Owens & Minor Inc (OMI) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Owens & Minor second-quarter 2013 earnings conference call. My name is Latoya, 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 the conference call.

(Operator Instructions)

As a reminder, this conference call 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, Chairman, President, and Chief Executive Officer of Owens & Minor. Please proceed, sir.

Thank you, Latoya, and good morning, everyone. Welcome to the Owens & Minor second-quarter 2013 call. This morning, we will review our results and take your questions, but first let me introduce my colleagues on the call today. I have Randy Meier, our Chief Financial Officer, and Grace den Hartog, our General Counsel.

Before we would begin, I would like to congratulate Jim Bierman on his promotion to President and Chief Operating Officer, which will take effect on August 1. Since Jim joined Owens & Minor six years ago, he has truly stepped up to the plate in a challenging time for health care. Furthermore, Jim has done a tremendous job with every assignment I have asked him to take on. During his tenure at Owens & Minor, Jim has proven that he has the leadership skills, the financial acumen, and the operational abilities to lead Owens & Minor into the future, and I am truly looking forward to working with him for many years to come. Jim, on behalf of everyone at Owens & Minor, I want to congratulate you on a well deserved promotion to President and Chief Operating Officer.

Thank you, Craig.

Now, turning to the business of today's call, Trudi Allcott from our investor relations team will read a Safe Harbor statement. Trudi?

Thank you, Craig. Our comments today will be focused on financial results for the second quarter of 2013, which are included in our press release. In our discussion today, we will reference certain Non-GAAP financial measures, information about these measures and reconciliations to GAAP financial measures are included in our press release, and in the second-quarter supplemental slide presentation, both of which are posted on our website. Our call today will also be archived on our website. In the course of our discussion 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. Thank you. Craig?

Thank you, Trudi. Now, I'd like to call on Jim Bierman for an operational overview, and then Jim will hand it over to Randy, who will review the numbers with you. Jim?

Good morning, everyone. As we did last quarter, I will leave the discussion of our financial results to Randy, while I review the operational and strategic progress we have made so far this year. In the domestic healthcare market, hospitals and large IDNs continue to consolidate and form alliances that are enabling them to build market share, improve patient care, and reduce costs. As we've said many times, our goal is to be the distributor of choice for these large healthcare systems, which we believe will be the future of healthcare. We have talked for some time about how these large healthcare systems are changing the marketplace. In one sense, they have greater buying power and to leverage in their dealings with their business partners. However, the full potential of these alliances will be realized once they standardize the clinical services they deliver, which would enable us to support them even more efficient supply chain solutions.

During the quarter, we brought on a large new healthcare system that, as a new customer, is a nice win, but more importantly, the factors around the win validate one of our key strategies. The strategy relates to our deployment of resources throughout our distribution network. In this instance, we were able to facilitate an arrangement between two disparate healthcare systems to take advantage of a shared services opportunity. Through our efforts, this new customer and an existing customer agree to share a dedicated distribution center. We are enabling these two systems to leverage greater buying power, lower their distribution costs, and improve product standardization.

Under our leadership, these two systems recognize the value of sharing supply chain infrastructure. This customer arrangement demonstrates our ability to bring innovative solutions to market. In turn, Owens & Minor Inc will reap the benefits from a fully utilized facility, and from the rationalization of suppliers and product choices made available to these two hospital systems. We believe this is a prime example of how our ability to serve the market in a new way is directly meeting the changing needs of our provider customers.

We are also implementing certain plan changes in our distribution network to improve efficiency. As planned this quarter, we incurred additional exit and realignment costs, as we continue to optimize our domestic network, with certain planned distribution center moves and consolidation. As I first mentioned at our investor day last November, we are establishing a large distribution center in the Midwest to serve a significant healthcare system, and are planning to consolidate operations there over the next few months. We believe this will be a more efficient means of serving the customer base in this area.

On the West Coast, we upgraded to a new facility in San Diego, in response to the needs of a large customer headquartered there. We will continue to refine our network so that we are responsive and flexible in meeting the needs of our customers. During the quarter, we also made headway on significant planned investments in our IT infrastructure, including investments in engineered standards technology, a new customer self-service portal, and a new inventory management and order allocation technology. The network consolidations, the innovative warehousing arrangement with our two large customers, and the latest IT projects are examples of investments we are making to ensure that Owens & Minor has a solid platform for growth. We believe the Owens & Minor of the future is fast, flexible, innovative, and global and that is what we are working towards.

In fact, we have expanded our presence in Asia. I'm pleased to report that we opened our second Mira MEDSource office, this one in Malaysia. This gives us expanded opportunities to source product and develop manufacturing relationships in the region. As we have said before, it is extremely important for us to have our own teams on the ground in Asia to carry out quality control and other duties associated with sourcing products. Thanks to the Mira team, our sourcing efforts continue to contribute positively to our operating margin results.

Our teams in Europe also did a good job this quarter. We were very pleased to see that they narrowed our international segment operating loss for the second quarter, a meaningful improvement over the first quarter. The Movianto team is very focused on signing new business and utilizing existing capacity in our logistics centers. I would note that since we acquired Movianto, we have received a number of inquiries from US-headquartered, multinational manufacturers, partnering opportunities, which we view as strong validation for the strategic investment. As we've been saying for some time, we view our suppliers and manufacturers as an important customer base for our future. To that end, we are working on a variety of strategic partnerships and projects to help them bring new products to market that will achieve more efficient supply chain solutions.

Finally, a word about the status of our GPO negotiations. I am pleased to report that we signed a three-year contract with MedAssets. The new contract runs from September 1 of this year through August of 2016. We are pleased to have this contract negotiation behind us. We continue to work on the HPG contract renewal, which is proceeding according to schedule. Once we sign the HPG contract, we will have multi-year agreements in place with all of our GPO partners.

In summary, this quarter demonstrates progress in managing our Company in a challenging environment, and a changing market. Our teams at the home office, in the field, in Europe and in Asia are all intently focused on achieving success for Owens & Minor and our customers. I would like to thank our teammates across our system for their efforts. Thank you, and I will turn it over now to Randy.

Thanks Jim, and congratulations on a well-deserved promotion. Good morning everyone. We have a lot to discuss today, so let's turn to our second-quarter results. For the purposes of comparison to 2012, please keep in mind the Movianto acquisition was not completed until the third quarter of last year.

Second-quarter consolidated revenues were $2.27 billion, an increase of 3.7%, when compared to the second quarter last year. The increase came primarily from our international segment, as Movianto's revenues were $123 million for the quarter. For the quarter, domestic revenue declined 1.9%. Factors leading to the domestic revenue decline were consistent with what we saw in the first quarter, including ongoing rationalization of smaller, less profitable healthcare provider customers and suppliers, lower hospital utilization rates, and reduced government purchasing. For the year-to-date period, revenue increased 3.2% to $4.54 billion, when compared to last year. The international segment contributed $244 million in revenues, representing the majority of the consolidated revenue increase.

Gross margin was $273.4 million in the second quarter, or 12.06% of revenues. That compares to gross margin of $211.4 million, or 9.67% of revenues for the same period last year. As for the year-to-date period, gross margin dollars increased $126.7 million to $552.5 million, when compared to the prior year. For both periods, the increase in gross margin came primarily from Movianto's revenues, of which approximately 50% of the revenues were derived from the fee-for-service business activities. On the domestic front, for both the quarter and the year-to-date, gross margins benefited from our sourcing efforts, as well as from supplier price changes, as we saw in the first quarter. These benefits offset the adverse impact of a decline in customer revenues.

Now turning to our operating expense. SG&A expenses increased $62.3 million to $212.5 million for the quarter, and were 9.38% of revenues. For the year-to-date period, SG&A expenses were $124.4 million, or $430.3 million, when compared to the same period last year. In both cases, the increase was primarily driven by the Movianto acquisition. In the domestic segment, second-quarter SG&A as a percentage of revenues was 7.16%, compared to 6.88% for the same period last year, but improved sequentially from 7.31% in the first quarter. During the quarter we reached a settlement of an administrative review related to the certain California municipal sales tax incentives, in a net amount of $3.5 million.

Going forward, we expect to receive an ongoing tax benefit, based on sales volume, as a result of this settlement with the municipalities where we conduct business. As we mentioned in the press release, a majority of this benefit to the domestic segment SG&A was offset by a number of unusual items, including costs associated with litigation expenses, healthcare claims, the transition to a new fleet vendor, and the adjustment to a benefit accrual. For the quarter, consolidated operating earnings were $50.1 million, a decrease of about $3 million when compared to last year's second quarter. Adjusted for the impact of acquisition-related and exit and realignment costs, margins were 2.24% of revenues compared to 2.46% one year ago. On a sequential basis, we have continued to see improvement in adjusted operating margin since we acquired Movianto in the third quarter of 2012. In fact, operating margins improved from 2.19% in the first quarter, and from 2.01% in the fourth quarter of 2012. For the year-to-date, adjusted consolidated operating earnings were $101 million, or 2.21% of revenues, a decline of about $5 million from the prior year period, driven primarily by the international segment losses.

Domestic segment operating earnings decreased $2.5 million, to $51.2 million in the second quarter, and declined $1.5 million to $104.2 million for the first six months of the year, when compared to the same periods last year. As for the international segment, we recorded a loss of $3.6 million for the year-to-date period. One should note that Movianto's financial performance improved from a loss of $3 million in the first quarter to a loss of $0.6 million in the second quarter. The Movianto team has done a good job of bringing on new business, and improving the leverage of our platform in Europe. We are making every effort to bring expenses in line and reduce our dependence on the former parent company for certain services. We continue to believe that we are working our way toward breakeven this year as we continue to focus on improving the cost structure without affecting our ability to grow the Movianto business in 2014 and beyond.

For the quarter and year-to-date, interest expense was $3.2 million and $6.4 million respectively. Our tax rate decreased to 38.3% for the quarter, from 39.4% a year ago. The decrease resulted partially from the conclusion of the 2009-2010 IRS tax audit. For the year-to-date period, the tax rate stands at 39.9%, compared to 39.4% for the comparable period of 2012. The increase in the year-to-date tax rate resulted primarily from the effect of foreign taxes. For the rest of the year, we would expect our tax rate to be in the 40% range, as we indicated back at investor day.

Year-to-date, operating cash flow was approximately $180 million. The increase from year-end was driven by a change in working capital, due to an increase in the accounts payables, resulting largely from quarter-end timing, and a build in inventory in advance of customer conversions. We would expect to see this moderating trend in accounts payable and cash flows in the second half of the year. The Company continues to report strong domestic asset management metrics, such as days sales outstanding of 19.3 days, and inventory turns of 10.3 times.

For the second quarter of 2013, adjusted net income was $29.3 million, or $0.46 per diluted share, compared with $0.48 for the prior period. For the year-to-date period, adjusted net income was $56.9 million, or $0.90 per diluted share, compared with $0.94 per diluted share for the prior year. Included in the first-half results are the previously mentioned international segment operating losses of approximately $3.6 million or $0.5 per diluted share for the year-to-date period. That represents a loss of $0.04 the first quarter and $0.01 in the second quarter.

Based on our performance year-to-date, our outlook for the remainder of the year, our guidance for 2013 remains unchanged. We continue to target revenue growth in the 2% to 4% range, and adjusted net income of $1.90 to $2 per diluted share for the year, which includes operating results from Movianto, but excludes exit and realignment costs, as well as acquisition-related costs. Additionally we announced our quarterly dividend this morning. With that, I'd like to thank you and turn the call back over to Craig.

Thank you Jim, and thank you, Randy. With that overview of our operational, strategic, and financial results, I'm going to take just a few minutes to talk about the overall market and our Company. Now as you can see from our results, I think it is fair to say that we are making progress. As we said last quarter, we have a few challenges to work through this year, both domestically and internationally. While the conditions in the overall healthcare market are beyond our control, we can control our response to the changes. As a result, we have continued to adapt our approach to the market, even as we expanded our opportunities in healthcare.

In looking at our customer base, we have seen no real change in utilization. Despite this we are holding our own in the domestic business. As Jim explained, we are taking positive steps to make our domestic network more efficient and more flexible. We are using innovative supply chain tactics to bring new solutions to market. We see emerging opportunities in the centralization of decision-making by large healthcare systems, and in just the last two years, we have greatly increased opportunities for Owens & Minor by establishing a presence overseas, expanding our sourcing efforts, and developing logistic services for healthcare manufacturer customers.

As for the manufacturers, we have challenged our team to develop and market the services that meet their growing logistics needs. Since we acquired Movianto and broadened our 3PL services overseas, conversations with global manufacturers are on the upswing. The healthcare market becomes more globalized with every passing day. With the base of operations in Europe, we believe we are well-positioned to capture opportunities that arise as economic and market conditions change. However, as we've said, our business in Europe needs fine-tuning and that is a high priority.

Movianto made solid headway in the second quarter. They achieved modest improvement in capacity utilization, and signed a number of customer arrangements that are scheduled for implementation this year and next. Since the acquisition, we have added new management talent, centralized the management structure, and focused the team on establishing tighter cost controls. These actions are helping us to bring results into line. At this point in the year, we remain cautiously optimistic that we will achieve our performance goals. With the investments we have made and continue to make, and with the strong teams we have in place, I believe we're doing the right things for our customers and for our company. With that, we'd be happy to take your questions.

(Operator Instructions)

Glen Santangelo, Credit Suisse.

This is actually Diego filling in for Glen. Just to follow your closing comments of there, are you still comparable with the idea that Movianto, with the previously given idea that is going to be about EUR300 million for the year? And then, anything you can give us in terms of helping this think about the cadence of the quarter, I know when the acquisition closed last year, we talked about how it was a seasonably strong quarter for you, for Movianto in particular, and so any help there would be very useful.

I think where we are, halfway through the year you saw a nice sequential progress in terms of revenue going from $121 million to $123 million. Relative to the comment around -- I assume you're talking about euros in terms of revenues, we are still comfortable with the original guidance was the $480 million to $500 million or so in revenues. I think for the year we're still comfortable with that guidance. I think we are very comfortable with the progression that we are making as Craig indicated, as we move forward. Again I think the objective to move towards breakeven this year, and positioning ourselves for reasonable growth next year is still our goal, and we still feel it's very achievable.

Just as a follow-up on a separate topic, any updated thoughts on what the ACA implementation might ultimately benefit you guys?

Diego, this is Jim Bierman, we've talked about that on and off since the legislation was passed. I think our views aren't dramatically different than others in the marketplace. We will like the idea of there being a significant bolus of potential patients that are covered, that would make their way through the system. However, there is an expectation, and understanding that many of those patients are receiving healthcare in other forms today. We think there could be an uptick as it becomes operational, but we are not looking for a windfall out of this, and I think that is very consistent with how our manufacturing partners and our provider customers see the market, also.

Thanks so much.

Robert Willoughby, Bank of America.

This is Elizabeth Blake in for Bob. I guess obviously a lot of consolidation in the hospital marketplace. Could you remind us which of the major chains are yours and when those contracts expire?

Yes, Elizabeth, we don't give that level of detail out, but as we look at the landscape, certainly we are in tune with the major transactions that have been announced. We have relationships with all of the major investor-owned systems of one sort or another, and we view it that we are positioned to help those systems achieve the efficiencies that they put out there.

A lot of these deals are dependent on achieving the cost synergies that they identify in their analysis, and we think the supply chain -- and the supply chain improvements and enhancements that we can help with, can certainly help facilitate their success. We are excited about the landscape and some of the transformations that are occurring. We've been talking about it, certainly on the not-for-profit side for a period of time, and over the last quarter, there certainly has been some investor-owned activity.

To follow up on Diego's Movianto questions, do you have commentary on the third quarter? Specifically could we see breakeven at that point, or is it still a full-year expectation?

Let me take that. I would reiterate that the top line is between $450 million to $550 million on the revenue, and we have been consistently saying that we are working towards breakeven at the end of the year. I think the good news is, we made some really great progress in the second quarter, we added some new customers, we are working on costs. Where we feel we are today is, we are on track on our performance goals, and we're working to a run rate of breakeven by the end of the year.

Robert Jones, Goldman Sachs.

This is Adam Noble calling in for Robert. I just wanted to ask around the $3.5 million California tax settlement benefit. It sounds like you are saying that should be there for the rest of the year, or something in that range. Was this contemplated in the $1.90 to $2 guidance? And should we view this as something for this year, and this is something that should falloff going forward?

Adam probably to give a little clarity, the $3.5 million is actually -- the settlement was for $4.2 million when we filed the Q and the debt amount, as it works out relative to the settlement, because it's a prior recognition of some of that, was $3.5 million. That is a one-time benefit that we are going to receive. There some ongoing benefits that we'll receive in the future as a result of the sales tax, with the resolution of the sales tax issue, which was basically the genesis of the whole issue.

Going forward, it is hard to project what it is going to be, because it is subject to sales in these various jurisdictions. There will be a benefit that we'll have going forward, it should be modest. It won't be anything approaching the $3.5 million that we have. That is not in the $1.90 to $2, but it is not going to have material impact on the second half of the year. I'm hoping that gives you a little better color going forward.

That's very helpful. I was just wondering if you could parse out, or maybe give a little directional commentary around the gross margin for both the domestic business and international, just so we have a better idea of that?

On a consolidated basis, the number we achieved in the second quarter was a little north of 12%, 12.06%, which was down slightly from the first quarter, but right -- pretty much in the middle of the range that we announced back at Investor Day. So we feel fairly comfortable that, moving forward, we will continue to hit our consolidated gross profit margin goals. We don't give a tremendous amount of color in the segment-related business. Although again, I think we were fairly pleased with the results of our domestic business, and have continued to benefit from all of the operational initiatives that have been implemented over the last few years.

Lisa Gill, JPMorgan.

This is actually Gavin Weiss in for Lisa. First, I just to say congratulations to Jim. Second, I just wanted to clarify on the tax issue. If I understood you correctly, the sales tax benefit going forward is not included in guidance, but was the $3.5 million settlement in the quarter included in your original guidance?

No, it was not. But the offset in the quarter, I think, reflects some unusual items. So we don't see that as being something that will be incrementally beneficial to us in terms of the overall annual guidance. Said more succinctly, the benefit we achieved in the quarter was somewhat offset by a number of unusual items, and we outlined them in both the press release and our comments.

But to reiterate them again, we had some unusually high healthcare expenses. We transitioned to a single vendor in terms of our truck leasing, so as a result of that, incurred some one-time repair and maintenance cost to achieve that transition. Then we had a true-up to some of our vacation accruals that we needed to do after some review that took place in the second half of the second quarter. We don't expect any of that to be recurring.

That was going to be my next question, how should we think about this segment, the earnings to the segment going forward for the rest of the year? You are seeing these various buckets of additional cost in the second quarter as non-recurring?

I think one of the ways I might suggest we look at it, if you review the segment results, the domestic business generally achieved about a $0.47 quarter. If you look at that, the quality of our domestic earnings, I think, are well-reflected in that, if you adjust out the one-time benefit on the income side, and offset that with some of the expenses. I think the quality of what we're seeing in terms of the domestic business around that $0.47 or so, I think is a good way to think about where the quarter was.

Okay, that's very helpful, thank you. In terms of the Movianto business, I think earlier this year you had mentioned capacity utilization was about 60%, and I know you have noted that you have some new customer wins. Where do you stand now on the utilization, and where do you see that going forward?

Gavin, this is Craig. We did make some progress on utilization. I think what we would like to do, is because we are adding business here, we had some good wins in the second quarter. Rather than maybe score card this out, is at the end of the year at Investor Day, probably give you a tally on where we are in utilization, but we are making good progress. Part of the challenge is, is in this 3PL business. As you add these customers, on some -- if it's a transportation deal, you can bring them on very quickly, some of them you want to contract, and there is an uptick on implementation. I would say overall, we are pleased with the utilization. It is a small increase, but we are seeing good progress on that, and think we are on pretty good track this year.

Eric Coldwell, Robert W. Baird.

It is Eric Coldwell for Eric Coldwell. (laughter) Just a couple of technical things here. LIFO, just curious if you could give us -- I did not see that, if I missed it, I'm sorry, but was there a LIFO charge or credit in the quarter?

In the first quarter, we made the determination that we were going to stop providing that information. As you recall, I will give you the footnote at year-end and give you color on that. Again just to reiterate, we thought that was creating a little bit more confusion than it was adding benefit of the underlying business. No, there wasn't any information related to that in the press release, or in the quarterly submission.

Shifting gears, I think you've addressed this, but the accrual adjustments, you mentioned a comment on vacation true-ups. Was there anything related to actual performance one way or the other, or was this just a review of your policies and a one-time catch-up?

This is just a one-time catch-up and had nothing to do with anything. It just was an annual review, making sure we have the right numbers in there.

Got it. Other income was a little over $2 million, that line on a quarterly basis has been anywhere from neutral to earnings to adding $0.01 or $0.02 a quarter. I was just curious if you could give an update on what exactly was in the other operating income this quarter, the $2.1 million, and directionally, where you see that trending?

It predominantly was a variety of finance charges that we collect from customers. We usually don't have that go through revenue. It usually comes through other income.

Do you see that maintaining at this $1 million, $2 million a quarter range going forward, or was there something else?

Not at all. This was predominantly related to Hurricane Sandy, and the and some of the catch-up associated with that.

Got it. Pricing, some comments about some pricing opportunities. I was unclear whether you meant on the sourcing side, or manufacturer price changes from your branded suppliers. Just hoping for a little more detail on that.

I'm not exactly sure, Eric, the context of your question, but let me talk about pricing for a minute or two, and what we're seeing in the marketplace. As it relates to product pricing, we continue to see this quarter, as we commented on last quarter, little to no price inflation whatsoever, and in fact, in certain categories, we are seeing price deflation occur. That is making its way through the system, if you will.

As it relates to pricing of services, as we've said for a period of time, beginning with the Novation contract resign period through the premier period, and now, MedAssets and as we contemplate bringing the HPG contract to a close, it is a competitive market out there, and it is competitive pressures on margin. We are selective on where we place bets, but we believe it is important to place the bets on those, that we think are going to be the winners in healthcare. We're definitely aggressively moving to certainly solidify and expand our position in the marketplace.

Jim sorry the context of the question was from the press release, domestic segment operating earnings were also positively affected by certain supplier price changes. That was the crux of the question, what were those price changes?

This is similar to the first quarter where we described some of the benefit that we received from some of the price changings in our inventory at year-end, and we alluded at that point that we would still have some benefit of that in the second quarter. We were just reiterating some of that from the first quarter, as it came through and we realized that benefit in the second quarter.

Got it, and lastly -- (multiple speakers).

Just to clarify, we would expect to see an offset to that as we move through the year, so net, this is not for the full year, we don't expect to see a full benefit of that. Okay, got it.

Last one, cash flow, completely understand what is going on with the AP, but curious, directionally, if you can give us some sense on your outlook for operating or free cash flow for the full year?

I think as we alluded in the first quarter, that we again felt comfortable with the number at the quarter, but we haven't historically given a lot of guidance around cash flow from operations. I don't expect -- just given the noise that we had in the first and second quarter around some timing issues, that you're going to see cash flow from operations go up significantly from here. Again, we were trying to give that with our comments around the modulating results, and AP, and some of the working capital adjustments in the second half of the year.

That's fair. So would it be safe to say that what we've seen year-to-date in cash flow is not far off from where we'll finish the year?

I wouldn't argue a lot with you on that.

Got it. Thanks. Appreciate it.

Steven Valiquette, UBS.

This is Doug Cooper in for Steven. My first question, wanted to talk about, there's been a number of public hospitals that have reported mixed results in terms of volumes, and I was wondering if you can give us a sense of what level of growth you are seeing in procedure volumes across your client base?

Doug, as we look at domestic utilization, and to a large degree, going back to my answer to Eric's question that we look at it on both utilization and potential product price inflation or deflation basis. On a combined basis, we are seeing a neutral to slight decrease in utilization/price changes in the marketplace. That is not dramatically different than the majority of investor-owned companies, and how they have reported it, and how manufacturers have reported. There has been, for a number of quarters now, continued decrease in the number of procedures done, and number of hospital admissions here domestically.

To follow up on that, we're seeing trends a little different between large and small hospital groups. Has that difference changed over time over the past several quarters, or is it pretty much staying relatively constant?

We called that out a number of quarters ago, as we begin to see this trend. It still continues today, and the trend is that the big are growing, they're taking share from the smaller hospitals. I think that rate of increase, at least on the total portfolio, may have slowed down a little bit. But some of that may just be that we are now used to it, and it is less of an anomaly then it was, initially at the outset. Absolutely, we are seeing the larger systems have better growth than the smaller systems.

Final question, on the heels of product inflation discussion earlier, do you get a sense of when deflation will subside, or inflation -- product inflation will return to the market?

Tough to make a call on that one. I think as we look towards 2014 -- and this comment is premature to a degree, because I would defer to our formal outlook when we get together for our Investor Day meeting. As we looked at 2014, and we think about it as of today, we don't see a significant change in the inflationary -- inflation for the products that go through our channel.

Operator, we have time for one more question.

David Larsen, Leerink Swann.

This is Chris Abbott in for Dave. As I look back over some of my notes, I think back in late 2010 at your Investor Day, you discussed a long-term operating margin goal of around 3%. Obviously this year, there is various investments going on. I guess I'm wondering, is that still a realistic goal, as you are seeing a shift towards some of these larger systems? Maybe now that you've gone through most of these GPO renewals and have a little more visibility, I guess I'm wondering if there's any updates there?

That is a great question, Chris. I think, certainly the investment in Movianto has a major impact on our ability to achieve the target that we have put out in 2010 of achieving 3% operating margin. To be honest, I think, as we think about it, we like some of the market dynamics that seem to be moving our way, and would speak to our ability to achieve that level of operating performance. Some of it is going to be driven by the pure mathematics associated with a fee-for-service business as opposed to the buy-sell relationship that we have in a classic distribution model.

I think, as we have a new level of conversations with the very large provider customers, and the very large manufacturing customers, I think we are feeling more bullish on the opportunity to achieve that level of performance. I think it is a great topic, and we will revisit it as we come around to Investor Day at the end of this year, and look forward to 2014 and beyond. Operator?

At this time there are no further questions. Ever to turn the call back over to Mr. Smith for his closing remarks.

Thank you everyone, thank you for listening in today. We look forward to reporting out to you after the third quarter. Have a good day.

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