from continuing operations for the second quarter 2009 increased by $3.3 million to $27.8 million when compared to the same period last year. The increase was due to a $22 million increase in gross margin which was partially offset by increases in SG&A expense of $15 million and income tax expense of $2 million. On a per share basis quarterly income from continuing operations was $0.67 improved from $0.59 per diluted share last year. Net income per diluted share was $0.57, essentially unchanged when compared to a year ago.

Turning to our discontinued operations, we recorded an after-tax loss of $4.1 million in the second quarter or $0.10 per diluted share. We incurred costs associated with exiting the DTC business including a provision for uncollectible accounts receivable, losses on the disposal of assets, expenses for personnel, contract terminations and lease obligations. Looking ahead, we believe that these dispositions are essentially completed.

As for asset liability management for the quarter, we reported operating cash flow of $123 million for the first six months of the year compared with operating cash flow of $76 million for the same period last year. Operating cash flow for the period was positively affected by the timing of payments for inventory and collections of accounts receivable. But negatively affected by increases in inventory and decreases in payroll related liabilities. Inventory turns in the second quarter were 10.1 compared to turns of 10.4 a year ago. As we have said all along this year, we expected inventory to be higher during the first six months as we brought on new business and completed the transition of the Burrows business.

We were pleased with our DSO result which was 22.6 days as of the end of the second quarter. This was an improvement when compared to year end and also to last year at this time when we reported DSO of 23.2 days. Cash used for capital expenditures in the second quarter was approximately $8.5 million, used primarily for investments in software and technology for distribution center improvements. During the quarter, cash dividends paid were $9.6 million. Cash provided by discontinued operations was $75 million year to date, including the $63 million we received from the January sale of certain assets of our DTC business. Combining the proceeds from the sale with operating cash enabled us to reduce long term debt by $151 million.

As for guidance for this year, we were targeting revenues for the year to be within the upper end of our guidance range of 8 to 12%. We are targeting income per diluted share from continuing operations for 2009 to be in the upper end of a range of $2.55 to $2.70 excluding the potential positive effect of a decrease in the LIFO provision in the third quarter. Now I will turn it over to Craig for his remarks.

Thank you, Jim. Our team turned in a very strong performance for the second quarter, putting us in a very good position for the year. Considering the high level of activity during the quarter, our results are especially gratifying, we successfully integrated new customers, continued to execute on our strategic initiatives, and essentially completed the winddown of our former DTC business. Most significantly, we completed the transition of the Burrows business during the quarter. Now, large scale transitions are always complex, and this one, of course, was no exception.

During the quarter we converted the remaining customers, closed the associated facilities, reduced our head count, and we are now working on reducing inventory levels to match the needs of the new customers. Also we sold one of the properties purchased in conjunction with the Burrows transaction. Our highly skilled transition and field teams did a great job with this conversion and they are to be commended. I have to tell you, just everybody in the Company did an outstanding job. We delivered a week early. We were on time just as we said we would do. And it's really up to the hard work of all the people in all of our operating units across the country and our home office that we were able to complete this as efficiently as we did. And now that the transition is finished, we are focused on leveraging our larger revenue base and achieving the synergies associated with the acquisition.

We remain focused on growing our business and finding innovative ways to serve our health care customers. One of the ways we serve our customers is through collaborative deals that are typically long term enterprise agreements with large providers. These agreements often include provisions that yield cost savings to our customers through adoption of our programs and services which we talk a lot about on our calls. We have had great success on delivering on our performance goals and as Jim reported earlier we've made excellent progress on the performance contracts discussed in the first quarter just like we said we would do. This really is business as usual for us. Therefore, going forward I do not expect to continue commenting on revenue deferrals.

Strong asset management has also been an important story for us this year as we generated more than $120 million in operating cash flow. That allows us to continue to reward shareholders with dividends, maintain a low debt to cap ratio, and preserve cash for flexibility in making strategic investments in acquisitions. And in fact, just last week the Board approved a $0.23 dividend for the third quarter. While our results were strong, the second quarter was more than just an operations story as we continued to execute on strategic initiatives. To date we have rolled out voice pick technology to 15 distribution centers and we remain on target to finish the rollout this year. As for other initiatives, our OM Health Care Logistics effort is fully operational and the team is up and running with its first customer. And they are working to bring in several more customers into the pipeline.

Turning to some other highlights for the quarter, we are proud of our customers who represent some of the finest institutions in health care. In fact we were pleased to see that we served 14 of the 21 best hospitals on this year's US News & World Report list. I believe that our cultural focus on excellence in customer service and supply chain management makes Owens & Minor the partner of choice for these exceptional institutions.

During the quarter, we were honored by Premier, our GPO partner at their annual membership conference with three awards. We were one of two winners of the Polaris award for highest supplier quality and customer service. We were the only supplier to win the Diversity Award. And we were awarded the Supplier Pinnacle Award for contract management excellence.

Looking ahead as Jim explained, we anticipate an unusual pricing event in the third quarter this year, which is expected to have a positive financial impact. Now let me be clear. This does not signal a change in our fundamental operations model. In fact, the fundamentals of our business remain unchanged and we remain on track with our guidance for the year. Reflecting over the last six months, we have managed our business effectively and productively. We completed the Burrows transition and we remain focused on our strategic initiatives with good success in several key areas. Thank you and now we would be happy to take your questions. Operator?

(Operator Instructions) Your first question comes from the line of Glen Santangelo of Credit Suisse.

Just a couple of quick questions on SG&A. I think Jim, last quarter you broke out how much SG&A was impacted by the Burrows integration. I think when you add it all up it was in that 12 million to $13 million range. You thought you were carrying an extra SG&A. And now as you look at the guidance, you've given us in the back half of the year, you're suggesting that SG&A starts to fall about 3 million to $4 million a quarter for the next couple of quarters. Is that the right way to think about it? And should all that original, that $12 million, $13 million in SG&A, should all of that come out?

Yes, Glen. Certainly as we look to the second half of the year, and again, for those of you that maybe didn't catch the full extent of the call, what we're targeting as an improvement in the second half of the year compared to the first half of the year in SG&A is an improvement of 15 to 20 basis points. Generally, we would expect that improvement to occur somewhat ratably over the back half of the year in that the fourth quarter should generally see continued improvement from the third quarter. I'm not sure we have any more granularity than that, Glen, at this particular point. Basis points can be converted into dollars. The fundamentals, though, which are really the important point to get across is that the reduction primarily in the third quarter will be the cessation of the Burrows transition related expenses that we've incurred and the improvement that we continue to see on into the fourth quarter is the realization of the operational improvements we've made in our warehouse distribution process.

And so when you say 15 basis points of improvement you mean by the end of the fourth quarter, not in the third and fourth quarter.

What we're saying is the second half year should see an improvement of 15 to 20 basis points. The first half of the year we're at 7.15%. And we should see a 15 to 20 basis point improvement off that in the back half of the year.

Just following that through to 2010, I know you don't want to give guidance on 2010 on this call, but theoretically in the first half of 2010 I should have really easy SG&A comps versus 2009. Am I thinking about that correctly?

The first half of 2009 certainly incurred the expenses associated with the Burrows transition that will not exist in the first half of 2010. You're correct on that.

And then your decision not to include the LIFO benefit coming in in the third quarter, didn't last quarter, didn't you incorporate the LIFO charge into your guidance but you're not giving yourself the benefit of the credit coming out?

Well, last quarter, yes. Last quarter the -- we had a negative effect that we felt over the course of the year given the guidance we had that we would not change guidance. The thinking on the third quarter event is that we're viewing that as a bit of an anomaly. But of more concern was that it be a distraction from the actual performance that we are putting forth. And so we thought that speaking in terms of the original guidance and talking performance relative to that guidance would limit the potential distraction that that could potentially have. The other point quite candidly is we put all the information out there and people can choose to assess it as they see fit.

Okay. And just my last question for Craig, you talked a lot about these collaborative deals you have with a subset of your health care customers. You took a $4.5 million into deferred revenue and bled some of it out this quarter. On last quarter's call you said you wouldn't recognize that deferred revenue until the end of fiscal '09 but yet your recognized it early. But you said we're not going to see or hear about this any longer. How come they just started to show up in last quarter and now all of the sudden we're not going to hear about them any more? Are they just getting smaller or what's going on there?

I don't want to get into a scorecard, Glen. I think honestly, this is a strategic advantage for us right now. Actually, what I said in the first quarter is we would have all of this collected back by the end of 2009. So I think we did an outstanding job in the second quarter to get back on track. I also said that in the fourth quarter, we had an unusual occurrence of several of these being signed in the fourth quarter and also what I said is that we would get back to a blending on an annual basis of deferrals coming on, deferrals coming off, and I just -- we're just -- I think we're back as I said also in my opening remarks, we're back to business as usual. I don't anticipate any kind of a high tide again. We're going to try to keep these as smoothed out as possible so that we don't have an event like we did in fourth quarter of last year.

Okay. Thanks for the comments.

Thank you.

Your next question comes from the line of Larry Marsh of Barclays Capital.

Thanks and good morning, everyone.

Good morning, Larry.

Nice results.

Thank you.

Glen had a couple of points I was wanting to address as well so I won't elaborate on that except to get you to maybe talk about how you're thinking about this pricing action by your customer. I know you said here in the last 6 to 12 months, you've seen more price inflation than you've seen in many, many years, and now you've got this price deflation. How do we think of this in a context of the behavior of your suppliers? And why should we think of this as a highly unusual event in that context?

Larry, this is Charlie Colpo and I'll take a stab at that. You go back to this time last year and we're probably at $150 a barrel of oil and a lot of the commodity prices were at record highs. And I believe the supplier community was responding to that. Now things have leveled off and the price of commodities are much lower than they were. And in this particular case, this was a supplier who really looked to move its list price closer to what the actual price is to what we're selling it to the customer. So this was probably more of a normalization for them than a response to commodity prices. The visibility that we have to the suppliers is very limited. And we don't get advanced notice, a lot of advanced notice of what they're thinking of doing. And we still view this as an anomaly. But it's just a sign of the times that we're in. And these are very difficult economic times. And I think that you're seeing some responses associated with that. And that -- we'll get through this period as things get back to normal.

To that point, your thought, Charlie, is that you would be very surprised if you saw other suppliers cut price in this environment?

I would be. I was very surprised in the first quarter at the level of the price increase. And am surprised at this. But again, we don't have that visibility that we could be -- we could predict what would be happening in the future.

Okay. Second point, maybe for Craig, just on deferred revenues. I think the confirmation is that you see this pricing flexibility as creating more opportunities for you with your sales team, Jeff's sales team on the consulting side. And it sounds like that could be a bigger part of your business. You're just saying you wouldn't anticipate the unusual roll off -- roll on of these contracts going forward. Is that a fair way to think of it?

Yes, Larry, again, I think people think we're going to have 300 or 400 of these deals. This is really more for larger systems that we would like to tie up from anywhere from 8 to 10 years. So we're going to keep doing them. I just don't see us doing hundreds of these deals. I mean, it's going to be a select group of IDNs, integrated delivery networks that over a period of time we want to get closer to and obviously integrate ourselves closer to. We think this is an opportunity for us. We also think it's an opportunity for these larger systems to really start to focus on their costs, especially everything that's going on in health care today. We will continue to do these on a select basis with a select group of customers.

So without being too specific, so you're not saying 300. Are you talking about the potential of--?

You always try to get me on a scorecard, Larry.

You got good grades.

You're pretty good at doing that. I think you have a group of -- I'd hate to put it to an exact number. But -- and the other issue is we might do three in a year. And we might do five the next year and none the year after that. It would be a smaller group of large customers.

Okay. Two other things just to make sure I addressed. I know early this year you talked about reinvigoration of the 3PL initiative and that you would have a supplier relationship sometime this summer. Can you give us an update of where that stands and any other data points about further expansion?

Charlie will take that.

Larry, Charlie, again. We have a customer and we're shipping product and we are fully operational. We have a funnel of a few more that we are very optimistic on and hope to report on at the end of the third quarter.

Okay. All right. So on track it sounds like.

We're on track, Larry.

The voice pick, the Jennifer technology, you say you got 15. You want to roll out that to the rest of your facilities. I know you had said some evidence you're getting a 10% improvement in productivity. I guess it gets measured in throughput and SG&A. Are you still on track to get that fully done by when? Early next year?

We will be done by the end of this year, Larry. Charlie is rolling his eyes a little bit. But we're moving the schedule ahead. And actually, what we have seen the somewhere two to three months into it, you start to see some pretty to three months into it, you start to see some pretty good improvement on lines per hour. But the Company goal would be to see a 10% improvement in lines per hour. That's over a period of time. Once the system is in and fully functional across all of the operating units.

Okay. And then finally, I know going back to the meeting in December, Jim, you framed the revenue expectations at a wider swath because of the potential of the economy. Obviously, the message since then has been you haven't seen an impact. But just any incremental anecdotes from the customer side of where their head is today versus three months ago given some of the improvement in the credit marks and has that changed at all their thinking of volume both in capital equipment and supplies that you would be a provider of?

I think generally at this point -- and we've tried to monitor the internal data that we have available -- we haven't seen a discernible change in utilization or the trends in using our products or having our products distributed in this quarter, first half of the year. We remain vigilant to looking for indicators in the marketplace that the trend could change. But at this point, we have not seen that. And we do remain concerned though that the critical variable of the unemployment rate and uninsured patients be a critical factor for our hospital customers. So as unemployment continues to increase and the number of potential patients without insurance coverage increases, we do think that will be a factor absent anything that the administration may put in place to mitigate that risk.

Okay, very good. Thanks, Jim.

Thank you.

Your next question comes from the line of Lisa Gill of JPMorgan.

Thanks, it's Atif Rahim in for Lisa. I guess just a follow up on the LIFO and price reduction issue. Granted you had an increase in the provision in the second quarter. Did you have any manufacturers reduce prices during the second quarter? Or what we're seeing in 3Q is that just an isolated incident?

Let me make sure it's crystal clear to everyone and also to you, we did not increase the provision in the second quarter. The increase that you've seen year to date occurred in the first quarter. So the second quarter was normalized I would characterize it as. And no, we did not see any significant price increase or decrease of any significance that impacted LIFO in the second quarter. The third quarter event is tied to a single supplier and not only that, it is a single suite of products that that supplier offers. And so it is in that sense relatively unique.

Okay. And then given the magnitude of the EPS benefit is it disproportionally higher in the portion of energy that you have or is it just a sharper price decrease. Any insight there?

Absolutely. No, it is a relatively small amount of the inventory. It is a dramatic price decrease. And has a, in some sense a disproportionate impact on the LIFO calculation.

And then a separate question on the M&A environment. You mentioned you're preserving cash for acquisitions. What do you see on the horizon? Any opportunities that are imminent? Would that be within the current MED series distribution area or are you looking outside that?

Well, we're constantly monitoring the marketplace and looking for opportunities. I think the business environment has certainly gotten more challenging for smaller companies, particularly companies that are cash flow dependent. And I think we offer a nice exit strategy for middle to small distributors that are looking to get out of the business. We monitor that pretty closely. We monitor also opportunities where some of our customers have gone down a path of self-distribution and have found that that wasn't economical and hadn't met with their original expectations. And so there are opportunities along that line too. As well as looking for opportunities to expand our suite of products in our consulting practice, particularly as it's focused on the operating room and clinical supplies.

Okay. That's great. Finally, one last question as a follow up to that. Could you break out the revenues that you generated from the consulting practice at this time?

We don't break that out. It's not within the realm of materiality. To a degree, it's relatively connected, involved with the distribution services type relationship. So we haven't broken that out and I would say it hasn't reached the level of materiality at this time.

Your next question comes from the line of Richard Close Jefferies & Company.

Yes, good morning. Thank you and congratulations. I guess an update on the renewal process. Do you have a lot of contracts coming up over the next several quarters or maybe next year up for renewal? And then if you can characterize the competitive environment. Are customers tending to go with the status quo? Maybe some feedback on what customers are telling you.

Richard, this is Craig. That's a good question. I believe we have MedAssets coming up first in 2010. They're a very good partner. We do a lot of non, what I would call pricing activity with them in terms of process improvement and productivity for customers. And then I believe the next one is in 2011 with Novation. So we have some time that we think now with the Burrows deal done, we can really start to focus on margin improvement and SG&A reduction. And of course, with the way things are in the marketplace today, we do see some of the smaller and mid-sized hospitals trying to get a little better price from existing distributors and there's a little pressure from that standpoint. Where we've really been focused is on the medium and large sized and it gets back to these revenue recognition deals. We've gone down a different path with the medium size and the larger hospitals who work on process improvement. Reduction of costs. And so we're seeing a lot of our customers and bigger customers really not as focused on product price but really looking more at process improvement and logistics technology, all the things that we've really invested in over the last 5 to 10 years, we're getting a lot of calls on that.

And then a follow up. What percentage of your revenue would you sort of classify as that medium and large customer?

Well, we do business with 4000 customers. It's -- I think in all four categories we have it broken out. We don't really report out on that. We do well in all four categories. We're competitive when we need to be. We have a whole different value model that we basically go in and talk with our customers about. So even for small and medium sized hospitals, we can be competitive and still help them in reduction of inventory and some of the technology challenges they may have. So we never break that out per se. But we have large, a large percentage in really what we consider as three different categories.

So essentially, there's maybe less pressure from those larger organizations on price and essentially that shifts to a cost saving from these additional services you're offering?

Yes, we have some customers that are large that are focused on one thing, inventory reduction or head count reduction. So it really -- to be able to put it in the box with all of the customers we do business with it would be very difficult. They all have different initiatives, different challenges, different opportunities. And everybody is feeling the crunch right now so everybody is looking for opportunities to really either improve their operating margin or reduce their costs. It's very hard just to do a black and white on that. Because we just have so many different customers.

Okay. I guess a question on Burrows clients, how effective are you? Or maybe if you could give us sort of your thought process on improving profitability with those customers, maybe a time horizon and just thoughts in and around that?

Sure, this is Charlie again. With the ex-Burrows customers. Again, remember that Burrows offered no private label products at all. And really did not offer the programs and services that Craig just mentioned. And from a horizons standpoint, we get started with those customers immediately after we get everything settled down and make sure all the pricing is accurate and everybody's in sync from a system standpoint. Over the next, really it's over the next year you just continue to see gradual improvement in both the choice penetration and the private level penetration and the programs and services.

Okay. And over all, the retention there has been up to your guy's satisfaction?

Yes, it has. We're very pleased with the results so far.

And one final question, any of you guys want to talk about any other opportunities such as Voice Pick that you have on the horizon?

How about we do that in investor day? We're right in the middle of finishing the automation in the Voice Pick, and right now, that's what we're really focused on. We have some customer service initiatives that we're working on. We're pretty busy now in terms of getting back to Jim's point about working on the SG&A over the next six months. We've got three major initiatives that we're trying to wrap up and that's got the whole Company pretty much focused right now on those three initiatives.

All right. Thank you.

Your next question comes from the line of Robert Willoughby of Banc of America.

Thanks. Craig or Jim. I guess I scratched my head on the motivation for a manufacturer to cut pricing given the challenges to their business models. I know you've characterized those as a normalization. From my standpoint I kind of doubt it's patriotism to the health care reform cause here. I look at your product line and wonder by nature of it being largely commodity like, how does this not trigger more opportunities with other manufacturers? Is this just a product line that a manufacturer was sunsetting or again, what's the motivation for a manufacturer to cut its own economics? I don't get that.

Let me take a shot at that, Robert. And if Charlie has a different view he can weigh in. We've spent a fair amount of time internally, trying to speculate on the motivation of the suppliers, both what we saw in the first quarter to have a significant price increase and then what we will see in the third quarter anticipate having a significant price decrease with another customer. And I think with the caveat that it would be difficult for us to speak on behalf of suppliers and what motivates them, I do think that in both instances, we had situations where the price difference between what was being charged to the distributor and what was being charged by that same supplier to their customer base had gotten disproportionately large gap. And in doing so, for various reasons, maybe not the least of which is administrative convenience, the objective was to reduce that gap. I would stress economically it makes no difference to us. And I don't believe makes any difference to the supplier. So the administrative convenience aspect of this shouldn't be dismissed out of hand at least.

The only thing I would add to that, Robert, is that it's really no impact to the customer either. Those prices are generally negotiated within the GPO and those have not changed.

Okay. And just by -- the product line itself in question is this something that the manufacturer -- it's clearly not something they're phasing out then. Can you comment on the nature of the product? Is it truly commodity or -- like a rubber glove or is it something a bit more proprietary from a technology standpoint?

It is a bit more proprietary. And therefore even a dramatic price decrease can have, as I had said earlier, a greater than average knock on effect in the LIFO calculation.

Okay. And just the charge from discontinued ops. A, that's a 0 going forward I guess. And B, of the $4 million, can you break it down by buckets what that was?

I don't have the details by buckets here. I gave the broad based categories. I can tell you though that during the second quarter, we completely terminated the work force. We still had some teammates down there in the -- during the second quarter. But as of the end of the second quarter, all employees were terminated. And we recorded the lease expenses associated with abandoning the building at that particular point in time. So we had operating related costs in the second quarter that were fully wound down. As we said, essentially, we believe that it is complete. There are no employees or business left in Florida at this point in time.

Is there any more receivables exposure or is that gone as well?

The receivables have been written off or fully reserved for. And that being said, we have contracted with an independent third party to pursue collection of those receivables. And we have a legal right to collect balances that we will continue to pursue. We're fully cognizant of how difficult that may be in today's market. But we are attempting to pursue that through a third party.

Okay. Thank you very much.

Operator, we have time for one more call. Your last question comes from the line of Randall Stanicky of Goldman Sachs.

Alex Pekler actually for Randall. A couple of quick ones from me. Was there any discernible benefit in the quarter from swine flu related volumes? Not sure and you could quantify it but it would be great to get some color.

Not that we could tell. Going back to my earlier comments I'm looking at revenue trends and what are we seeing currently that could be indicators of something in the future. We did look from that perspective but couldn't really identify anything from the data we had?

And then Jim you commented a bit on underlying market volume growth. What is your sense of where market growth is trending at the moment and how that would compare to what you've seen earlier in the year?

Well, I think there's a bit of a seasonal adjustment that it tends to occur in the second quarter as opposed to the first quarter. And I think we did see some impact of that. But generally I think it's in line with both expectations and what we've seen historically.

Okay. Sort of 4 to 5% or is that lower now?

I don't have a number. I wouldn't feel comfortable even hazarding a guess of a percentage at this point.

Thank you very much.

Thank you everyone for joining us today and thank you for your questions and we look forward to reporting out to you after the third quarter. Thank you.

Thank you for participating in today's conference. This concludes the call. You may now disconnect. Good day.