Owens & Minor Inc (OMI) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Owens & Minor 2010 fourth quarter and year-end earnings conference call. My name is Regina, and I'll 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 call, Mr. Craig Smith, President & Chief Executive Officer of Owens & Minor. Please proceed, sir.

Thank you, Regina, and good morning, everyone. Welcome to the Owens & Minor fourth quarter and full-year 2010 conference call. Now we'll review our results and take your questions in a moment. But first, let me introduce my colleagues on the call today; James Bierman, our Chief Financial Officer; Charlie Colpo, our Chief Operating Officer; Grace den Hartog, our General Counsel and Drew Edwards, our Controller and Chief Accounting Officer.

Before we begin, Trudi Allcott, our Director of Investor and Media Relations will read a Safe Harbor Statement. Trudi?

Thank you, Craig. Our comments today will be focused on Company results for the 2010 fourth quarter and full-year which are included in our press release. The press release, as well as the supplemental slide presentation, can be found in our website at owens-minor.com. We'll also archive the webcast of today's conference call on our website.

In the course of our discussion today we may make forward-looking statements. These statements are subject to risk and uncertainty 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. As for our investor calendar we're participating in two conferences in March. These are outlined in our press release and we look forward to seeing you on the road in the coming weeks. Thank you. Craig?

Thanks, Trudi. Now let me call on Jim to update us on our financial results. Jim?

Thank you, Craig. Good morning, everyone. Thank you for joining us today.

Our presentation today will provide you with an overview of the operational and financial achievements we made in 2010 in a number of significant areas. We continue a trend begun over the last four years of improving sequentially our financial performance. Our profitability metrics, operating earnings, operating margin, and income per share, as adjusted, all improved as a result of operating efficiencies gained through process improvement and investment in our infrastructure. As a result, our financial position also continues to strengthen. Our receivables management performance was outstanding. We reported the lowest DSO ever achieved by the Company. As of the end of the year, we have $159 million of cash and cash equivalents and no revolver debt outstanding, and during the fourth quarter, we terminated our pension plan, settling its obligations and eliminating this financial contingency.

In terminating the pension plan, we contributed $13.9 million to the plan and completed the distribution of substantially all of the plan assets to the plan participants. The pension expense which is a separate line item in our current financial statements was $21.4 million, including a settlement charge of $19.6 million recognized as a result of the settlement of the plan obligations, and $1.8 million in other net periodic pension costs. Settlement of the plan obligations had a negative impact of $0.19 on income from continuing operations per diluted share in both the fourth quarter and the year-ended December 31, 2010.

Before we turn to a discussion of our financial results today, for comparisons sake, we have excluded the impact of the pension settlement charge from certain key measurements, including operating earnings, income from continuing operations, net income and income per diluted share. Although this is a non-GAAP disclosure, we believe this approach provides greater clarity into our financial performance for the quarter and the year. We refer you to our website and the financial statements issued with our press release for additional data, including a reconciliation of our results to the amounts we will discuss today.

Turning now to our results for the year. 2010 revenues were $8.1 billion, an increase of 1.1% when compared to 2009. The increase resulted from greater sales to existing customers of $189 million and to new customers of $242 million for a total increase of $431 million, partially offset by a decrease in sales to lost customers of $342 million. If you look at our provider customers, excluding any new or acquired business, we estimate that the growth rate for existing customers was just over 2% for the year. As we noted throughout the year, this is 200 to 300 basis points lower than the recent historical norm.

The trends we experienced during the year continued into the fourth quarter. During the fourth quarter revenues were $2.1 billion, an increase of nearly $30 million, or 1.5%, when compared to last years fourth quarter. During the quarter we began the process of converting a significant new customer to multiple locations within our distribution network. As we have discussed, this customers conversion date was deferred from earlier in the year. The fourth quarter revenue impact was not significant but efforts associated with beginning the conversion process did impact other financial metrics.

For 2011, we continue to target revenue growth in a range of 3% to 5%. As we discussed at Investor Day in December, revenue growth for the year ahead is predicated on certain assumptions. At this point in the year, we have not seen a meaningful change in market conditions since we issued our guidance in December. Before I turn to gross margin results, I would remind you that we have reclassified service related expenses from cost of goods sold to SG&A. All amounts are presented on a comparable basis. This reclassification has no impact on operating earnings, net income, earnings per share, shareholders equity, or cash from operations. This change in presentation was done to accommodate our evolving business model and the effect that fee-for-service revenue will have on our results in the future.

Turning to our results, gross margin dollars decreased by less than 1% to $808 million for the full-year 2010 compared to $814 million for 2009. As a percentage of revenues, the 19 basis point decrease in gross margin resulted primarily from the following factors; lower gross margin on sales to new and existing customers accounting for six basis points and a net decrease in fee-for-service revenues which accounted for approximately 5 basis points of the decline. Also, keep in mind that the decreases in gross margin dollars for the year reflect an increase in the LIFO provision for 2010 that is $8.4 million greater than it was in 2009.

You may recall that in 2009, changes in inventory mix and net supplier price changes resulted in a LIFO provision for the year that was lower than historical experience. For the fourth quarter, gross margin dollars were essentially unchanged at $208 million when compared to the same period last year. As a percentage of revenues, quarterly gross margin decreased 18 basis points to 10.04% when compared to last years fourth quarter. The net decline in the fourth quarter gross margin percentage resulted from several factors including a significantly higher LIFO provision in the fourth quarter of 2010 and a net decrease in fee-for-service revenues, partially offset by increases derived from sales to new and existing customers.

For the year, SG&A expenses decreased $28 million to approximately $564 million when compared to 2009. As we had expected, the improvement in SG&A resulted primarily from comparatively lower incentive costs for the year, as we did not achieve certain incentive related targets. 2010 SG&A also improved as a result of lower costs for information technology outsourcing and consulting, the absence of acquisition related expenses and other administrative improvements. These decreases were partially offset by increases of $4.7 million for costs incurred in our third party logistics operations. Consequently as a percentage of revenues, 2010 SG&A improved by approximately 43 basis points when compared to 2009. For the quarter, SG&A expenses were $142 million, an improvement of nearly $5 million when compared to the prior-year quarter. As a percentage of revenues, fourth quarter SG&A expense improved 33 basis points to 6.88%. During the quarter, we incurred approximately $1 million in expenses associated with preparing for CareFusion, our new third party logistics customer.

Going forward, we will continue to focus our efforts on efficiency, productivity and expense control, but as we discussed in Investor Day, we are targeting a more normalized incentive compensation expense for 2011. In other words some of our expense improvements, such as those derived from warehouse automation and voice pick technology, are sustainable, but others such as our incentive compensation expense will more than likely revert to more normalized levels. Also as you look ahead to 2011, remember that in the first quarter, we typically experience increases in payroll related taxes and equity based compensation expenses.

Turning now to adjusted operating earnings. Operating earnings for the year were approximately $216 million, or 2.65% of revenues, representing an improvement of approximately $15 million when compared to 2009. For the fourth quarter 2010, operating earnings were nearly $59 million increased by $3 million when compared to the fourth quarter last year. Quarterly operating earnings were 2.84% of revenues in the fourth quarter, a solid 11 basis point improvement when compared to the fourth quarter of 2009. Interest expense, a component of net income but not of operating earnings was $14 million for the year, increased only $1 million compared to 2009. For the year, our effective interest rate was 6.8% on average borrowings of approximately $210 million, compared to 6% last year on average borrowings of $217 million. For the fourth quarter, interest expense was approximately $3.8 million, increased only slightly from the prior-year quarter.

Turning to our income tax rate. The effective tax rate for 2010 was 39.1% compared to 37.9% last year. The lower rate for 2009 resulted primarily from the recognition of tax benefits following the conclusion of IRS audits of our income tax returns for 2007 and 2006. For the year, adjusted income from continuing operations was $122 million, an improvement of nearly $6 million. For 2010, both net income and income from continuing operations per diluted share as adjusted were $1.94. That compares to $1.67 and $1.86 respectively for the prior year. When comparing to last year, you may recall that we recorded a loss from discontinued operations in 2009 of $12 million, or $0.19 per share, as we exited the direct-to-consumer diabetes supply business.

Adjusted net income for the fourth quarter of 2010 was $34 million, or $0.53 per diluted share, compared to net income of $32 million, or $0.51 per diluted share in the prior-year fourth quarter. Our third party logistics agreement with CareFusion required that we incur certain start up expenses during the quarter which were an estimated $0.01 per diluted share. As for asset liability management for the year, we reported cash from continuing operations of $245 million compared to $165 million in 2009. Cash from continuing operations was positively affected by a decrease in accounts receivable coupled with an increase in accounts payable all partially offset by an increase in inventory.

I would note that there was a decrease in drafts payable, a component of financing activities of approximately $100 million at year-end which should be considered when thinking about our operating cash flows. Inventory turns in the fourth quarter were 10.2 compared to turns of 10.6 a year ago. Several of our distribution centers increased inventory as a result of conversion activities under way for our significant new customer. Our receivables DSO was 19.6 days as of the end of the fourth quarter, improved when compared to DSO of 21.4 days at the same time last year. As we said at the outset, we believe this is a record low DSO and we want to recognize our credit teams at the home office and nationwide for achieving this very impressive result.

Cash used for capital expenditures for the year was approximately $41 million compared to $32 million last year. The cash was used primarily for investments in strategic initiatives including those related to the new OM Healthcare Logistics distribution center in California and its information technology systems. Other capital expenditures were made during the year for distribution center relocations or expansions including facility investments made in the fourth quarter to accommodate our significant new customer. For the year, cash dividends paid were $45 million while quarterly cash dividends were $11 million. Cash used by discontinued operations was $1.7 million for the year compared to $73 million in cash received in the same period of 2009 resulting primarily from exiting the direct-to-consumer business.

Turning now to our guidance for 2011. As we outlined at our Investor meeting in December, we continue to target revenue growth in the range of 3% to 5% and net income per diluted share in the range of $1.95 to $2.10. Thank you and I will now turn it over to Craig for his remarks.

Thank you, Jim, and let's turn to an update of our business. Looking back, we see that low utilization trends in healthcare persisted all year driven by unemployment and consumer reluctance to spend, even on healthcare services. However, we are pleased that through improved operating efficiencies, exceptional customer service and strong asset management, we achieved our earnings goal for the year. We were pleased to see measurable results from the investments we made in our infrastructure over the last year, including the installation of voice pick technology and warehouse automation. We did see efficiency gains in key performance indicators such as lines per hour, stocking levels and pricing accuracy. Teammates using Voice Pick technology and automation equipment in our distribution centers today are simply faster, more efficient, and more accurate than they were just a year ago. These indicators demonstrate that we provide our customers with the right product, at the right place, at the right time, at the right price, every single day, and this has been the cornerstone of our operational success over the last 129 years.

Our customers rank among the best hospital systems in the country and they demand high quality service, therefore I am pleased that we received a number of honors last year that speak to the quality of our offering. In our annual Customer Satisfaction survey, 99% of our customers said they were either satisfied, or very satisfied with our service. Owens & Minor was ranked number one on Gartner's Healthcare Supply Chain Top 25 for 2010. We were named one of Fortune Magazine's most admired companies and we were commended for Service Excellence by a number of GPOs. And just last week we were named as one of the Best Places to Work in Virginia by Virginia Business Magazine.

Throughout the year our team also performed exceptionally well in managing our assets, achieving the lowest DSO we have ever reported. Excellent operating cash flow results and, as planned, the successful termination of our pension plan. Turning to the year ahead, you may recall that we are working on two complex conversion projects. In our core business, we are in the process of converting a significant new customer. As Jim explained, this conversion required investment in our distribution network as well as investment in our inventories. The conversion of this large scale customer involved a number of our distribution centers and the expertise of our conversion teams.

As for the other large-scale conversion this year, we remain on target to convert the CareFusion business to the OM Healthcare Logistics platform. As you may recall in 2010 we opened, outfitted and staffed a West Coast Logistics center to support our five-year, 3PL agreement with CareFusion. This West Coast facility is an important strategic advantage for us as we market our 3PL services to the manufactures and suppliers of healthcare products. As we look ahead we see a vital healthcare market with increasingly favorable demographics.

We believe the hospital market will continue to consolidate. We also believe physicians will continue to turn to hospitals and large IDNs for employment and we foresee growth in the non-acute care market. We do see opportunities to create tools that will enable hospitals to improve tracking of pricing, utilization and billing for devices, products and implants that are used in clinical areas of the hospital. And we believe that manufacturers will turn to us for the innovative supply chain management solutions we are bringing to the market.

As these transitions occur in the healthcare market, we believe we are well- positioned to capture emerging opportunities. At the same time, we will continue to invest in our future by educating our teammates, pursuing our strategic initiatives, improving our infrastructure and providing long-term value for our shareholders. On that score, our Board approved a 13% increase in the first quarter dividend to $0.20 per share. With a current dividend yield of 2.7%, we believe our dividend policy provides ongoing value for our shareholders, and our Board has authorized a $50 million share repurchase program, to be executed over 36 months. The repurchase program is designed to offset future dilution from our stock based incentive plan. As we look ahead we are closely watching utilization trends. We will continue to execute and develop our strategic initiatives and we will invest in our business and our teammates. No matter what happens in the market in our business, consistency counts. Therefore in the coming year, our team also remains focused on the basics, providing our customers with the highest quality service we can deliver, maintaining operational excellence and improving it wherever we can, effectively managing our expenses and assets and creating the supply chain solutions that will insure that Owens & Minor remains a vital component of the healthcare supply chain.

Last but not least, I would like to thank our teammates all across the country for their hard work in 2010 and for a very impressive string of accomplishments. Achieving our earnings goal for the year and all of the milestones of recognition are the direct result of the hard work of every member of our team. They are definitely a credit to the healthcare industry. Now, we have a busy Investor calendar this year and we look forward to seeing you on the road in the months to come. Thank you and we would be happy to take your questions. Regina, you may open the line for questions.

(Operator Instructions)

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

Thanks, and good morning, everyone.

Good morning, Larry.

In the old days this time of year, I would always start by asking about spring training. So, these days I'll start by asking about patient volumes. That's the kind of exciting guy I am.

Let's talk baseball!

I am an exciting guy, let's talk about patient volumes. Jim, and Craig, you mentioned really no meaningful change in market conditions from what you described in early December. And Craig you elaborated a little bit on what you're seeing in the marketplace.

Right.

That having been said, can you reflect on any updates on changes of tone in your conversations with hospital customers this past couple months? And what are their priorities in the supply chain given all the conversations we're hearing around bundling and ACOs and such?

I think, Larry, to some degree I think the hospitals are really getting back to business as usual, as best as possible. And I think supply chain, obviously was a focus, I think all year. Either through price or through process with these large systems in these smaller hospitals. But I did start to feel that there was a tone the last three or four months of last year of getting on with it, getting back to work.

I felt the first eight months everybody was kind of standing around waiting to see what was going to happen with healthcare. And I think everybody's rolled their sleeves back up and they are going to go back to working hard in their markets. You're going to see -- I think continue to see hospital consolidation which I talked about. I think you're going to continue to see that physicians will either become employees or owned by large IDNs, and that has not slowed down at all. So, that really was a trend that followed all through last year.

So, I guess to paraphrase, Craig, you're saying no change in particular volumes but certainly improvement in tone?

I would say an improvement of tone of let's get on with it and let's figure out how we're going to manage through this. And so, I would say it's a back to business attitude.

Okay. Just to follow-up, I know you've talked about the CareFusion integration and conversion, but you elaborate a little bit more on this other large customer conversion into your distribution networks with the expertise of the conversion team. I know you're hesitant to talk too specifically about this customer, but can you elaborate a little bit about how we put this customer in context. Is this a different type of relationship than you've had with the typical hospitals? Is it more integrated and what are the key drivers to this relationship?

It will. First of all Larry, I think just based on its size, It obviously, has an impact on us and on some of our operating units. I think the way you would look at this is, one of the moves that we did in the fourth quarter was actually to set up an integrated service center, which we've talked a lot about in the past. So, a portion of these customers will actually have a self-distribution model. They're also looking at all the programs and services that we have and are wide open to, really trying to move process improvement, efficiency, and productivity throughout their supply chain. Now, in some of the areas of our divisions it's a small piece of business.

In some of our divisions it's fairly impactful with a fairly large concentration of customers, where we can through technology and programs and services, through private label, we can really help them drive their cost down. So, I would see this as I know we kind of strung you guys out last year, but it was a pretty big customer, and I think it's going to pay off that we were patient. I think we made the right physical moves in the fourth quarter. It did cost us some money that was not budgeted. But I think we're set up to really grow the business with this customer and they have been very supportive and really looking at us as a partner.

So just to be clear, Craig, when you say customer, are you referring to a supplier customer, or a health system, or hospital customer?

Well we have the two big ones. I thought you were talking about the provider that we've been bringing on over the last several months. I think CareFusion will be the same way. I think that's going to be an opportunity for us to get all of our services and our programs set for other manufacturers to come on board. I think CareFusion will definitely be a showcase for us. They've been a great partner.

They have worked very hard with us to get this done and we're on track. And I think both of these customers will have an impact on the Company, going forward, either in programs and services with the provider, or in programs and services for the manufacturer. And I think that gets back to what we've been talking about is the influence on the whole supply chain, just not on the provider side or the manufacturer. This really starts to open us up to have the ability to impact really the full supply chain.

Okay. So, just two quick clarifications. When you say provider relationship in this context, is this something where you're going to be recognizing full dollar revenues in spread, or is this a fee-based relationship like CareFusion?

No, we will be recognizing -- it's a buy/sell relationship. So, we'll be recognizing the full dollars of the product as revenue.

Thanks, Jim. And then, I know at Analyst Day you talked 3% to 5% top line growth expectations, implicitly, and I think it was a couple hundred basis points of share gain. I guess along with -- so, tied to this provider conversation, it sounds like your as confident, maybe more confident in achieving that revenue growth, or is that still way too early to say?

Well, as I said at Investor Day, Charlie and I spent a lot of time on this. Obviously, last year was a disappointment for us from a revenue standpoint and I think there was a lot of external factors that impacted that. But we continue almost, well I would say daily and weekly, to validate that number. And it's not just this customer we're bringing over. We did have some other wins. And as you know, when we bring a new customer on there's usually an opportunity when we bring a customer on from a competitor to improve that book of business from anywhere from 10% to 25%. So, there is some sales penetration in that 3% to 5% on some of the new customers we brought over. And then of course the market share gains. So, we are comfortable with the guidance this early in the year but we spent a lot of time validating it.

And finally, I know Jim, you called out an extra selling day in Q1. I assume that's another maybe $30 million of revenues, all things equal, without much of an impact in earnings? Is that the right way to think about Q1 versus last year?

Yes, I think that's a pretty good way of looking at it, Larry.

Okay, all right, very good. Thanks.

Your next question comes from the line of Eric Coldwell with Baird.

Thanks, good morning. The cash flow for 2010, cash flow from operations was very strong obviously. I'm curious if we could get some comments on your thoughts about 2011, especially given the historic low DSO. Do you see further improvement there? Or could this be a year where perhaps DSO goes up a little bit but maybe you recoup some of the increased inventory build, and see a better inventory turn that would offset?Just any comments to help us on the cash flow model.

Absolutely, Eric. I'd point out again for those of you that maybe don't know us as well, we reported cash from operating activities of $245 million. But as I pointed out in my prepared remarks, I do think it may be helpful to consider the fact that there is, under financing activities, a decrease in drafts payable, which is about $100 million. So, you could factor the two of those together to come to sort of an adjusted cash from operations. That being said and that done, I would characterize the performance for the year then, in line with what we would expect in sort of a normal type situation, a normal type of year.

Specifically as to the components though of the working capital, it would since we are at a record DSO, it would be reasonable to assume that receivables may increase a bit over the course of the next year. And that we would see some deterioration in the DSO numbers. But correspondingly as you alluded to Eric, we would expect to see some benefit coming out of inventory as we return to more historical norms in our inventory turn rates. So, I think the combination of the two should generally offset as one thinks about 2011.

Okay, so looking at 2011 is kind of a normal year based against the adjustments that we should be looking at for 2010?

Exactly.

Okay, shifting gears here. Always a chance that we misunderstood or misheard your comments at the Investor Day in December, but I was under the impression that the 3PL conversion for CareFusion would be a little more expensive in the fourth quarter than a penny impact, thinking more in line of perhaps $0.02 or $0.03 impact. Can you just help us understand what you're thinking for the quarter? Did it turn out as you expected in the quarter? And then, reiterate what you're thinking for 2011 in terms of the incremental 3PL build out expense?

Absolutely. When we last spoke of the outlook for the CareFusion start up expenses in the fourth quarter, we were thinking in terms of an amount that could be as high as $0.02 per share and we estimate that the actual impact at the end of the fourth quarter was closer to $0.01 per share. I would characterize that difference primarily as being one where we deferred or delayed certain expenses that we will ultimately incur in 2011.

We deferred them, delayed them until 2011. So, that was done with some aggressive cost management on our side. But again, being careful not to jeopardize the success or the timing of the conversion for CareFusion. As we think about 2011, I don't think our expectation regarding the financial impact of dilution that exists from CareFusion really has changed much since then. And you'll note that we did report that we have part of our SG&A impact for the year was an increase of $4.7 million of additional expenses associated with the OM Healthcare Logistics offering.

Great. Final question. On the OpEx side, you've really just delivered phenomenal results here in recent years with SG&A to sales being well below expectations and frankly well below guidance in several periods. I guess I'm a little worried that we get sucked into this mind set that there's more improvement to come. Or that you've been a little bit overly cautious on your SG&A guidance and therefore, we model it too aggressively and get disappointed this year. Could you give us a little more help in terms of your thinking on the phasing of your SG&A guidance through 2011? And as you look at it today, are you feeling like you could be at the better end of that guidance or the midpoint, or just any additional thoughts on this continued upside that you keep showing?

Absolutely. I think we've been exceedingly clear that much of the performance that we've enjoyed this year is what we would characterize as sustainable and due to process improvements and technology that we've installed in our distribution centers. However, there is a substantial portion of the improvement that we've seen this year that is tied to the fact that our performance is below the target levels for our incentive plans and consequently, our incentive accruals and payments have been significantly lesser than in the last several years.

Consequently, as you think about 2011 and the outlook that we had targeted at Investor Day, was that SG&A expenses should be in a range of 7% to 7.25% of revenues. And we say at this point in the year, we believe that's about the best comment we can make as to what we would be targeting for 2011. As to the sequencing of SG&A in 2011, as I know you know, the first quarter tends to be a higher expense month, or series of months, in part because of payroll taxes, compensation, equity based compensation expenses. In the middle months we should see some improvement. In the back half of the year, expenses will continue to increase as a percentage of revenues as we bring on the CareFusion contract and we ramp it up to full speed. So, there will be a bit of seasonality associated with the SG&A performance on a quarter-by-quarter basis. But again, I will reiterate, we are targeting SG&A to be within a range of 7% to 7.25% of revenues for 2011.

Okay, I'll leave it at that. Thanks for the answers.

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

Thanks very much. Good morning. Craig, you had talked about physician employment and as we look at some of the numbers that are out there. I think the American Medical Association says that, in the next several years the number of physicians employed by hospitals is expected to almost double. Can you maybe just talk about the role Owens & Minor will play in that? Is the expectation that if the physician is owned by the hospital there will be some opportunity for you to pick up that business?

Yes, good morning, Lisa. I think I've been pretty consistent on this is that and let me maybe go up a little more globally on this whole question. If you look at a provider today, they have multiple supply chains that they're trying to manage, especially as a large IDN, and they're trying to bring these systems together. Really, our goal is to consolidate as much of that supply chain as possible for these larger IDNs and to take that pressure off of them on multiple deliveries, multiple orders. And the goal really is, to move as much as we possibly can through our network, to help them. So, as you see these large practices being acquired, we are getting asked to look at that business and help these larger customers out as they face this.

Now, I don't think this is an overnight solution, Lisa, because I think first of all, there's the acquisition of the physician base. And then there is the transition of bringing them on board into the hospital system and getting them on as an employee and really kind of educating them on how the system works. So, I do think this is going to be a process over a period of time but we're going to be asked more and more to deal with that. Now, the answer for us has been as you remember, over this last year, we have automated a lot of our operating units that now can deal in low unit of measure in eaches. So, we do have the capability. We have also through OM Direct with the internet-based system the ability to build formularies for these physician practices and order for them.

I think probably one of our challenges is that we're working through would be the delivery network that we provide for those physicians, and that could be that it goes on our truck to the warehouse of the hospital or if there's a building there right on campus we could go directly right to there. So, we're working on that. We've had a lot of discussions, good discussion with some large hospital systems but we do see that as an opportunity for us over the next several years.

So, it's a several year out opportunity, so you wouldn't expect it will have a material impact over the next, call it, two to three years?

Well, I think we've all been caught a little bit off guard by how fast this has moved over the last probably 18 months. I wasn't sure that if this was a trend or for lack of a better word a fad that we have seen twice before. And I think this is definitely a trend that we're going to continue to see and its been validated, as you know, by a lot of outside folks. And so, we're going to move as quickly as our customer base wants us to. We have some discussions, we've had a couple beta tests. And we're going to continue just as fast as our customer asks us to move on that. We'll move as fast as they want us to move. So, I would say it would be hard to give you a hard yes or no on it right now. But we are having discussions with hospitals about it.

Craig, when you think about your revenue growth and you think about your customer base, you've actually fared pretty well through this whole turn down in utilization. But my guess would be that some of the smaller players have probably not done as well. Are there opportunities to continue to take market share? Or do you see any potential acquisition opportunities in the marketplace for some of the smaller hospital distribution companies?

I'm going to let Jim answer that, I think.

Yes, Lisa. I think, as we reflect upon at least the most recent history, we are an excellent exit strategy for a family run distribution business. If you look at how we managed the transaction that occurred two years ago now, and with the Burrows Company, which was a small Midwest regional distributer. We are an excellent alternative to those kind of companies and we are interested in those kind of opportunities. We think we've demonstrated the ability to transition those businesses, bring them on to our platform and continue, very oftentimes, the service model that those businesses are predicated on. So, yes, we think there are opportunities. Unfortunately, there are fewer today than existed a while ago. But we remain interested and selectively looking to enhance our -- and to continue to enhance our footprint throughout the United States.

And I mean, I know that there's nothing obviously contemplated in your guidance. But Jim, are you at the point now where you're having discussions or these are just, if it came your way, it's something you'd be very interested in? How should we think about the timing aspect of the opportunity?

None of our guidance for 2011 is predicated on a transaction. I think that's the easiest way to characterize it at this point in time.

Okay, great. I appreciate the comments.

Your next question comes from the line of David Larson with Leerink Swann.

Hi, thanks very much. All my questions have been asked and answered. I did just have one. In the hospital M&A environment, would you typically consider yourselves a net winner in those situations? Thanks.

Yes, David. I think absolutely, as we've said for a significant period of time, we concentrate and have a concentration of large IDNs as our major customers and many of them are highly acquisitive and have the financial wherewithal to be acquisitive. And so, therefore, we're very satisfied, pleased with our positioning as the market goes through its consolidation phase.

Okay, thanks a lot.

Regina, we have time for one more call.

Your final question comes from the line of Robert Jones with Goldman Sachs.

Thanks for the question. Just wanted to follow-up on the utilization comments earlier in the Q&A. It sounds encouraging that your customers are certainly looking to turn things around in 2011, but I wasn't totally clear on what you are exactly seeing from patient volumes. Could you maybe just give us a little bit more sense of the progression you saw throughout the quarter?

Well, I think what we have consistently said is, we really haven't seen any change. I think what we were really talking more was from an attitude or a philosophy that hospitals are basically moving forward. And I've had several conversations with CFOs, CEOs, and primarily, I think they are all still -- especially in the larger systems, some of their hospitals are doing well, some of their hospitals are flat, some of their hospitals are down. So, I would say just from the patient standpoint, the patient flow is pretty much what it's been all year from what I'm told.

I think what we're seeing is that now hospitals are going back and saying okay, how am I going to reduce my cost? How am I going to get my cost in line? How are you going to help me with my 14 hospitals or 20 hospitals versus kind of standing on the sidelines and really waiting to see what's going to happen. So, I think that was really my response to that was more that the hospitals are moving forward. And with what they have they are dealing with it and trying to get that as productive and efficient and, of course, from a quality and safety standpoint, improve on quality and safety. So, that they can get whatever patient mix there is out there, try to get them to come through their doors.

That's very helpful. And then just put that in the context of the 3% to 5% revenue growth. I understand it's not predicated on improving underlying utilization. But I was wondering if maybe you could just help us, how we should be thinking about the organic or same-source sales growth that's built into the guidance?

Yes, as we reflected on establishing our outlook for 2011, we concluded that at the time, and nothings really changed since then, that the trends of 2010 more than likely would continue on into 2011. If you look at the macro variables that could potentially impact the trends of 2010, I think we were relatively early on in identifying that certainly unemployment and the unemployment rate would have a major impact on potential healthcare utilization. And until that begins to dramatically change, our outlook is that those underlying utilization assumptions are fundamentally the same in 2011 as we experienced in 2010.

Thanks for the questions.

Thank you.

I will now turn the call back over to Mr. Smith for his closing remarks.

Well, I want to thank you all for tuning in today. I want to thank you for your questions and we look forward to getting back to you either at Investor meetings or with our first quarter results. Thank you for listening in today.

Thank you for your participation in today's conference. This concludes the call and you may now disconnect. Have a good day.